Abstract

Asset price bubbles are an important example of human group decision making gone awry, but the behavioral and neural underpinnings of bubble dynamics remain mysterious. In multisubject markets determined by 11-23 subjects, with 2-3 subjects simultaneously scanned using functional MRI, we show how behavior and brain activity interact during bubbles. Nucleus accumbens (NAcc) activity tracks the price bubble and predicts future price changes. Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.