Trading is an interesting field to say the least. It revolves around a great deal of decision making, and a lot of choices which will have diverse effects. What is responsible for the decisions made? Naturally, the trader’s thoughts and considerations in relation to his or her trading experience. So, to a certain extent neuroscience comes into the picture.

Neuroscience refers to the way the brain works, along with its cognitive functions. In fact neuroscientists focus their studies on the human brain, and how it has an impact on behavior and thinking functions.

Financial decisions are very important, and it goes without saying that they are affected by the individual’s financial literacy, experience as well as cognitive constraints. Decisions are also affected by one’s level of confidence, level of objectivity, and the element of risk involved. The amount of money involved is also prevalent, as the higher it is, the bigger the risks are and the more cautious one is more likely to be, as long as greed and over confidence do not cloud one’s decision. Thus, there are several factors which all have an effect on the decision that is finally made.

Therefore the neuroscience behind trading decisions is a very complex matter. Despite efforts to try to understand how the brain works and how it effects trading psychology and the subsequent decisions made by traders, one cannot say for sure how it all works out as there are so many factors and issues involved. There are however some patterns and trends that were noted after neuroscientists conducted certain studies in this regard.

For instance, there is a general belief that traders invest in a diversified portfolio in order to limit risk, and once this is done, they are less pressured to make substantial trading decisions since they have their investments spread out quite well. There are others who prefer to take bigger risks because they want to stick to certain stocks only, because they have a belief that they are going to do better off that way. Evidently in this case pride and confidence comes into play.

There is also a belief that traders are more inclined to repurchase stocks that they had previously sold because at the time they had gone down in price. The element of regret may come into play too in trading, since in some cases traders may feel that they might have sold stocks too early. Another trading pattern is for investors to have a soft spot for stocks that are headquartered close to their place of residence. This is often referred to as home bias. This concentration of risk could negatively impact the decision making process of the trader, who may end up with a less diversified portfolio.

There is also a tendency for investors to prefer to trade rather infrequently. However, when they do decide to make a trade, in most cases it ends up being one where too much is traded, and as a result money may be lost.

Stock price changes also have a huge impact on trading psychology. The simple truth is that traders react differently to changes in stock prices, and in many cases rational decision making and careful evaluation of possibilities does not always take place. Thus, no matter how rational a trader claims to be, the gut feeling always tend to crop up while making trading decisions.

These are just some of the most common trading biases which are all related to neuroscience. There have been various studies conducted on the relation of neuroscience and trading. Neuroimaging was conducted during stock trading in order to try to examine psychological changes and relate them with the trader’s decision. MRI scans were also used to try to identify the brain structures that are associated with trading activities and decisions. Effectively neuroscientists try to read through the trader’s mind, and understand how he/she thinks and feels, and what he/she is going to do based on that.

The attempt to probe in the neural activities of traders in a market setting is certainly not simple, and results can only shed some light on what may be going on in the trader’s mind. However it is surely an intriguing science and one that cannot be easily understood. However what is most important is that one appreicates the complex issues revolving around trading from a psychological point of view. For a trader to do this may be helpful in order to try to make decisions as rationally as possible.