"The ability to infer
intentions of other agents, called theory of mind (ToM), confers strong
advantages for individuals in social situations. Here, we show that ToM can
also be maladaptive when people interact with complex modern institutions like
financial markets. We tested participants who were investing in an experimental
bubble market, a situation in which the price of an asset is much higher than
its underlying fundamental value. We describe a mechanism by which social
signals computed in the dorsomedial prefrontal cortex affect value computations
in ventromedial prefrontal cortex, thereby increasing an individual’s
propensity to ‘ride’ financial bubbles and lose money. These regions compute a
financial metric that signals variations in order flow intensity, prompting
inference about other traders’ intentions. Our results suggest that
incorporating inferences about the intentions of others when making value judgments
in a complex financial market could lead to the formation of market
bubbles."
