, 2007), inference about information possessed by other traders (Bruguier et al., 2010), and mental accounting of trading outcomes (C. Frydman, personal communication) shape financial decisions. However, the neural mechanisms underpinning the formation of a financial bubble are still unknown. Understanding of these mechanisms could prove critical in distinguishing between alternative hypotheses, each requiring different macroeconomic interventions. This study, which combines

experimental finance settings together with behavioral modeling and neuroimaging methods, aims to identify the neural coding scheme at the core of bubble formation. We focus here on how the representation of assets trading values in ventromedial prefrontal cortex (vmPFC), a brain region heavily involved in representing goal value (Rangel et al., 2008, Boorman et al., 2009, Chib et al., 2009, Hare et al.,

2009 and Levy and Glimcher, 2012), are modulated by Screening Library formation of a bubble. Our hypothesis is that the increase in prices observed in bubble markets is associated with the neural representation of inflated trading values in vmPFC, which produces an enhanced susceptibility to buying assets at prices exceeding their fundamental value. We test the hypothesis that the inflated values are caused by participants’ maladaptive attempts to forecast buy PF-01367338 the intentions of other players in a fast-growing market. In particular, we propose that the more dorsal portion of the prefrontal cortex (dmPFC), a region well known to represent the mental state of other individuals (also known as theory of mind; ToM) (Frith and Frith, 2003, Amodio and Frith, 2006 and Hampton et al., 2008), is involved in updating the value computation in vmPFC,

stimulating the formation of a financial bubble. In order to clarify the role played by intentions in modulating activity in these brain regions during financial bubbles, we introduce a computational concept from financial theory. This metric captures the dynamic changes from a steady, regular arrival of buying and selling orders to a more variable arrival process (perhaps signaling the start of a bubble, as orders arrive rapidly due to excitement, or an impending crash, when orders arrive slowly as traders hold their breath) that can signal the presence of strategic agents in a market. Ergoloid Activity in medial prefrontal regions is correlated with this index more strongly in bubble markets than in nonbubble markets and is associated with the individual’s propensity to ride the financial bubble. Twenty-one participants were scanned while trading in experimental markets. Trading activity in six actual experimental markets (collected in previous behavioral studies; Porter and Smith, 2003) was replayed over a 2-day scanning schedule. On each day, the participants traded in three experimental markets. Each market was divided into fifteen trading periods.