Effects of Dopamine and Loss Aversion on Financial Decisions

Abstract

Making decisions is a part of life. People do it everyday, but not everyone understands how or why they make certain decisions. Adults always need to consider certain circumstances and understand the effects of each choice they are given. Economists quantify the different components of financial decisions, such as weighing the benefits and losses of each choice, to better understand why people choose certain choices over others.  Once they analyze the benefits and losses of each choice, they can evaluate them and choose the best one. However, there are many factors that affect how people evaluate the different choices they are given, causing their decisions in the end to change. Studying the brain and certain principles of economics can help us understand what factors affect decisions and why people make certain risky or safe decisions. The level of dopamine, a neurotransmitter associated with reward processing, can lead some people to consider the potential costs (or benefits) of their choices more strongly than others. By understanding the effect of these different factors in explaining people’s financial decisions, people can improve their decision making and help prevent themselves from being affected by negative factors such as biases that lead people to make costly financial decisions.