The Psychology of Everyday Life: Motivation and the Search For Happiness

The Biology of Money

How does the dopaminergic reward system respond to randomness?

Additionally, the dopaminergic reward system does not do well with randomness. This system has evolved to detect patterns and still tends to interpret patterns even when no pattern is really there. Consequently, we tend to overestimate our ability to predict future events from past events. We can see this when we consider how people demonstrate frequent overconfidence when picking stocks. If there is a good run in the stock market or in the real estate market, people tend to assume this run will continue forever. In truth, a streak of good luck can end at any time. When we assume that past fortune guarantees future fortune, we make foolish investments. Hence, we become overconfident at our ability to predict future events. This mechanism is a central contributor to financial bubbles.


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