Caltech behavioral economist Colin Camerer is one of 24 people to receive the MacArthur Foundation "genius" grant for 2013. The honor includes a $625,000 prize to the winners for showing "exceptional creativity in their work and the prospect for still more in the future."
Camerer's pioneering research looks at the psychology behind stock market bubbles and crashes, analyzing the decision-making process of investors. One of his studies involved having test subjects buy and sell stocks in an artificial market to simulate what might happen in real life.
"It's like simulating earthquakes, we can over and over study a bubble, crash, bubble, crash," said Camerer on Take Two. "Then we can see mathematically if there's some regular pattern and what's going on in people's brains when prices are going up and before the crash is happening."
His research also pinpointed the crucial impact that human emotion has on markets.
"We see that hyperactivity and reward areas are important when the bubble's rising. People getting caught up in it," said Camerer. "We also see areas involving mentalizing, which means thinking about other people: Who's buying? Who's selling? Do they know something? We see emotional areas before the crash that indicate a sense of uncertainty or dread. "
The aim of his research is to develop a way for investors and regulators to recognize patterns associated with bubbles and crashes. He admits, however, that it is difficult to predict how the market will go.
"It probably won't be super predictive, it'll be more like an early warning system," said Camerer. "If you're an investor or a regulator, you might be able to at least get a hint that something unusual is going on."
Camerer plans on donating a portion of his prize to St. Mark's School in Altadena, a portion to his sister's charity in Detroit and to fund his own research and that of others in areas that are difficult to fund, but which he says are scientifically important.
With the rest of the money, "I'm going to buy my wife a fancy watch ... so that she'll be on time more often. "