Warren Buffett has long maintained that success in investing doesn’t require anything more than ‘ordinary intelligence,’ but that you do need the right temperament to fight urges that cause other people to chase earnings and then sell into a bear market. Now the principal that he, Charles Munger, and others have argued from experience is getting some scientific backing (h/t Rob Wile at Business Insider).

A study led by Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech, measured brain activity with an MRI while subjects participated in trading simulations and found that neural activity in a particular part of the brain (the nucleus accumbens or NAcc) tracks rising stock prices, but lower earning subjects were more likely to act when this activity spiked.

‘Exuberance is the brain signal’: Camerer

“That is a correlation we can call irrational exuberance,” Camerer said in a statement. “Exuberance is the brain signal, and the irrational part is buying so many shares. The people who make the most money have low sensitivity to the same brain signal. Even though they’re having the same mental reaction, they’re not translating it into buying as aggressively.”

Conversely, the highest earnings subjects were not only able to resist the urge to buy that came with increased NAcc activity, but they also had higher activity in the anterior insular cortex, part of the brain linked to feelings of discomfort and disgust, that made them want to sell into a rising market.

Irrational Exuberance neural activity v earnings 0714

Irrational exuberance: Bubbles formed without any media hype

The study was also interesting because the bubbles that were built up and then popped were completely endogenous – there were no financial pundits, sell-side analysts, or bloggers to hype some stocks and tear down others. The bubbles formed all on their own as people independently decided to buy into rising stocks, and the bubbles appeared to collapse because the subjects with higher anterior insular cortex activity (those that Buffett might say have the right temperament) started selling and caused the trend to reverse direction.

That’s not to say that bullish pundits don’t play a role in asset bubbles, but they may only be encouraging people to follow their worst impulses. It also means that the most successful investors may be hard-wired to benefit from the first-mover advantage even if that’s not how it seems to them when they start selling overpriced stocks.