MIND GAMES.

Like many people who have accumulated some savings, I invest in the stock market. Most of my retirement money is invested in mutual funds, but now and again I also buy individual stocks. My holdings include the oil company Royal Dutch Shell, the drug company GlaxoSmithKline, and the phone company British Telecommunication. I like to think that I picked these stocks because I can discern value where others can't, but my record hardly backs this up. I invested in BT in 2001, shortly after the Nasdaq crashed, when the stock had already fallen substantially, only to watch it slide another fifty per cent. I should have sold out, but I held on, hoping for a rebound. Five years later, the stock is trading well below the price I paid for it, and I still own it.

I sometimes wonder what goes on in my head when I make stupid investment decisions. A few weeks ago, I had a chance to find out, when I took part in an experiment at New York University's Center for Brain Imaging, in a building off Washington Square Park. In the lobby, I met Peter Sokol-Hessner, a twenty-four-year-old graduate student, who escorted me to a control room full of computers. Sokol-Hessner is completing a doctorate in psychology, but he is currently working on a research project in the emerging field of neuroeconomics, which uses state-of-the-art imaging technology to explore the neural bases of economic decision-making.

Sokol-Hessner is particularly interested in "loss aversion," which is what I was suffering from when I refused to sell my BT stock. During the past decade or so, economists have devised a series of experiments to demonstrate just how much we dislike losing money. If you present people with an even chance of winning a hundred and fifty dollars or losing a hundred dollars, most refuse the gamble, even though it is to their advantage to accept it: if you multiply the odds of winning--fifty per cent--times a hundred and fifty dollars, minus the odds of losing--also fifty per cent--times a hundred dollars, you end up with a gain of twenty-five dollars. If you accepted this bet ten times in a row, you could expect to gain two hundred and fifty dollars. But, when people are presented with it once, a prospective return of a hundred and fifty dollars isn't enough to compensate them for a possible loss of a hundred dollars. In fact, most people won't accept the gamble unless the winning stake is raised to two hundred dollars.

Why are we so averse to losses, even at the expense of gains? At the Center for Brain Imaging, I removed my belt and shoes and entered a room containing a big metal box, which measured about six feet by six feet by six feet, with a slim gurney protruding from one side. It was a magnetic-resonance-imaging machine, identical to those hospitals use to scan bodies for lesions and tumors. "As blood pumps through the brain, the oxygen it contains causes small changes in the magnetic field," Sokol-Hessner explained. "The scanner can pick up on that and tell us where the blood is flowing. We get a picture of which parts of the brain are being used."

I put on earplugs and lay back on the gurney. Sokol-Hessner and two lab assistants placed some foam around my ears and lowered a plastic grille over my face. In one of my hands they placed a metal console with two buttons on it. I felt my head and shoulders sliding into a long, cylindrical hole about a foot and a half wide. "Take a few deep breaths," Sokol-Hessner said. There was a crashing noise--the sound of the magnet warming up. Struggling to fend off claustrophobia, I closed my eyes and counted to a hundred while the scanner took a picture. "How are you doing?" asked Sokol-Hessner, who had retreated to the control room. "Fine," I lied.

My task was to consider a series of investment options that were presented on a small illuminated screen over my head. In each case, one of the options would be a fifty-fifty bet and the other would be a sure thing. The first scenario appeared on the screen: a possible gain of four dollars and a possible loss of two dollars versus a sure thing of zero, meaning that I wouldn't win or lose anything. I had three seconds to make my selection. Two dollars didn't seem like a lot to lose, so I pressed a button on the console to accept the bet. Somewhere in the next room, a random number generator was deciding whether I had won or lost. Then this message flashed on the screen: "You won $4.00."

Sokol-Hessner's thesis advisers are Elizabeth Phelps, a professor of psychology and neural science at N.Y.U., and Colin Camerer, an economist at Caltech who helped found neuroeconomics. This spring, I visited Camerer at his office in Pasadena, California. He is a stocky man of forty-six, with a large, bald head and blue eyes. His office was cluttered with textbooks and academic journals, and on one wall there was a whiteboard covered with equations. It looked like every other economist's office I've visited, except that on Camerer's desk there was a plastic model of the human brain.