It was May 2004, and Knutson, a professor of neuroscience and psychology at the California university, was sending student volunteers through a highpower imaging machine called an fMRI.

Deep inside each subject's head, electrical currents danced through a bundle of neurons the size and shape of a peanut.

Blood was rushing to the brain's pleasure centre as students executed mock stock and bond trades. On Knutson's screen, this region of the brain, the core of human desire, flashed canary yellow.

The pleasure of orgasm, the high from cocaine, the rush of buying Google at $450 a share . . . the same neural network governs all three, Knutson, 38, concluded. What's more, our primal pleasure circuits can, and often do, override our seat of reason, the brain's frontal cortex, he says. In other words, stocks, like sex, sometimes drive us crazy.

Knutson says he knows how heretical his findings are. Stock exchanges are dedicated to the principle that, when it comes to money, logic prevails. In practice, of course, investors do foolish things all the time. Some gamble away fortunes on money-losing investments, doubling down when logic tells them to fold, or letting winnings ride when the rational person would cash out.

Others seem to have an uncanny knack for knowing when to buy and sell. In the 1970s, Richard Dennis parlayed a stake of several thousand dollars into a $200m fortune trading commodities in the Chicago futures pits. In the 1980s, hedge fund icon Paul Tudor Jones made $80m by betting against US stocks just before the market crashed. In the 1990s, George Soros, the man who beat the Bank of England, made $1bn in an afternoon by shorting the British pound.

The question that keeps nagging Knutson is this: why do some traders get rich while others walk away losers? The answer, he says, may lie somewhere in the 96,000km of neural wiring in our brains. The results of the Stanford study, published in last September's issue of Neuron magazine, are now causing a stir among neuroscientists and psychologists mapping the human brain in the hope of understanding investor behaviour.

This controversial field, called neurofinance, may represent the next great investment frontier, says Daniel Kahneman, who won the 2002 Nobel Prize in economics for his work in behavioural finance, which fuses classical economic theory and studies of human psychology. "The brain scientists are the wave of the future in the financial world, " says 71-year-old Kahneman.

One day, brain science may help money managers spot shifts in investor sentiment, predicts David Darst, chief investment strategist for the $700bn individual investor group at Morgan Stanley. Armed with brain scans, psychotherapists may be able to hone traders' natural impulses of fear and greed. Neuroscientists may develop psychoactive drugs, or neuroceuticals, that make people more profitable traders, Knutson and other psychologists say.

In a few years, Prozac and other drugs have not only revolutionised treatment of depression but changed how we view the mind. People recognise that chemistry drives their brains, moods and behaviour . . . and can change them. Some believe similar drugs, which could improve a trader's decision-making by 20%-30%, may be just a few years away.

So far, the hopes and claims of neurofinance have outpaced its science.

Few investment professionals have even heard of the field. Many dismiss it as hokum. Knutson's response: just wait.

"Investors want to beat the market and become better traders, " he says. "The first step is to know how the machinery works. The applications to exploit the machinery will soon follow."

The idea that something other than reason sometimes drives economic decisions is hardly new. Extraordinary Popular Delusions and the Madness of Crowds, written by Charles Mackay in 1841, remains a classic. Mackay examined the history of alchemy, witch hunts, fortune-telling and speculative frenzies such as the mania over tulips that gripped Holland in the early 17th century. His book shows how otherwise intelligent people sometimes succumb to mass idiocy.

Soros, 75, has a theory about why markets behave the way they do. He calls it reflexivity. The gist is that markets can't discount future events correctly because they help shape them.

Consider the Nasdaq boom and bust of the late 1990s. Young, money-losing companies depended on their ability to finance themselves in the capital markets. When stocks are climbing, such companies can raise money easily. A rising stock makes a start-up more viable, which leads to an even higher stock price, which makes the company more viable still, and so on. The same happens in reverse when stocks decline.

Soros's son, Robert, has offered his own explanation for his father's trading success. "You know the reason he changes his position on the market or whatever is because his back starts hurting him. He literally goes into a spasm, and it's this early warning."

Alan Greenberg, chairman of the executive committee of Bear Stearns, doesn't buy neuroscientists' claims that such instincts are rooted in our brain.

"There's smarts, there's guts and there's instincts, " 78-year-old Greenberg says.

"The other stuff . . . behavioural, neuro, whatever they call it . . . is horseshit."

One August afternoon, as the brilliant California sun beats down on Stanford's sprawling campus, Knutson sits inside his darkened second-floor office with the shades drawn. He's studying his computer. The image on his screen looks like a Rorschach inkblot, or halved cauliflower. It's a scan of a human brain . . . one of Knutson's trader test subjects . . . lit up in blue, yellow and pink.

Knutson has sandy hair cut schoolboy short, a crooked grin and wire-rim glasses. His baggy white oxford shirt is rumpled, and his shirt-tails trail outside his trousers. His appearance and mannerisms bring to mind a young, over-caffeinated Bill Gates. "This is so cool, " Knutson says, pointing to the yellow area in the centre of the scan. It's the nucleus accumbens . . . the pleasure centre . . . of one of his volunteers.

Knutson has been trying to map the money mind since 1996. "I figured if I can't delve into the brain, I'll never really know how it works, " he says.

It was at the University of California that Knutson began to discover how money plays on the brain. "We very quickly found out that nothing had an effect on people like money . . . not naked bodies, not corpses, " he says. "Like food provides motivation for dogs, money provides it for people." He eventually landed a grant to conduct brain scans specifically related to investing.

Later that August afternoon, Knutson hustles across campus to Stanford's two functional magnetic resonance imaging machines, or fMRIs. Unlike traditional MRIs, fMRIs can create moving images. They can capture the flow of blood through the brain, painting mental activity in a palette from hot pink to chromium yellow.

During their hour-long scans, Knutson's 19 volunteers . . . 10 women and nine men. . . had to bite on a piece of plastic to keep their heads still. They had to wear plastic earphones, to drown out the whir of the fMRI, and wear video-display goggles so they could execute mock trades.

Here's how the experiment worked:

the subjects, who ranged in age from 24 to 39, were given $20. In each round of the test, the volunteers got to choose among three investments. The first was a bond guaranteed to return $1 per round. The second was a safe stock, with a 50% chance of earning $10 per round and a 25% chance of losing $10.

The third was a risky stock, with a 50% chance of losing $10 and a 25% chance of winning $10.

Knutson didn't tell his volunteers which stock was which, so they had to rely on the stocks' histories. Three out of four times, the volunteers made wise, rational choices. Every fourth try, they exercised bad judgment, usually by chasing profit when the bond would have been the smart choice, or opting for the bond when they should have taken a gamble on one of the stocks. In each case, the fMRI captured what was going on inside their brains.

Before the students made a risky bet, investing in a stock that had burned them before, their nucleus accumbens flashed yellow on Knutson's screen. This part of the brain is driven primarily by dopamine, a chemical that scientists believe produces pleasure and euphoria.

Dopamine fuels our reward response, and brains can't get enough of the stuff.

When scientists insert an electrode into the nucleus accumbens of a rat, the rodent will press a lever that delivers a jolt to this region of its brain until the animal collapses from exhaustion or dies.

Doctors who have performed similar experiments on humans during brain surgery have reported that some patients experience orgasms. All drugs of abuse, from cocaine to heroin, activate our dopamine circuits.

Before the volunteers made a safe investment, a different part of the brain, the anterior insula, was activated.While our nucleus accumbens may goad us on, our anterior insula is believed to hold us back with anxiety that can at times be irrational.

The anterior insula is primarily driven by two other neurotransmitters, serotonin and noradrenaline. While dopamine flows during moments of pleasure, these two chemicals course through the brain when we're fearful or anxious.

When we make trading decisions, our brain's centres for pleasure and angst wage battle. The first seeks profit; the second tries to avoid loss. Subjects who showed high activity in the anterior insula were 20% less likely to invest in a stock that lost money before, even when the odds were good that they would profit. Such people might sell impulsively when markets turn against them, Knutson says.

For now, neurofinance is more science fiction than science fact. But Knutson says he's confident his research will pay off one day. Unlocking the mysteries of the human brain is the greatest challenge that scientists have ever faced, he says.

"Brain imaging gives us the hope of opening up the black box, " Knutson says. And money may be the key.