“A Monkey Economy as Irrational as Ours” – Laurie Santos [TED Talk]

Posted: September 17, 2010 in Brain Sciences & Psychology, Finance, Economics, Money
Tags: , , , , ,

A year or two ago, I came across a Wikipedia entry of all the known cognitive biases that human beings are subject to (link).  Rather quickly, I concluded that these were all ways that our brains played tricks on us, and that in order to avoid making poor decisions, understanding this list would be crucial.  Which brings me to the topic of this post.

In the TED talk embedded below, Yale primate psychologist and behavioural economic researcher Laurie Santos discusses her research with Capuchin monkeys who have been trained to use a currency in exchange for food.  The fascinating thing about the experiments is that these monkeys (who split off from the human ancestral line ~35 million years ago), make many of the same mistakes that humans do when it comes to making decisions in the realm of economic calculation.  This suggests that we could very-well be evolutionarily unsuited to make sound financial and economic decisions.

It may come as a surprise to those haven’t studied some economics, but one of the core tenets of this faux-science, is that human beings are “rational, utility-maximizers.”  Findings such as those discussed by Santos (and there are many others) pose a fundamental challenge to this underlying premise, as they show just how irrational we can be, not to mention that this behaviour is evolutionarily ingrained (and hence not easily “fixed”).

Although we are highly intelligent in certain domains (i.e. mathematics, physics, engineering, etc.) and in certain environments, in other domains & environments, we are prone to many psychological biases which cause us to make poor decisions (i.e. socio-economic & political realms, interpersonal relationships, etc.).

It seems as though the domains which we champion as proof our intelligence are those that require the use of abstract concepts & symbolic logic which allow for quantification, whereas the domains that we often accuse of being the source of our irrationality are closely connected to limbic-system functions such as memory, fear, aggression, etc. which do not lend themselves to simple quantification.  Santos work shows that, although we may like to think we use reason & logic to solve economic problems, in reality, our behaviour is influenced far more by our evolutionary biology.

The behaviour that Santos observed in the Capuchin monkeys suggests that there are at least two underlying drivers of poor decision-making in the realm of economics.

The first is that we have a very hard time seeing things in absolute terms.  We constantly put things in relative terms.  We don’t evaluate things in rational terms when it comes to risks & rewards.  As Santos says “we think ‘oh, I’m gonna get more’ or ‘oh, I’m gonna get less” rather than (in my words) – “okay…I have X% chance of outcome A if I chose Option 1 and Y% chance of outcome B if I chose option 2, and if I calculate a probability-weighted outcome, then the rational choice would be to chose Option 1 (or 2).”  Simply put, the idea that we are rational and always seek to maximize our utility in our economic decisions is a myth unsupported by the facts (we seek utility of course; but not rationally as is so often assumed).

The second underlying driver of poor decision making is what is called “loss aversion bias.” Wikipedia describes loss aversion bias as follows: “the disutility of giving up an object is greater than the utility associated with acquiring it.”  Basically, this means that we hate losing more than we love winning.  We hate losing so much that we will actually engage in riskier behaviour just to avoid losses.  The paradox of course is that by trying to avoid losses, people often engage in behaviour which actually increases their chances of loss.

I’m certainly not the first blogger to find this gem of a video.  Barry Ritholtz of the always interesting finance & economics blog “The Big Picture” wrote about it back in June:

Excerpt: “Over the past few years, I have increasingly taken to referring us humans as “Slightly smarter, pants wearing primates.” (here, here and here). When I discussed it in a Forbes interview (Ritholtz’s Monkey Theory)  it generated a ton of email:

What is the greatest financial lesson you’ve ever learned?

You’re a monkey. It all comes down to that. You are a slightly clever, pants-wearing primate. If you forget that you’re nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn’t invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I’ve learned have come out of that. As has the field of behavioral economics.

Wall Street clichés, like “cut your losses and let your winners run” come back to prevent the monkey part of your brain from doing what it does. There’s a banana–I want it. That’s how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that–we don’t own anything in the office that doesn’t have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we’re chimps, and don’t let the chimp inside us make those chimp-like decisions.

Every good financial decision I’ve made comes from, “Wait a second, monkey boy, step back, don’t do that.” Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.

It was (mostly) a glib comment to show how irrational and biased us monkeys can be. (I even made reference to it in Bailout Nation.) It turns out that joke was closer to the truth than anyone believed. Laurie Santos gives a talk at TED that looks at how shockingly similar our biases are to those of monkeys when it comes to hardwired foolishness. The good news, for investors as well as monkeys, is that recognizing our limitations — acknowledging, learning the details of, and contextualizing them — allows us to rise above them . . .

So, is it true? Can we actually become conscious of our own limitations in order to make better investment decisions and, by extension, life or perhaps even societal decisions?  Are we capable of coming to terms with the preponderance of evidence of our irrationality when almost all “progressive” intellectual thought from at least the Enlightenment onwards has been about the the faculties of reason & systems of logic?  Can the ego deal with the notion that “I’m not as smart as I think I am”?  Will we stop turning to “experts” & “specialists” to solve massively complex & wide-boundary predicaments and instead approach these problems with a systems perspective in mind?

It seems to me at least, that it’s going to take a major paradigm shift before we realize that our rational faculties – though absolutely instrumental in our heroic rise to glory, and definitely essential for our continued survival into the future – are also screwing us over in many ways.

Many of the dominant theories upon which our institutions are built, seem to rest upon simplistic or linear assumptions derived from reductionist, rational & utilitarian schools of thought.  These schools of thought are, if not wrong, then at the very least no longer true or woefully incomplete for those of us who wish to comprehend, cope with, and adapt to the bewilderingly complex world in which we now find ourselves.

The findings of researchers like Santos challenges us to fundamentally re-think our underlying economic assumptions – particularly the notion that we are rational, utility maximizers.  It’s a tough pill for our ego’s to swallow, but more and more, it seems like it’s a necessary action if we are to cure ourselves of poor economic decision making.

To close, I wanted to pull a quote from Ronald Wright’s excellent book A Short History of Progress which I thought was relevant to the above discussion:

Homo sapiens has the information to know itself for what it is: an Ice Age hunter only half-evolved towards intelligence; clever but seldom wise.

Let’s hope we slightly clever, pants-wearing (and gun-toting) primates find wisdom soon.


– a.j.m.

Additional Resources: http://www.philosophytalk.org/pastShows/IrrationalAnimal.htm


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