Home » Blog » TEDGlobal 2010 » TEDGlobal: Laurie Santos, irrationality and our primate financial advisors

TEDGlobal: Laurie Santos, irrationality and our primate financial advisors

Yale professor Laurie Santos tells us that homo sapiens are extremely smart and extremely vain. Despite the fact that we’re really smart, we can be incredibly dumb about some aspects of our decisionmaking. Think of our recent financial crisis.

We’d like to believe these bad decisions are the result of a few bad apples. But the mistakes we make are predictable, and we tend to make them over and over, even if we are corrected. How is a species as smart as we are capable of such presistent errors?

One possibility is that it’s not our fault – we can create super-complicated environments, some so complex we can’t understand them. If this were the case, we’d just figure out what we can’t deal with and stop building them. The other, more worrying possibility – maybe our minds are designed badly.

People tend to keep making errors the same way, over and over. It seems like we might be built to make certain errors. If it’s us that’s messed up, it’s harder to know how to deal with it.

How do we tell the difference between these two hypotheses? We’d like to make these decisions independent of technological and cultural influences. So Santos works with capuchin monkeys, an evolutionary relative, but a fairly distant one.

So Santos decided to study monkeys economic decisions. Unfortunately, monkeys rarely use money. So she taught monkeys to use money. Monkeys at Yale now can use tokens to buy food from humans. Monkeys initially ignored the new, shiny objects, but quickly monkeys got good at trading money for food.

Is this anything like human money, or is this just a simple, trained behavior? We might expect to see monkeys track their spending, hoard their currency, etc. So they created The Monkey Marketplace. Monkeys were given wallets full of money, and could purchase food for a token. Some experimenters offered a better deal than others. Monkeys very quickly learn to maximize their grapes per token.

Monkey behavior closely matches how humans behave in a market. So Santos believes she’s got a good testbed.

Just as with humans, the monkeys tend not to save. And there is, embarrasingly, lots of evidence of monkey larceny – theft of tokens from other monkeys and from the experimenters.

Santos offers us an experiment – she’ll give us $1000 and and offer – if we take a risk, we have a 50% chance of getting $1000 more… or a guarantee of $500 more. The choice seems pretty much even. So here’s a different one. She gives us $2000 and now we get to choose whether to lose $500 with certainty, or take a risk and lose either $0 or $1000. People’s decision on risk makes – they make riskier decisions when it’s about losing money.

We have a very hard time thinking in absolute terms – instead, we think in relative terms. And loss aversion – our unhapiness at losing money – may make us make risky decisions. This is why investors hold on to bad stocks longer and why people refuse to sell houses at a loss.

So how do monkeys handle this? Human salespeople now became risky – some salesmen give a safe bonus, while others give random, larger bonuses. Monkeys play it safe, too. When Santos ran the experiment with losses – a salesmen who offers 3 grapes and gives you only 2, versus one who offers three and gives either 3 or 1. And like humans, monkeys do the same irrational thing that people do.

What does this show us? Monkeys can use currency in much of the same way we do. And they’ve got some of the same biases we do. The takeaway – don’t hire a capuchin as your financial advisor, as they’re roughly as bad for humans.

These biases might be a deep part of us, part of our evolutionary history. Perhaps we’re dumb all the way back 35 million years to New World monkeys. As such, these strategies are really hard to overcome. We can’t just shut off certain behaviors – our desire to eat sugary, fatty things. And we may have a very hard time watching stocks fall and overcoming our deep instincts.

So what’s the good news? We’re not just smart – we’re good at overcoming our biological limitations. We don’t need wings to fly, or perfect eyesight to see long distances. But to solve these limitations, we first have to acknowledge them. We need to think about our limitations to recognize, accept them and design our way around them.