New Haven, Conn., June 20, 2005—The basic economic theory that people work harder to avoid losing money than they do to make money is shared by monkeys, suggesting this trait has a long evolutionary history, according to a Yale University study under review by the Journal of Political Economy.
This phenomenon, known as “loss aversion,” refers to the tendency for people to strongly prefer avoiding losses to acquiring gains. “A large body of studies suggest that losses are more than twice as psychologically powerful as gains,” said author M. Keith Chen, assistant professor at Yale School of Management.
In this study conducted with Venkat Lakshminaryanan, a research assistant in the Department of Psychology, and Laurie Santos, assistant psychology professor and director of the Capuchin Cognition Laboratory at Yale, tufted capuchin monkeys were given small disks to trade for rewards—apples, grapes or gelatin cubes. The researchers said capuchins are well-suited subjects for study since they are relatively large-brained primates, skilled problem solvers, and a close evolutionary neighbor to humans.
In their studies monkeys were given a budget of disks and asked to decide how much to spend on apples, and how much to spend on the gelatin cubes, even as the prices of these goods and the size of their budgets fluctuated. Capuchins performed much like humans do. Capuchins, like humans, react rationally to these fluctuations.
In a second experiment, capuchins were asked to choose between spending a token on one visible piece of food that half the time gave a return of two pieces, or two pieces of visible food, that half the time gave a return of only one piece. Economic theory predicts that consumers should not care which of these outcomes they receive since they are essentially both 50-50 shots at one or two pieces of food. The capuchins, however, vastly preferred the first gamble, which is essentially a half chance at a bonus, than the second gamble, which is essentially a half chance at a loss.
“The goal of this work,” said Santos, “is to learn whether other animals share some of our basic economic decision processes or whether human economic behavior is unique to our own species.”
“The economic view,” Chen added, “says people are aware, rational and in control of their major decisions. Social psychology cuts in the opposite direction, maintaining that people are often unaware of the forces that dictate their behavior. We wanted to understand the interactions of these two things. What we’ve shown is that capuchin monkeys look remarkably like us; making rational decisions in many of the same settings that humans get right, but also make many of the same mistakes we make.”
Their work provides an evolutionary spin on the current debate about why Americans do not save enough for retirement or put enough of their savings into the stock market. “Although the stock market offers a better rate of return than investing in safer financial products, such as bonds, people tend to experience stock market fluctuations through the biased lens of loss aversion, a lens that appears to be shared with other primates,” Santos said. Chen added, “We are fighting tendencies that may be biologically hard-wired.”
We are more like monkeys that most of are willing to admit. Resistance to the theory of evolution is just one manifestation of that reluctance.
To learn about work done on humans with loss aversion read about the classic experiment on risk aversion done by Kahneman, Knetsch, and Thaler with coffee mugs. Basically, people value objects that they own more than objects that they could buy. Also, see the Wikipedia Loss Aversion entry. Or see an example that perhaps more closely mirrors the example with the monkeys where different styles of framing choices causes different preferred outcomes.
This whole area of economics calls for attempts to develop methods to compensate for systematic biases in human cognitive processes. For example, to overcome resistance to regulatory changes due to status quo bias loss aversion Lynne Kiesling of Knowledge Problem argues that experiments to demonstrate the effects of policy changes might help reduce the resistance to changes in the regulatory status quo.
|Share |||Randall Parker, 2005 June 22 01:35 PM Brain Economics|