Day 066 - Biologically bad with money

Submitted by Sam on 26 July, 2011 - 00:02

The sunk costs fallacy is a manifestation of our innate loss-aversion, a flawed form of reasoning in which costs incurred in the past adversely affect our current investment decisions. The pursuit of past investment rather than rational consideration of potential future gains in isolation is perhaps most notoriously exampled by the 'Concorde fallacy', in which British and French governments continued wasteful public expenditure on the supersonic airliner Concorde long after it had any obvious commercial viability. Loss aversion is a fact of behavioural psychology and is perhaps one of the principle motivations for non-believing clergy to remain in their position, having sunk a lifetime's worth of resources into their profession.

Our propensity towards loss-aversion is, in some contexts, predictable in its consistency. The frequency with which we make the same mistakes again and again, pursuing our losses even to our own detriment, suggests that we may have an in-built tendency for these kind of errors of judgement, built to make errors in certain ways. Laurie Santos, an associate professor at Yale, tested this theory with primates, who share a common ancestor with us about 35 million years ago. Her hypothesis was that if we are genetically pre-determined towards certain types of loss-aversion, our close relatives would be as well, and would make the same mistakes as us.

The team taught the monkeys how to use tokens as money to pay for food, allowing the researchers to make direct comparisons between the moneys' behaviour and human decisions in the financial domain. Surprisingly, when the team collaborated with economists and analysed the results, they found that the data-sets matched what humans do in real financial markets so closely that one was indistinguishable from the other. The monkeys showed other all too familiar traits when they became familiarized with their marketplace as well – they never saved their tokens, always spending their entire budget, and they also spontaneously developed larceny, stealing money from each other (and the researchers) at every opportunity.

Most profoundly, however, the study found that the monkeys showed the same biases that humans do towards loss-aversion, consistently employing the same irrationally high-risk behaviour that we tend towards when faced with the possibility of loss. The monkeys systematically made mistakes in the same ways that we do, suggesting that such mistakes are a fundamental part of our evolutionary heritage, explaining why they are so extremely difficult to resist (much like an evolutionary predilection for sugary foods makes the dessert menu so unavoidably appealing).

Knowing our weaknesses, particularly such in-built biological limitations, will help us overcome them in new and ingeniously engineered ways.

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