Reading, Writing, and Reflecting

In Superfreakonomics, their follow-up to the hit book Freakonomics, authors Stephen Dubner and Steve Levitt describe an interesting study by Keith Chen, Associate Professor of Economics at Yale University.  As I wrote about in my review of Superfreakonomics, Chen’s research describes studies where monkeys are taught how to use money.   The monkey’s quickly learned to use money, understood money had value and modified their behavior based on the money’s value.

Chen’s Yale research colleague, Associate Professor of Psychology, Laurie Santos, recently gave a TED talk delving deeper into their economic and psychological study with capuchin monkeys.   The interesting 20 minute lecture by Santos is shown below, followed by my thoughts on the overall lecture.

Santos started her speech with the obvious points that

1. Humans are really smart—clearly the smartest organisms on the planet.
2. But even though humans are really smart, humans have made some incredibly dumb decisions, citing the recent collapse of the financial markets and the BP oil spill.

The question she asks is “Why would a species as smart as humans, make such bad decisions”.   There are two possible answers to this:

1. The Environment was designed badly.  (For example, humans created a financial structure that was so complex, that not everyone could understand how it should function.)
2. Our mind is designed badly or irrationally.

If the answer was # 1,, humans can easily fix that.  Redesign the environment, put different people in charge to get rid of the bad apples who made it poorly, etc.   With the financial markets, you would break down the existing structure, and rebuild it in a much simpler way.

If the answer was # 2, that’s a much bigger issue.  If humans are hard wired to act in a certain way, and you put any human in the same situation and you get the same result, it’s not as easy to avoid such outcomes— suggesting it was bound to happen.

Proving or disproving answer # 2 was the whole purpose around Santos’ research.

One of the more interesting aspects of the study revolved around how quickly the monkey’s consistently demonstrated loss aversion behavior, similar to how humans behave.   The example given is this..

Scenario 1

Say you are given $1000.   You now have the choice of the following two options

Option 1

A coin is flipped and if it comes up heads, you get $1000 more, if it comes up tails, you get $0 more  or

Option 2

You are simply given $500 more with certainty

Most people use Option 2.   They will take the $500 and have the certainty of $1,500 vs the potential of more at $2,000 if it turns up heads, but only $1,000 if it turns up tails.  This is how humans behave

Now, Santos presents a similar case, but slightly reverse.

Scenario 2

Say, you are given $2,000 (the maximum you could have gotten in the first scenario).  You now have the choice of the following

Option 1

A coin is flipped and if it turns up heads, you lose $1,000.  If it turns up tails, you lose $0.

Option 2

You just lose $500 with certainty.

Most people in this scenario chose Option 1. Even though this is the exact same case as Scenario 1, where you can choose an option that gives you $1,500 with certainty, people are averse to losing money that they already have and will go for Option 1, where they may end up losing $0 and still end up with $2,000.   This is an example that economists call Loss Aversion and what Santos calls an examples of humans irrational behavior—an example of how the human species is hard wired to make bad decisions.

She wanted to study this situation with the monkeys, evolutionary predecessors of humans and see if this type of irrationality was hard wired in their decisions, soon after they learned about the value of money and started to make economic decisions.  You’ll see from the video, monkeys were able to buy grapes with the tokens that were introduced as currency into their environment.     When presented with a similar situation as the $1,000 example described above, but at a much smaller scale, with the monkey tokens, the monkeys acted in the exact same way as most humans do.   Economists and psychologists would call that irrational, and the monkeys acted as irrational.

I’m not sure what we as humans do with this information and conclusion.  Santos doesn’t really get into that, which is a shortcoming of the speech and I would guess a next step of their research.   It’s not really surprising to conclude that humans are hard wired in some instances to make bad decisions, we’ve all seen that at play before—stupid decisions being done over and over by people around the world.  Maybe as Santos suggests, we are irrationally built that way.   It will be fun to watch this type of research progress over the years.