A Monkey Economy As Irrational As Ours

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The homo economicus, or economic man, forms the backbone of our modernday economic system. Rational and objective, he is forever engaged in a never-ending pursuit of self-interest and utility maximization. It then extends that when every homo economicus is maximizing his own well being, under given constraints, markets produce the optimal quantity of goods and services that maximizes society’s overall utility, thereby playing their famed “invisible hand” (Smith). For the past few centuries, we have improved our understanding of the homo economicus through intuitive frameworks and mathematical models, using this knowledge to usher in an era of unprecedented wealth creation and economic growth.

But these models are not perfect. Booms and busts do happen, as do paralyzing economic crises that escape even the most expert of models and predictions. ‘Bubbles’ grow, and bubbles burst. Today, the front page of any newspaper is all it takes to shake our faith in the ‘economic man,’ forcing us to question: is our assumption of the homo economicus being a perfectly rational decision maker entirely sound? This divergence from conventional economic theories has given rise to “Behavioral Economics,” a new field that strives to model human irrationality through studying its roots in social, cognitive, and emotional factors. For instance, studies on heuristics and framing have demonstrated how the homo economicus makes systematic errors when placed in certain environments. Another offshoot of this on-going research is “monkeynomics,” or the study of primate economic behavior. Through studying how our primate relatives respond to incentives and make economic decisions, “monkeynomics” aims to shed light on the evolutionary origins of human (ir)rationality.

If Adam Smith were the father of economics, Keith Chen and Laurie Santos would be the parents of “monkeynomics,” having been involved in conducting truly pioneering research in the field. For the past few years, these two Yale professors, together with graduate student Venkat Lakshminarayana, have been teaching capuchin monkeys (New World primates that broke off from the human branch around 35 million years ago) how to use “monkey cash” and investigating their spending behavior. Although many would argue against comparing ourselves to our less intelligent primate relatives, Chen and Santos maintain that given our propensity to make the same mistakes throughout recorded human history, human psychology might contain many vestiges from what Darwin calls our evolutionary past.

Chen and Santos first designed an experimental set-up to study the capuchin monkeys’ preferences. It took them several months to teach the monkeys that a disc-shaped silver token (one inch in diameter, with a hole in the middle) serves as a means of exchange for a piece of food. Once trained, each monkey was given a small wallet of tokens and instructed to trade them with the experimenters for small food rewards. Two experimenters, eachpositioned at one end of the cage, offered different kinds or amounts of rewards when presented with a single token. By studying whom the monkey decided to trade with, one could establish the monkey’s preferences across different bundles of goods. Having set up the experimental framework, Chen and Santos then moved on to testing their claims.

The initial results were very encouraging. Chen and Santos first proved that when put in the same situation as humans, capuchin monkeys largely behave as rational decision makers – just like the homo economicus. They know how to maximize their utility by seeking trades that would give them the greatest quantity and/or highest quality of food. Moreover, when experimenters introduced a compensated price shift (i.e. when the price of one of the two goods is lowered), the monkeys shifted their consumption to the relatively cheaper good, suggesting that capuchin monkeys, like homo economicus, obey the laws of price theory. A further study incorporated risk, and proved that capuchin monkeys would always try to maximize theirexpected payoff. For example, given a first experimenter, who always offered one piece of apple and handed it over, and a second experimenter, who offered two pieces of apple and, with 50% probability, handed over either one piece or two pieces, the monkeys consistently chose the latter. Though riskier, the second experimenter was preferred since he offered a payoff that was at least as high as the first payoff. A monkey marketplace, based on the interactions between demand and supply, and fuelled by individual agents’ rational pursuit of self-interest, had effectively been created.

What Chen and Santos discovered further was that although capuchin monkeys are generally rational decision makers, they sometimes do behave irrationally. Since the efficacy of the free market depends on the rationality of its individual, it follows that through understanding irrationality among capuchin monkeys, we can attempt to correct major systematic errors in our own free market system and make better economic decisions.

First, Chen and Santos explain how capuchin monkeys consistently demonstrate two kinds of behavioral biasesa tendency to think in relative terms, and an aversion towards loss. For example, given a first experimenter who began each trade by showing two pieces of apple and handed over either one or two pieces with equal probability, and a second experimenter, who began by showing one piece and delivered the same payoffs, the monkeys always preferred the latter. This was because the first payoff was perceived as a loss and the second as a gain, suggesting that the monkeys do not necessarily evaluate different trades in absolute terms, but rather relative to an arbitrary reference point.

Furthermore, capuchin monkeys are strongly averse to loss and would take on risky behavior to avoid it. When given the choice of losing one piece of apple or having an equal chance of losing zero or two pieces of apple, they always choose the riskier second option. Such biases manifest themselves in homo economicus behavior too. On stock trading floors, people tend to hold onto losing positions even when they should rationally be exiting the market and take on risky behavior to earn back their losses, actions that most often result in bankruptcy. A similar phenomenon, known as “risk shifting,” is observed when distressed firms engage in overly risky behavior as a last ditch effort to avoid losses. Since equity downside risks are limited when stock prices are already extremely low, these firms prefer to engage in riskier options to increase their upside potential – even when these options have negative expected payoffs. As this research shows, they are not too far off from capuchin monkeys in doing so.

Second, Chen and Santos hint at how capuchin monkeys are not conditioned to accept delayed gratification. For example, during experiments the monkeys always spent all the “monkey cash” they possessed, even resorting to stealing at times, and never considered saving to achieve greater rewards in the future. Such behavior too has been observed in humans, and is referred to formally as “hyperbolic discounting.” This means that people discount future rewards by a factor, per unit delay, that decreases with the length of delay. In other words, people are more impatient to wait for a year today than to wait for a year, say, a decade from now, thus resulting in time-inconsistent preferences. This differs from “exponential discounting” in rational financial theory, under which people have the same discount factor for a unit of time regardless of when in the future the wait occurs. Consequently, when people borrow to speculate in the markets, they often underestimate the future cost of repaying the loan and tend to borrow more than they should. At the same time, people often underestimate the benefits of savings and tend to under-save, creating a greater need for borrowing. What results is a vicious cycle of under-saving and over-borrowing. For example, in the fifty years from 1961 to 2011, U.S. household consumption as a proportion of GDP increased from 62.5% to 70.6%,while savings rate dwindled from 8.8% to 4.0%.

The key insights derived from monkeynomics about the characteristics of human irrationality point us in the direction of what needs to be done to mitigate, if not prevent, it.

First, given how framing affects choice and preferences for humans and monkeys alike, people should be educated on financial planning so that they can make economic decisions rationally, and based on facts. For example, Benjamin Graham, a legendary value investor, advises private investors to conduct their own due diligence to determine the intrinsic value of a stock and thus profit from, instead of participating in, market fluctuations.

People should also be educated to seek means to address their loss aversion, which will reduce irrational risk taking behavior. One way of doing so is to use insurance, which guarantees policyholders a fixed expected income – they incur a small but certain losswhile eliminating the risk of facing larger downfalls. Similarly, diversification allows traders to offset the losses from one stock with the gains from another.

To deal with hyperbolic discounting, there should be more options for people to make pre-commitments, and tougher penalties to get out of them. For instance, by enforcing a 10% penalty for early withdrawal from retirement schemes such as 401 (k) and the Individual Retirement Account (IRA), people are forced to think hard before reaching for their retirement nest eggs prematurely.

Furthermore, people should be educated on the merits of saving and encouraged to save. When people are shown how much future consumption they are foregoing through undersaving today, they are more likely to appreciate the importance of saving. However, people might still undersave due to the psychological inertia or problems associated with switching toa new saving regime. This can be mitigated by implementing an opt-out savings program, where the status quo is for people to be enrolled in a savings scheme with the option to leave, rather than the opposite.

While studies on capuchin monkeys might not be entirely applicable to human behavior, they offer valuable key insights into ways the human mind might be evolutionarily wired and conditioned. In Santos’ words, “when you’re watching your stocks plummet into the red, when you’re watching your house price go down, you’re not going to be able to see that in anything but old evolutionary terms.” Chen and Santos have shown that many aspects of capuchin monkeys’ economic behavior, rational or irrational, are similar to those of humans, suggesting that these traits might have been present in our common evolutionary ancestors. The knowledge gained from this research and, broadly the field of “monkeynomics,” can help us understand human irrationality better and design ways to make human behavior more rational, and markets consequently more efficient. Through understanding the irrational decision making behavior of our primate relatives in specific situations, we are reminded of our own bounded rationality, and how we should act to reduce the errors we are programmed to make.


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David Yin is a sophomore in Berkeley College. Contact him at david.yin@yale.edu.

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