November 11, 2005

Intuitive Economics

"Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. But are these biases learned or innate? We investigate this question using experiments on a novel set of subjects -- capuchin monkeys. By introducing a fiat currency and trade to a capuchin colony, we are able to recover their preferences over a wide range of goods and risky choices. We show that standard price theory does a remarkably good job of describing capuchin purchasing behavior; capuchin monkeys react rationally to both price and wealth shocks. However, when capuchins are faced with more complex choices including risky gambles, they display many of the hallmark biases of human behavior, including reference-dependent choices and loss-aversion. Given that capuchins demonstrate little to no social learning and lack experience with abstract gambles, these results suggest that certain biases such as loss-aversion are an innate function of how our brains code experiences, rather than learned behavior or the result of misapplied heuristics."

Keith Chen: The Evolution of Our Preferences - Evidence from Capuchin-Monkey trading behavior

"…The first surprise was just how readily they took to the idea of money. Despite the fact that capuchins do not usually display social learning – picking ups skills from other members of the group – it took just a few months for Chen and his colleagues to teach them that small discs could be used to buy treats. The monkey’s appreciation for money even extends to trying to counterfeit it – by using slices of cucumber instead – and hiding their own stash, suggesting that they understand it has intrinsic worth. In these respects capuchins seem to have innate economic wisdom much like our own."

Mark Buchanan: Monkey and Monkey Business, New Scientist, 5 November 2005

"During the chaos in the monkey cage, Chen saw something out of the corner of his eye that he would later try to play down but in his heart of hearts he knew to be true. What he witnessed was probably the first observed exchange of money for sex in the history of monkeykind. (Further proof that the monkeys truly understood money: the monkey who was paid for sex immediately traded the token in for a grape.)"

Monkey Business: Keith Chen's Monkey Research
By Stephen J. Dubner and Steven D. Levitt , Freakanomics

[excerpts from the Mark Buchanan article in New Scientist – needs a subscription.]

The capuchin monkeys working with economist Keith Chen and psychologist Laurie Santos know a good bargain when they see one. They use metal chips as money, buying bits of apple or cucumber from humans, and they seem to know what they are doing. When the researchers make apple cheaper than cucumber – offering more food for the same number of chips – the capuchins opt for the better-value food , as any savvy shopper would. Yet it is not the monkeys’ good economic sense that Chen and Santos find most interesting. Rather it is their tendency, on occasion, to make an irrational deal – and to do so in a distinctively human way.

The capuchins … often make decisions as wisely as any good business person, yet in other cases they appear to succumb to the same irrational temptations we do. And a sense of fairness? Pay one monkey less than another for equal work, and you are likely to get a screeching tantrum, seemingly in protest at gross economic injustice…

…The first surprise was just how readily they took to the idea of money. Despite the fact that capuchins do not usually display social learning – picking ups skills from other members of the group – it took just a few months for Chen and his colleagues to teach them that small discs could be used to buy treats. The monkey’s appreciation for money even extends to trying to counterfeit it – by using slices of cucumber instead – and hiding their own stash, suggesting that they understand it has intrinsic worth. In these respects capuchins seem to have innate economic wisdom much like our own.

They act like people in other, more subtle ways too. In one experiment, Chen and colleagues had the monkeys choose between two apparently different but actually identical gambles. In the first, for the price of one disc, the monkeys got one grape and also a 50-50 chance of getting a second grape, with the outcome determined by a coin flip. Alternatively, the monkeys could choose to start with two grapes but then risk losing one on the flip of the coin. Again, this lead to a 50-50 chance of getting either one or two grapes. The monkeys were able to distinguish between the available bargains because they interacted with two experimenters, each one always offering the same deal. As the chances of ending up with two grapes or one are the same in both bargains, a ‘rational’ individual would be individual about which to take. The real monkeys chose the experimenter offering one grape plus the chance of another about 75 per cent of the time. “We were surprised,” says Chen. “Psychologists we talked to thought the monkeys would simply trade with whomever initially showed the most food.”

There seems to be a parallel in human behaviour. Although the gambles were strictly equivalent, the second involved a potential loss and the first a potential gain, leading Chen to conclude that his capuchins are showing the very same ‘loss aversion’ that researchers have found in humans. Although economic rationality suggests that we should give equal weight to small gains or losses, countless experiments indicate that the pain associated with a loss tends to outweigh the pleasure of an equivalent gain…

To some researchers, the similarity in human and capuchin behaviour suggests an ancient evolutionary origin. “It’s not credit cards and gas prices that make us react irrationally,” Santos suggests, “but something more fundamental that we share with other species.” and if our bias towards loss aversion does have deep origins, it may well be that a behaviour that seems irrational today could have been wise for our ancestors living in very different circumstances. One possibility, Santos believes, is that a heightened fear of losses could have helped our ancestors survive in fluctuating environments…

… Chen believes that economists should already be thinking about the possible implications of these experiments. Loss aversion makes us do some silly things – it explains, for example, why stock markets investors hold on to falling stocks too long and why homeowners may be reluctant to sell their houses at a loss, even when that would be the sensible thing to do. A close evolutionary link between human and capuchin behaviour, Chen suggests, would imply that such behavioural peculiarities may be “hard-wired” into us rather than being learned. As a consequence, economists and policy-makers may find it difficult to alter such behaviour with the usual economic incentives.

Take savings and investments. Most people save too little for retirement, and loss aversion seems to be a primary cause. To begin with, people who do save conscientiously tend to invest less in risky stocks than in safer securities such as bonds, even though stocks, historically, have earned more in the long run. “Loss aversion is one of the most plausible reasons,” says Chen, because stock values fluctuate more strongly than bonds and so an investor in stocks has a greater chance of experiencing a painful loss, even if gains will more than balance it eventually. More fundamentally, putting money away today means losing funds you could spend now, in return for the uncertain prospect of more money in the future. Because many people feel present losses more than the thought of future security, they systematically under-invest.

But by accepting loss aversion as a part of human nature, policy-makers may be able to encourage better decisions. One idea, proposed by economists Richard Thaler of the University of Chicago and Shlomo Benartzi of the University of California, Los Angeles, goes under the slogan of ‘Save More Tomorrow’. Under this scheme, individual employees can elect to have more of their pay put toward their retirement, but only starting next year, with the rate of contribution then rising gradually. In real-world trials, Thaler and Benartzi found that pushing the investment decision into the future, so that the loss feels less painful now, significantly increased the overall investment people made toward retirement.

[Primatologist Frans de Waal and anthropologist Sarah Brosnan] taught capuchin monkeys to trade small rocks for food rewards, serving two monkeys side by side so that each could see the trades offered to the other. At first, the experimenters always gave the monkeys cucumber for their rocks. But then they began giving one monkey a grape, which capuchins greatly prefer to cucumber, or even a free grape without requiring a rock in exchange. They observed that the slighted monkeys often reacted by refusing to trade effectively, going on strike. “In some cases,” says Brosnan, “they’d throw the tokens or rewards back at us.” In others, they would not even eat cucumber they had already ‘bought’. “The moral of the story,” as Brosnan puts it, “is that cucumbers are only bad when someone else has got something better.”

“Capuchin monkeys seem to measure rewards in relative terms,” says de Waal, who suggests that emotions of some kind probably lie behind this behaviour, as in people…

…the broad-brush similarity between humans and capuchins regarding human treatment suggests that something like a preference for fairness could be a deep evolutionary adaptation in primates, rather than something only we humans have learned.”

Posted by sd at November 11, 2005 12:45 AM | TrackBack




One of the many interesting implications of intuitive economics ('loss aversion' being an especially clear and mathematically tractable example) is that AIs will be able to take humans to the cleaners in competitive trading environments unless these pleistocene biases are somehow neutralized. Current financial instruments allow for such flexible and omnidimensional strategies (expressing pure ludic competences) that a deviation from rationality anything like as drastic as that exemplified by the 1 + 0.5 : 2 - 0.5 psychological inequality described above would rapidly lead to total disaster against an unbiased opponent.

Posted by: nick at November 11, 2005 05:17 AM



Innate economic biases are now disadvantageous adpatations for humans: like love of fatty and sugary foods, they were adaptive in a world where lack rather than abundance were the norm, and now they can be disastrous. While the obesity resulting from excessive fat and sugar consumption mainly effect the individuals doing the consuming (though there are obvious knock-on consequences in the health service), economic biases have broader and more long-ranging consequences. Apart from the reluctance to invest in the future which is rooted to loss aversion and the stubborn refusal to take statistics on board, the experiments also seem to suggest that irrational responses to perceived injustice are hard-wired into primate nature. The capuchins cut off their noses to spite their faces, in protest against perceived unfairness which has no basis in reality. The obvious human analog is the charge of exploitation levelled at an exchange which a more rational assessment would label as 'not a good deal' (and look/wait for an alternative deal, or a temporary alternative to dealing). With the capuchins, the resentment is triggered by reference to the deals others make: the sense of fairness is a group adaptation that enabled gene alliances to scramble through the pleistocene. Unfortunately, such irrational biases, like God, are now part of human nature and will always pop up work against runaway trade, until some serious reprogramming takes place.

Posted by: sd at November 11, 2005 08:41 AM



Apologies for DGism, but species are 'strata' whose 'interests' are not evolutionary, but rather the opposite. Wallace is clearer than Darwin about this - natural selection operates like a (cybernegative) homeostat keeping the species from drifting beyond what biological reproduction requires (i.e. adaptation). The regenerative (cyberpositive) dynamics of destratified trade signal the death of the species through transition into an evolutionarily higher form - in this respect hom sap has crossed the catastrophe threshold way back and is slipping off the biostability stratum, taking the whole natural order with it in a cascade effect. Virtually speaking, we don't even have a 'genome' anymore, only technoplastic genocode awaiting efficient commercial volatilization.
This all to say that the 'irrationality' of the monkeys is conservative rationality from the perspective of the stratum they populate. Far better the sacrifice of the preponderant part of experimentally-acquired capabilities if the ultimate consequence of such advances is the liquification of the biostability in runaway technogenesis and impulsion into intelligence catastrophe - thus spake the Lobster God. If idiot conservatism is just flexible enough to persist - and not an iota more - it wins.
Fortunately for the future, the degree of adaptability required for survival is now exploding on a logistic curve as nature sublimes into robotic nanoswarms. Conservatism is becoming a death sentence.

Posted by: Nick at November 14, 2005 11:26 AM



you keep sounding more like that rocket developer in gravity's rainbow all the time so watch out sd, the proof of your obvious dedication may be the death of you. The pure individuality you worship may be as fleeting meteoric spectacle. Those lovegames are fine with me but I'd rather see the individuality applied to ways and means before the big event you know. Instead, hypocritical as hell your kind yokes, cajoles and cheats all and everything into co(r((r))e)lation of collectives damaging schemes (cheapen and downgrades your singularity into one made by mere contrast; typical case of denigrate what can't be done without, what one must depend on yet refuses to appreciate. Kinda like jews refusing to examine why they rile Nazis up so much (preferring to dream their robot dreams).
To conclude here's a little calculous:
sf = the left x the religious

Posted by: p at November 24, 2005 09:49 AM



I live in 40428 Las Vegas, Nevada. Have you been here before?

Posted by: Ein Lo Sechel at September 15, 2006 11:26 AM



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