Monkey Economics
Over the past few years, I have increasingly taken to referring us humans as “Slightly smarter, pants wearing primates.” (here, here and here). When I discussed it in an Forbes interview (Ritholtz’s Monkey Theory) it generated a ton of email:
What is the greatest financial lesson you’ve ever learned?
You’re a monkey. It all comes down to that. You are a slightly clever, pants-wearing primate. If you forget that you’re nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn’t invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I’ve learned have come out of that. As has the field of behavioral economics.
Wall Street clichés, like “cut your losses and let your winners run” come back to prevent the monkey part of your brain from doing what it does. There’s a banana–I want it. That’s how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that–we don’t own anything in the office that doesn’t have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we’re chimps, and don’t let the chimp inside us make those chimp-like decisions.
Every good financial decision I’ve made comes from, “Wait a second, monkey boy, step back, don’t do that.” Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.
It was (mostly) a glib comment to show how irrational and biased us monkeys can be. (I even made reference to it in Bailout Nation.)
It turns out that joke was closer to the truth than anyone believed. Laurie Santos gives a talk at TED that looks at how shockingly similar our biases are to those of monkeys when it comes to hardwired foolishness.
The good news, for investors as well as monkeys, is that recognizing our limitations — acknowledging, learning the details of, and contextualizing them — allows us to rise above them . . .
>
Previously:
Festival of Links (May 21st, 2006)
How Rational Are Markets? (January 16th, 2008)
How Overrated is Sentiment in Economics? (November 22nd, 2009)
Sources:
Ritholtz’s Monkey Theory
David Serchuk
Forbes 03.13.09
http://www.forbes.com/2009/03/12/barry-ritholtz-interview-intelligent-investing-ritholtz.html
Laurie Santos: A monkey economy as irrational as ours
TED, July 2010
http://www.ted.com/talks/laurie_santos.html
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July 30th, 2010 at 11:28 am
This is an idea going back as far as God’s admonition to Cain that “sin is crouching at the door, thou mayest (timshel) overcome it.”
The impulses of our emotions drive us. They arise from the core of our brains and have as their basic goal our survival and procreation. But they are stupid, instinctual impulses that need filtering. Which is what the reasoning portions of the brain are for (the frontal lobes). Spinoza said reason can release us from the bondage of our emotions. Understanding the impulses arising from the core of our being allows us to direct and control them, which is what good traders and Cain should have done. The impulse to kill your brother might have a good basis in a naked struggle to survive, but if reason can’t redirect the impulse such that it is expressed in other ways, it can actually impair survival prospects, as Cain found out.
Indeed, we are monkeys, if we allow our emotions to control us. We become human when we learn to understand and control our emotions such that they serve us, and not the other way around.
July 30th, 2010 at 11:46 am
How many monkeys do you have to put in front of typewriters to duplicate the Abacus prospectus?
July 30th, 2010 at 12:18 pm
I find the the fact that cognitive biases may be biologically-evolutionarily hardwired into our brains astounding!
July 30th, 2010 at 12:19 pm
Your last sentence is why we are not monkeys. We are created to be human beings, unique from all other animals.
Monkeys can’t recognize, contextualize or learn the details of their weaknesses. They just stay the same. They also can’t create. That’s what makes us special. The ability to design, to create, to learn, to perform self-evaluation, to serve others altruistically, and to even sacrifice for others out of love.
July 30th, 2010 at 12:39 pm
And now that our suspicions as to the origins of faulty decision making has been confirmed, how about the origins of decisions themselves? Rational or emotional?
http://www.ted.com/talks/lang/eng/simon_sinek_how_great_leaders_inspire_action.html
July 30th, 2010 at 1:12 pm
^ Supported the Scopes verdict
July 30th, 2010 at 1:15 pm
Limitations?
Who… me????
July 30th, 2010 at 1:19 pm
BR,
“your are a slightly clever, pants-wearing primate”
http://boingboing.net/2010/01/21/story-time-jerry-the.html
A client I presume?
July 30th, 2010 at 1:54 pm
Howard Cosell
July 30th, 2010 at 2:13 pm
Another story, same subject from a couple of years ago:
============
Discover Interview
The “Monkey Whisperer” Learns the Secrets of Primate Economics
Laurie Santos penetrates the world of monkeys… and finds they’re more like humans than we think.
http://discovermagazine.com/2008/nov/13-the-monkey-whisperer-learns-the-secrets-of-primate-economics/
July 30th, 2010 at 3:03 pm
Surprising you are highlighting this interview as a lot of the market commentary in it turned out to be fairly off the mark.
usually you are your own biggest fanboy… personal growth?
July 30th, 2010 at 4:05 pm
The greatest financial lesson I’ve ever learned?
After you contribute to the 401K, employee stock plans, insurance and all that… take 2% of your take home pay every week and put it in the bank.
And leave it there. Don’t ever touch it. Ever. Never. Ever.
.
July 30th, 2010 at 10:55 pm
@hammerandtong2001 Says:
July 30th, 2010 at 4:05 pm
The greatest financial lesson I’ve ever learned?
After you contribute to the 401K, employee stock plans, insurance and all that… take 2% of your take home pay every week and put it in the bank.
And leave it there. Don’t ever touch it. Ever. Never. Ever.
—–
SHUSH! We Monkeys aren’t supposed to know about that! SECURE SAVINGS! RAINY DAY FUND!
Call it a “STASH under the COCONUT TREE!” :-)
July 31st, 2010 at 8:18 am
The greatest lesson I ever learned, financial or otherwise, came perhaps 20 years ago. I lost a sucker bet, and the person I lost it to was kind enough to tell me, in very broad terms, why I lost. Since that day, I have literally and actually saved uncountable dollars and kicked the crap out of several smart asses who were not nearly as clever as they thought. I
n the most satisfying instances, I got some bad people to play my game while allowing them to think I was playing theirs. I slayed as soon as they agreed to my terms. They didn’t know for weeks that they had lost, and may not still know over a decade later that I made it happen by having clever terms they agreed to that looked, on the surface, like I was a frightened idiot. (ACTING!!!)
The lesson: Never Play Someone Else’s Game. Why? They know the rules, you don’t. They will always play it better. They know the lay of the land, you don’t. In fact, you may lose just by playing, and that does not mean it’s crooked. They may know what you could know if you had the time and resources.
Get them to play your game.
BTW, what did I do? In general terms I set an honesty trap. If they meant well and had a win win as a goal, then only good things would happen for all parties. Otherwise, it was a pure example of “I’m Rubber, You’re Glue, It Bounces Off Me And Sticks To You” for all bad intentions tossed in my direction. Based on the moment, I believed they did not have my best interests at heart and was right. They had a self inflicted catastrophe that had lasting effects for them. I’m sill laughing.
July 31st, 2010 at 9:03 am
Don’t add to a loser; call it tuition and graduate.
July 31st, 2010 at 6:29 pm
Loved the article, but, you need to say “we humans”, not us humans (2nd paragraph)..
September 28th, 2010 at 9:01 am
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