Smart yet foolish: what can monkeys teach us about human loss aversion?

Monkey Economics: the surprising lessons in human decision-making

As we consider our choices, we focus more on what we stand to lose rather than how we might benefit. According to “prospect theory,” an economic theory developed by researchers Daniel Kahneman and Amos Tversky in 1979, “losses loom larger than gains.” The graph below (click display images to see it) demonstrates the effects of prospect theory, which describes how individuals choose between options and how they estimate the perceived likelihood of different options.

This concept really blew my mind when I watched a TED Talk by cognitive psychologist Dr. Laurie Santos, titled “A Monkey Economy as Irrational as Ours,” about how she had looked for the roots of human irrationality by watching the way our primate relatives make decisions. After studying the actions of a simple economy using monkeys, Dr. Santos discovered that we are far less sophisticated than we think we are.

Why do we make irrational decisions so predictably? A clever series of experiments in "monkeynomics" shows that some of the silly choices we make, monkeys make too.

TED Talk: A monkey economy as irrational as ours

"the fact that even though we're actually really smart, sometimes uniquely smart, we can also be incredibly, incredibly dumb when it comes to some aspects of our decision making." — Dr. Laurie Santos

When it comes to potentially losing money versus definitely losing money, most people decide to take excessive risk by flipping the coin as per Kahneman and Tversky’s prospect theory. Dr. Santos went a step further and found that the monkeys do the exact same thing! Their survival instinct is to avoid losing something they already have, but in doing so they’re irrationally willing to take excessive risk.

You can see how our natural instincts can drive us to make irrational decisions, especially when confronted with a complex situation that impacts survival. No wonder it’s hard to change our economic behaviours—they go back 35 million years! No matter how much we have, we all suffer from loss aversion, just like our monkey ancestors.

Recognise your potential for irrational decisions and actively question your instincts, especially in high-stakes situations.

With gratitude,
Arunjay.

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