Monkeys Exhibit the Same Economic Irrationality As Us

grrlscientist writes "Laurie Santos is trying to find the roots of human irrationality by watching the way our primates make decisions. This video documents a clever series of experiments in 'monkeynomics' and shows that some of the stupid decisions we make are made by our primate relatives too."

Comments

Irrational Market Behavior

[catchblue22]

Many of the economic theories that our governments have been adhering to over the past few decades have as a core premise that overall, markets behave rationally. Specifically, the "Efficient Market Hypothesis", in which it is proposed that the price for a good or service ALWAYS reflects ALL available information, implicitly assumes that market actors are acting rationally. And the "Efficient Market Hypothesis" is at the core of most of the mind-blowing mathematical economic models that many of our society's decision makers use to make economic decisions. The question is: If humans naturally make irrational decisions because we are biologically predisposed to do so, then how can markets be assumed to behave rationally? There have been striking experiments done on seemingly rational MBA students in which they make staggeringly irrational economic decisions. The monkey experiments seem to reinforce our predisposition to act irrationally.

In other words, the above research points towards falsifying the primary economic ideology that has been used to govern America since Reagan. This is no small matter. It affects all of our lives. And yet, if you listen to Republicans lately, they are still calling for policies derived from these economic models, policies such as tax cuts for the rich, working towards a reduction in governmental economic power, so as to let the power of the private sector and the magical invisible hand of the market place work their economic miracles. Myself, I am more of a Keynsian. I think the market is useful, but it can run amok if not attended to by a government powerful enough to guide it towards the public good.

Here is an excellent episode of the TV series Nova called "Mind over Money", which lays out many of my arguments clearly. The video only streams to the US.

Re:Irrational Market Behavior

[Anonymous Coward]

Keynes was also guilty of attempting to quantify economics; he just used different numbers to reach different conclusions.

If you don't want to fall into that trap, you're left with von Mises. But I doubt you'd agree with him. You've made your decision.

Re:Irrational Market Behavior

[GigsVT]

In other words, the above research points towards falsifying the primary economic ideology that has been used to govern America since Reagan. This is no small matter.

No, it doesn't. It starts with a basic assumption that we make irrational economic decisions. You are begging the question.

"Rationality" is based on personal, usually unknowable, factors. It's impossible to prove or disprove the rationality of an economic decision since there's no way that you can take psychological factors, wants and needs into account, some of which may not even be fully known to the subject.

Re:Irrational Market Behavior

[catchblue22]

I would argue that the intellectual basis of neo-conservative economics comes mainly from the "Rational Market Hypothesis", and is thus largely based on the assumption of rationality. From the assumption of market rationality, there have been derived mathematical models that would make many mathematicians quiver. If you arranged a group of all the people in the world who actually understand these models, I suspect you could fit all of their names on a single sheet of paper (perhaps with a small font). The ideologues take the results or predictions of these models, as derived by Nobel Prize winning economists, and fit them into their ideologies. Then politicians like Reagan listen to their ideological advisors and implement their plans and models. I doubt Reagan himself had any formal understanding of economics beyond first year econ. courses.

Re:Irrational Market Behavior

[vtcodger]

***The intellectual basis of all economics rely on rationality of actors, Keynesianism included.***

In no way shape or form. You need to read up on Keynesianism and to do a little work on the difference between rationality and predictability. It seems to be possible to predict behavior (especially, but not limited to, foolish behavior) without understanding it and certainly without thinking it is rational.

Re:Irrational Market Behavior

[catchblue22]

Economists like Milton Friedman and his ilk would put it that in a perfect free market economy there is no such thing as a stock market bubble. There is no such thing as a housing bubble. They would say that any bubble like behavior is due to "distortions" in the market place that cause their perfect system to malfunction. They base these assertions on their assumption that the market always places the best price on a good or service based on all available information. Thus a bubble is impossible. They assume that people buy houses to satisfy their own need for accommodation and to maximize their future net worth. What they miss is that, in seeking to maximize their net worth, individual market actors, and the market itself will buy houses because the prices are going up. They will be afraid that they will be priced out of the market. They will be exuberant because they seem to be making lots of money on rising real estate prices, and they will borrow obscene amounts of money to jump into the rising market, forcing prices up even further. The prices will keep rising for a while, reinforcing the irrational belief that the inflated market is based on real supply and demand factors. Eventually, the prices crash. Since people were buying because the prices were rising, when the prices stop rising, demand dries up, causing the prices to crash.

The situation above has played out in the American real estate market. And it has played out in the stock market many times. Such behavior is inherently irrational. If the market itself, and not just the individual actors displays irrational behavior, then I would argue that the "Efficient Market Hypothesis" is falsified.

Rationality" is based on personal, usually unknowable, factors. It's impossible to prove or disprove the rationality of an economic decision since there's no way that you can take psychological factors, wants and needs into account, some of which may not even be fully known to the subject.

No. We are talking about the rationality of the market itself, and not necessarily about just the individual actors. The assumption is that the market will always set the best price based on supply and demand. The assumption is that the market price is always the most rational price based on all available information. Bubbles are irrational phenomenon. The price is going up because the price is going up. If we have built into our brains inherent irrationality, and if all actors in the market display this to some degree or another, then the market is going to act irrationally, since market behavior is just the overall behavior of all individuals.

Re:Irrational Market Behavior

[VortexCortex]

The market itself is the fallacy.

Company X earns Y amount of profit annually.
Company X's stock market price increases or decreases due to market perceptions.
Company X still earns Y amount of profit annually, but its its stock price reflects a different value.

Yahoo's stock price raised when Microsoft wanted to purchase them, and tanked after Yahoo's refusal to sell;
This affected stock price of Yahoo even though they still earned the same profit annually...

Re:Irrational Market Behavior

[catchblue22]

FDRs policies did not get us out of the Great Depression (which was only called that in the US). What got us out of the Great Depression was getting into a war. Pulling millions of men out of the labor market had the obvious effect of lowering unemployment.

My god, is the intellectual level of our society so low that posters can blatantly contradict themselves and not even realize it?!!

The above poster claims that FDR's programs (I am assuming he means public works expenditures) did not get us out of the Great Depression. It was the war that pulled America out instead. But what is a war, except a huge public works program, a massive series of government expenditures used to build weapons and to pay soldiers. It is indistinguishable economically from say building the Golden Gate Bridge or the Hoover Dam, except that the products of war are more destructive. The real thing to notice is that war expenditures seem to be the only type of public works program that America will accept in any great amount.

Rational for the species or the individual?

[spun]

Modern economic research shows that human beings are not primarily motivated by self interest, but by ideals of fairness and reciprocity that benefit the species as a whole. What is rational for the individual may not be what is rational for the species, and vice versa. Evolution operates on more than just an individual level, in fact what makes an individual "more competitive" in a simplistic sense might not be what gets selected for. For instance, those feelings of fairness and reciprocity most of us have. In an experimental game called the Dictator game, one person is given a large sum of money. They can give all to none of it to player B. What they do give is multiplied by a small percentage and then person B can give all to none of it back to person A, but the gift is again multiplied. Well, rational actor theory says the most rational choice for each individual is to keep ALL the money given to them. The most rational act for the species in general is for person A to give all the money to person B, and person B to give a proportional amount back, because this maximizes gains for the species as a whole. And, surprise surprise, this is close to what most people do, exchanging not all but a large chunk of the money and increasing overall reward.

Also, given imperfect information about the world, perhaps just doing what has worked up until now for your ancestors is not a bad strategy in general, especially for the less intelligent.

Researcher has a bias for 'smart' vs. 'stupid'

[ElectricTurtle]

She seems to think that the 'sure thing' is always smart and that risks are always 'mistakes'. She must really like making 1% on her savings account. Wealth is not generated that way, nobody has ever been outstandingly successful by generating 1% growth. Human civilization is built on risks, and individually those have sometimes raised people up and sometimes dragged people down, but to categorize that behavior as 'stupid' or a 'mistake' is to spit upon the whole of human endeavor. But of course this makes me a sub-human fat-cat corporatist, so be sure to ignore me while I reap the rewards of more risky investments. Those were just stupid mistakes after all that just happen to defray my cost of living.

Confirmation Bias?

[cephus]

I love reading about an experiment in which a question is posed and then the reults are interpreted strictly within the context of that specific question without considering other possible explanations for the observed behavior.

In this case, the guy on the left always cheated while the guy on the right sometimes cheated but sometimes completed the trade as advertised. So why isn't the conclusion that monkeys have a sense of fair play? So they choose not to deal with the guy who always cheats. Or maybe the conclusion is that happy outcomes are remembered for longer than unhappy ones, so that the monkey's memory says that dealing with the guy on the right produces a better outcome more often?

Failing to consider other explanations seems ... well ... irrational.

I always laugh at these insults

[gurps_npc]

They take a brilliant, evolved decision making process and call it "irrational".

No. The decisions you think are "irrational" are often in fact VERY rational - based on a 'wider' world.

For example, the gambling thing does not consider TRUSTWORTHYNESS.

Taking the gamble that the odds say is good, assumes the odds are accurate. Once you understand that the gamble may be a con and the gamble may be fake, then YES, you should treat the 50/50 chance to gain as less interesting than the 50/50 chance to lose.

This means the the 'absolute" bias, and Loss Aversion are NOT stupid irrationalities, but in fact a logical decision due to the knowledge that people are liars and cheats.