Yes, that’s right. Santos was on a tropical island studying urinating monkeys, and this led her to ponder on the economic crash of 2008. Bear with me on this one. Santos had in mind those investors who were so resistant to accepting losses that they continued gambling on the stock market, hoping for an elusive win, even as their losses grew and grew. She thought too of people who refused to sell their houses for less than they had paid for them, even though these home-owners weren’t in negative equity and with prices slumping could have upgraded to a larger house. Both were classic examples of human loss aversion. The fear of losing out must be buried pretty deep in us, Santos thought. So could it be that the monkeys, our evolutionary cousins, were loss averse too?
To find out she had to return to the Comparative Cognition Laboratory at Yale, where she and her team have a group of captive capuchins. These monkeys have been trained to exchange shiny round tokens for food.
A capuchin called Auric heads to what researchers call the monkey marketplace. There he’s given a pouch filled with tokens. He sees two research assistants behind a glass window holding out their offerings, slices of grape in a dish or occasionally a marshmallow, and he knows that if he puts a token through a round hole in the glass window he’ll get some food in exchange. But Auric’s a smarter monkey than that. He’s also learnt to spot the best deals, choosing to go to the ‘traders’ who offer the most fruit or the biggest treat for the lowest number of tokens.
Like humans, Auric and his fellow capuchins ‘spend’ and ‘value’ their ‘money’ differently. Some use all the tokens in one go, while others hoard them. Some steal tokens from other monkeys, and do so even when they could have stolen fruit instead.
The capuchins are now familiar both with the way the marketplace works and with each of the ‘traders’. Some trust has been established. But then a bit of trickery is introduced. One trader starts to vary the number of grapes handed over in exchange for one token. Auric and his friends are expecting two grapes – the number the trader displayed. And half the time they get two. But the rest of the time they only get one.
To confuse matters even more a second trader settles into a pattern of appearing to be about to give just one grape for each token, only to add in a bonus grape at the last moment, but only half of the time.
Now I expect you can see what is happening here? Auric and the other capuchins are taking part in a similar test to the one Kahneman does on us humans. And as you’ll have realised, whichever trader the monkeys go to they have a 50/50 chance of getting two grapes or one grape. Even so, our furry friends demonstrate a clear preference for one deal over the other.
They head to the second trader 71 per cent of the time.3 And loss aversion would seem to explain why. For his last-minute offer of a second grape must seem like a gain, while the first trader’s late withdrawal of a grape feels like a loss. Just like humans, Auric and friends seem to hate a loss.
For Laurie Santos, this is evidence that the irrational bias towards loss aversion goes back a long way in our evolutionary history, perhaps as long as 35 million years. It’s deep-rooted in us and therefore hard to overcome.
But why does it exist and persist?
The neuroscientist Dean Buonomano suggests loss aversion stems from the time when the main obsession of humans was to find enough food; in other words, to a time when we were more like capuchin monkeys. Buonomano’s hypothesis is very simple. In these pre-historic times, human beings, like monkeys now, prized the food they already had over the prospect of gaining some extra food, especially as they had no good way of storing it. In these circumstances, getting extra food was welcome, but losing food could be catastrophic. It could result in starvation.4
This theory might get at the evolutionary root of loss aversion but doesn’t fully explain why we continue making the same decisions in the modern age. And a particular issue for us now is that loss aversion can lead us to make poor, sometimes disastrous, financial decisions. Just think back to investors refusing to cut their losses during a bear market. In such cases, loss aversion doesn’t just lead us to irrationally choose one option over another even though both options have the same outcome. It leads us to choose the option with the worst outcome.
THE BEST WAY TO LOSE WHEN PLAYING THE LOTTERY
Imagine you’re a student. You’re offered a free lottery ticket with the chance to win a 15 euro book token. You’re shown the ticket, and you notice the number on it. Then you’re given the chance to swap that ticket for a different one. In return for swapping tickets, you’ll get a free gift – a pen embossed with your university’s name. Would you agree to exchange the tickets or not?
When students at Tilburg University in the Netherlands were given this choice only 56 per cent of them went for it, even though their chances of winning the book token were the same and so they might as well have had the free pen.5
Perhaps you’re thinking it was the lousy gift that explained their reaction. Couldn’t the researchers have tempted the students with a slightly more enticing freebie? Maybe, but that’s not the issue. The important detail here is that the students were shown the number on the original lottery ticket. This meant that having swapped their original ticket for another, if the number on the original was drawn out of the hat, they would know they’d made the wrong decision. So they were prepared to pay what’s known as a ‘regret premium’; in other words missing out on the free pen (which was a guaranteed gain) in order to avoid the potential disappointment of missing out on a book token (which was a highly unlikely loss) later on.
Further proof of our tendency to behave this way comes from the fact that other students who were not shown the number of their original lottery ticket were much more likely to agree to the swap. For these players, the regret if their new ticket didn’t win was diluted. All they’d know (and they knew this in advance) was that this winning ticket could have been the one they swapped. But the chances were remote: one in a few hundred or a few thousand – depending on how many tickets were issued.
Here then is a tip for anyone thinking of playing the National Lottery. Always pick different numbers and make no attempt to remember the numbers you picked in the past. If you pick the same ones every week and for whatever reason miss a week, you expose yourself to the potential agony – infinitesimally remote as it is – that ‘your’ numbers will come up. That can’t happen if you adopt a random and amnesiac strategy. The exception is if everyone you work with belongs to a syndicate. If they have a big win, you’re definitely going to know about it. So unless you think you can cope with all your colleagues becoming millionaires overnight while you don’t, you might just have to join them to save the regret later. In which case it doesn’t matter whether you have the same numbers or not.
That said, if you live in the Netherlands, some lottery organisers are one step ahead. In a fiendish example of the exploitation of regret aversion, they’ve designed a lottery in which everyone’s unique postcode is automatically entered into the draw. Although you can only win if you’ve paid for a ticket, in any given week you can look up to see whether you’d have won, if only you had bothered to enter.
Here then is a second tip, this time specifically for Dutch people. Don’t do it. Don’t ever look to see whether yours was the winning postcode, unless you’ve bought a ticket. You’ll not be surprised to hear that researchers found that people anticipate far more regret over failing to enter this alternative postcode lottery than the Netherlands’ National State Lottery, where the numbers are random.6
Another example of this tendency happened in my own life – and again it relates to my recent house move. The timing of that move meant that the removal men we decided to hire (see Chapter 3) were going to pack all our belongings into their van on a Friday, then drive the van to their locked yard and park up, before moving everything into our new house on the Monday.
We found it somewhat unnerving that everything we owned would be spending the weekend