Given the dire state of world finances, it is tempting to think that monkeys could do a better job of looking after our money. It would certainly satisfy the current public and press desire to see our top bankers’ pay reduced to peanuts!
A recent research experiment at Yale University found that Capuchin monkeys can be taught to use money to buy food and even to choose between different sellers, based on price and risk. The research may help us understand how people make financial decisions and how we can compensate for an innate bias towards safety.
The monkeys tended to go for the safe option when given the choice between, say, the certainty of two grapes from a safe seller rather than one or three grapes from a risky seller.
But interestingly, once the monkeys were faced with a certain loss, they were more inclined to take an even bigger risk to try to reverse that loss. This is like you or me choosing a ‘double or quits’ option when we lose a bet.
The conclusion from this is that we – humans, that is – seem to be hard-wired to behave in this way, and have been since we branched away from the Capuchins 35 million years ago. The impact of loss is 2.5 times greater than that of a gain, according to the research.
I have seen this in practice many times. For instance, I tell a potential new client that our fees will be twice what they are paying their present accountant, but the extra fees will be more than paid for out of the tax savings that we identify. Very often the client decides not to take us on. Why? They clearly perceive a risk or uncertainty in acting on our advice, and I now understand from this research that the gain has to be very large compared with the fees for them to make the change.
The good news is that by recognising this innate bias, we can compensate for it and make better, more rational financial decisions.
To find out more, Google ‘yale monkey money’ and ‘prospect theory’.
Maybe this bias towards low risk should be built into financial modelling in assessing investor risk profiles (or perhaps it is already)? Please post a comment or let me know if you have come across this in practice – especially you IFAs!