Diversification is a strategy found everywhere from microorganisms to giant Wall Street investment firms. But is it always the best bet? New findings, reported online this week in the journal Psychological Science, suggest the answer may depend on where you grew up.
A Walmart store epitomizes diversification. In a space large enough to accommodate the White House (three times), a typical Walmart displays a dazzling array of products -- from Apple iPads to Ziploc freezer bags (including blueberries, blue jeans, bibs, cribs, treadmills, washing machines, and Starbuck’s coffee). By contrast, a typical Apple store contains a selection of products ranging from Apple iPads to Apple iPods. Walmart and Apple exemplify two different business models, but the question of how much to diversify applies to many aspects of life, from planting crops and buying stocks to dating and child-rearing.
How much to diversify is a question that arises not only in human business affairs. In fact, it’s an issue throughout the animal kingdom. Some creatures opt for high-diversification—they gather food from a variety of sources, or have lots of offspring with different partners. Other animals play a more focused strategy: they rely on a single, high-energy food source (think of those cute little koala bears, who subsist on a diet of eucalyptus leaves), or produce a small number of offspring with a single partner. Which strategy is better?
The answer depends on the environment in which the animals are living. In unstable, unpredictable environments, diversification usually wins. When it is uncertain what the future will bring, going for variety increases the odds of finding one good food source or producing one surviving offspring. In a predictable and stable environment, on the other hand, it often pays to put all one’s eggs into the same basket. When an animal can prepare for a predictable future, it pays to focus – to stick with one high-energy food source, or invest more in a single offspring.
New research suggests the same rules apply to human beings—with an important caveat. Whether or not people are inclined to diversify seems to be determined by childhood experiences of environmental harshness and unpredictability, but to show up only when people are facing hardships later in life.
According to Andrew White, the first author of the report: “When people face adversity, such as increasing violence or economic downturns, whether or not they diversify depends on their childhood experiences. People raised in harsh, unpredictable circumstances respond to current adversity by focusing on the present and wanting children sooner (behaviors linked to enhanced diversification strategies). By contrast, people raised in safe, predictable environments respond to current adversity by considering the future and wanting children later (behaviors related to reduced diversification strategies).” Other members of the team included Jessica Li at the University of Kansas and Vladas Griskevicius at the University of Minnesota; in earlier blogs I’ve covered their work applying evolutionary ideas to economic decisions (see How a passing mood can profoundly alter your economic decisions, and more links to that research below).
To test how environmental adversity affects people’s preferences for diversification, White and the rest of his team had one group of participants read a story about the increasing problems with violence in modern American society. The story was presented as an article from the New York Times,
complete with the newspapers logo, font, and style. Another group read a neutral story (about organizing a desk). Afterwards, the researchers asked the students about their preferences for diversified bundles of products—for instance, a variety pack of chocolate bars versus a pack containing a single type of chocolate bar, or a pack of different colored shirts versus a pack with shirts of the same color.
The results are depicted in Figure 1.
When the students were worried about increasing violence in the world, those from poor backgrounds preferred more variety and diversity, but those from wealthy backgrounds preferred less variety.
In another study, the researchers looked at the influence of adversity on economic decisions, by asking participants to make choices between stock packages that varied in diversification (100 shares of 8 different electric companies, for example, or 800 shares of a single electronic company). Faced with adversity, people from poor backgrounds preferred more diversified stock packages, but people from wealthy backgrounds preferred less.
These findings highlight the deeper evolutionary logic of economic decisions. From an early age, many of us are reluctant to put all our eggs in one basket. Similarly, in the investing realm, diversification is seen as a fundamental strategy. As such, it can seem irrational when people opt not to diversify. As White notes: “These results show that diversification can be linked to much more fundamental biological processes: They are functionally attuned to respond to environmental conditions in predictable and sensible ways.”
These findings are part of a larger program of research exploring how human decision-making reflects the influence of our evolutionary past, much of it generously funded by an NSF grant to Steve Neuberg, Vlad Griskevicius, and me. The findings are described in my forthcoming book, with Vlad Griskevicius, titled The Rational Animal: How evolution made us smarter than we think (click on the book title to see a cool 3 minute animated video).
How a passing mood can profoundly alter your economic decisions.
Deep Rationality: Evolutionary psychology meets behavioral economics.
Biological Markets: Why money only sometimes buys love
How Would More Women Help the Economy? Sex ratios and spending.
Kenrick, D.T., & Griskevicius, V. (2013). The rational animal: How evolution made us smarter than we think. New York: Basic Books. In press, release date Sept. 10.
Kenrick, D.T., Griskevicius, V., Sundie, J.M., Li, N.P., Li, Y.J. & Neuberg, S.L. (2009). Deep rationality: The evolutionary economics of decision-making. Social cognition, 27, 764-785.
Li, Y.J., Kenrick, D.T., Griskevicius, V., & Neuberg, S.L. (2012). Economic biases in evolutionary perspective: How mating and self-protection motives alter loss aversion. Journal of Personality & Social Psychology, 102, 550–561.
Marshall, D. J., Bonduriansky, R., & Bussiere, L. F. (2008). Offspring size variation within broods as bet-hedging strategy in unpredictable environments. Ecology, 89, 2506–2517.
Olofsson, H., Ripa, J., & Jonzen, N. (2009). Bet-hedging as an evolutionary game: The trade-off between egg size and number. Proceedings of the Royal Society B, 276, 2963–2969.
White, A.E., Li, Y.J., Griskevicius, V., Li, Y.J., Neuberg, S.L. & Kenrick, D.T (2013). Putting all your eggs in one basket: Life history strategies, bet-hedging, and diversification. Psychological Science. Early online release, April.