Are we all naturally stupid? Amos Tversky, a prominent cognitive psychologist and one of the founding fathers of modern behavioral economics, said: “My colleagues, they study artificial intelligence; me, I study natural stupidity.”
Tversky’s partner in the study of natural stupidity was Daniel Kahneman, who in 2002 won a Nobel Prize in Economics for their work together. That work did much to undermine the traditional model of Rational Man, upon which much of Wall Street Economics has been based. On the traditional model, people make eminently self-serving and consistent decisions, carefully designed to maximize personal benefits and minimize costs. But you don’t have to look far to find examples of seemingly irrational economic decisions. Consider just a few:
• Corrected for inflation, Elvis Presley spent $785,400 on a Cadillac customized with gold-plated hubcaps and 40 coats of paint made from pearls, oriental fish scales, and diamond dust.
• Ray Otero, a hard-working building superintendent in New York City, has budgeted over $30,000 a year for lottery tickets, despite never having had a big win yet.
• A college professor had carefully protected his paltry retirement savings by putting them in safe bond accounts. In 2001, though, after watching the stock market run up wildly for several years, he ignored rumors from financial experts who predicted the bubble was about to burst, and put half his scarce retirement nest egg into risky stocks. He was just in time to participate in couple of historically unprecedented crashes in stock market values. (I, um, know this fellow quite well, since I see him every time I look in the mirror, and I also know that unless his latest book becomes a New York Times bestseller, he is planning to retire some time after his 79th birthday, to a small hut in rural Ecuador).
It turns out that Elvis Presley, Ray Otero, and Doug Kenrick aren’t all that unusual. Indeed, behavioral economists have demonstrated numerous ways that people’s decisions are biased and irrational. A classical example of irrational decision-making, studied by Tversky and Kahneman, is “loss aversion.” To a classical economist, $100 is worth exactly $100, whether it is coming or going, but people’s psychological pain when they lose $100 is of much greater magnitude than their psychological joy when they gain $100.
For the last two decades, these two perspectives have been dueling it out. Which is correct? Are we admirably rational in our choices, as the classical economists assume, or are we hopelessly irrational, as the behavioral economists claim? For the last several years, with the assistance of funding from the National Science Foundation, my colleagues and I have been arguing for a third alternative: That our decisions are in fact biased, but in ways that reflect an evolutionary Deep Rationality. Along with decision scientist Vlad Griskevicius, I lay out the evidence for this new perspective in the book The Rational Animal: How Evolution Made Us Smarter Than We Think.
In that book, we re-examine some famously odd decisions made by Elvis Presley, the Kennedy family, Steve Jobs, and Walt Disney, as well as the everyday decisions made by less illustrious mortals like you, me, and that testosterone-driven teenage boy risking his neck at the local skateboard park. We also delve into modern research on decision-making, neuroscience, and evolutionary biology to try to understand the functions of human decision-biases.
We Ain't So Dumb
One of the things that the new evidence reveals is that biases are often not as stupid as psychologists like to make them out to be. For one thing, biases like loss aversion are found in monkeys as well as men, and often make sense (when you are the edge of starvation, a possible loss is in fact more important than a potential gain). For another, our colleagues have been uncovering evidence that those biases get turned on and off in functionally sensible ways. Both men and women get more loss averse when they are in danger, for example, whereas men seeking mates completely turn off loss aversion, and throw caution to the wind (women remain cautious, for functional reasons, see Li et al., 2012). Furthermore, people’s economic biases get turned and off, in functional ways, over the lifespan – depending, for example, on whether their environments suggest that resources are scarce or abundant.
Deep Rationality Parasites
Bob Cialdini, whose work I have discussed in prior blogs, was my graduate school mentor. I was his first graduate student at Arizona State, and my coauthor Vlad Griskevicius was one his last crop (before his recent retirement from academia). Bob got famous for uncovering the ways in which influence professionals exploit our simple decision-biases. One of the fun chapters in our new book takes a page from Cialdini’s approach, by examining what we call Deep Rationality Parasites – people like Bernard Madoff, who exploit our evolved biases in the way that cuckoos, who lay their own eggs in warbler’s nests, exploit the parental instincts of other birds. In another fun chapter, we look at the very different biases that men and women have when they are investing resources in finding mates.
Vlad and I think the new book presents an important and potentially revolutionary set of ideas in a fun and readable package. Here’s the link to our 3 minute video that lays out the arguments, complete with funny little animations of Elvis and M.C. Hammer, and a cute 5-year-old failing to resist the temptation of a plate full of marshmallows.
The book just started shipping last week, so it remains to be seen whether or not it will help you make better financial decisions, or whether it will sell sufficient copies to help me upgrade my retirement hut in Ecuador. I can only say for certain that it is a heck of great deal to have a job that allows me to do continue to learn as I earn, to study such fun topics along the way, and to try to make our research findings relevant to everyday life.
Kenrick, D.T., & Griskevicius, V. (2013). The rational animal: How evolution made us smarter than we think. New York: Basic Books.
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.