In 2005, the Department of Psychology at Yale University taught capuchin monkeys how to use money, then observed what spending decisions they made when faced with various purchasing scenarios.
In their studies monkeys were given a budget of disks and asked to decide how much to spend on apples, and how much to spend on the gelatin cubes, even as the prices of these goods and the size of their budgets fluctuated. Capuchins performed much like humans do. Capuchins, like humans, react rationally to these fluctuations.
In a second experiment, capuchins were asked to choose between spending a token on one visible piece of food that half the time gave a return of two pieces, or two pieces of visible food, that half the time gave a return of only one piece. Economic theory predicts that consumers should not care which of these outcomes they receive since they are essentially both 50-50 shots at one or two pieces of food. The capuchins, however, vastly preferred the first gamble, which is essentially a half chance at a bonus, than the second gamble, which is essentially a half chance at a loss.
Loss avoidance is a key feature of prospect theory which explains why we tend to work harder to prevent the loss of £10 than we would to gain £10. What we own is valued more than the equivalent that we do not own. The Yale experiment with capuchins points to loss aversion being deeply rooted in our evolutionary past, and as such this primitive irrational bias is very difficult to overcome when we go through life making everyday financial decisions. One major consequence of this can now be observed in the mortgage market as the housing bubble deflates. Last June, mortgage approvals hit a record low which implies that the house prices that sellers are asking for are too high in relation to the credit that is available to buyers. This reluctance to lower prices can easily be explained by the seller’s aversion to the loss perceived when the stratospheric house evaluations of one year ago are used as reference. The bias is only made worse if the owner is in negative equity.
Michael Shermer, author of The Mind of the Market, has long recognised the role that loss aversion and other irrational biases play in market making decisions. He writes of the Yale research:
This research goes a long way toward debunking one of the biggest myths in all of psychology and economics, known as “Homo economicus.” This is the theory that “economic man” is rational, self-maximizing and efficient in making choices.
What is interesting is that Shermer is generally in favour of minimally regulated free markets – a libertarian ideal he shares with followers of the Austrian School of Economics. Rational individualism forms one of the key pillars upon which the system of laissez-faire capitalism relies. Due to a deeply ingrained mistrust of regulation and big government, there is a strong tendency for libertarian capitalists to be in denial about global warming issues. However, Shermer seems to be one of those rare individuals with libertarian leanings who has become convinced of the reality of anthropogenic climate change and the need to adopt measures to mitigate against it. He has since voiced support for tradeable emissions permits via carbon credits, a scheme intended to harness free market mechanisms to bring down CO2 output globally. In effect, CO2 pollution becomes a scarce right much like private property.
If recognition of our inherent psychological irrational tendencies is what allows people like Shermer to overcome the ideologically-driven confirmation bias that is endemic within the libertarian movement, then perhaps it is the exploitation of these same psychological mechanisms that holds the best promise for overcoming our reluctance to change course toward a more sustainable future. A major obstacle for taking decisive action in the face of peak oil and climate change, is the fact that most people frame this decision as losing the fossil-fueled lifestyle of convenience. This is why off-shore drilling has such an appeal in the US because it offers a chance, however small, that they would not have to give up their high energy consuming existence. Expert lifehackers are well versed at motivating productive activity by working with one’s emotional biases rather than directly opposing them. With an appropriate reframing, even loss aversion can become a powerful ally when pursuing changes in lifestyle one may be reluctant to make initially. It is a strategy that everyone, on both sides of the sustainability debates, would do well to adopt.