Over the past few years, I have increasingly taken to referring us humans as “Slightly smarter, pants wearing primates.” (here, here and here). When I discussed it in an Forbes interview (Ritholtz’s Monkey Theory) it generated a ton of email:
What is the greatest financial lesson you’ve ever learned?
You’re a monkey. It all comes down to that. You are a slightly clever, pants-wearing primate. If you forget that you’re nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn’t invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I’ve learned have come out of that. As has the field of behavioral economics.
Wall Street clichés, like “cut your losses and let your winners run” come back to prevent the monkey part of your brain from doing what it does. There’s a banana–I want it. That’s how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that–we don’t own anything in the office that doesn’t have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we’re chimps, and don’t let the chimp inside us make those chimp-like decisions.
Every good financial decision I’ve made comes from, “Wait a second, monkey boy, step back, don’t do that.” Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.
It was (mostly) a glib comment to show how irrational and biased us monkeys can be. (I even made reference to it in Bailout Nation.)
It turns out that joke was closer to the truth than anyone believed. Laurie Santos gives a talk at TED that looks at how shockingly similar our biases are to those of monkeys when it comes to hardwired foolishness.
The good news, for investors as well as monkeys, is that recognizing our limitations — acknowledging, learning the details of, and contextualizing them — allows us to rise above them . . .
Festival of Links (May 21st, 2006)
How Rational Are Markets? (January 16th, 2008)
How Overrated is Sentiment in Economics? (November 22nd, 2009)
Ritholtz’s Monkey Theory
Laurie Santos: A monkey economy as irrational as ours
TED, July 2010