Making Predictable Money Mistakes – Time and Again

April 9, 2014 Katharina Lochner

Laurie Santos on Why We Make the Same Mistakes

Humans are incredibly irrational, particularly when it comes to financial decisions. The mistakes we make are predictable and they appear again and again. We make the same mistakes even if we are given feedback. But these mistakes might not be as human as we think… Laurie Santos from Yale University and her colleagues exposed monkeys to problems with money. First they taught them how to use money. Then they set up a monkey marketplace in which monkeys received tokens that they could then use for buying things. In this TED Talk, Laurie Santos explains how the monkeys made use of money.

Initially monkeys made sure they could get more and better food for the same amount of money. In this sense they behaved like humans. Moreover they did not save money and sometimes stole it from their keepers. However, when it comes to more complex decisions, what do the monkeys do? Do they make the same mistakes humans make?

For example, there are two pretty classical scenarios. 1) You have been given $1000. You have the choice of either getting an additional $500 for sure or having a 50 per cent chance of getting $1000 or nothing. Which option would you choose? 2) You are given $2000 and have the choice of either giving away $500 for sure or having a 50 per cent chance of losing nothing or $1000. Which option would you choose? The result is basically the same: either having $1,500 for sure or getting $2,000 with a chance of 50 per cent. However, in the first scenario humans usually choose the safe option and in the second scenario the choose the risky option.

With this scenario she illustrates two of the human biases that come into play when we make financial decisions: We have a hard time to think in absolute terms, but find it easy to think in relative terms. Moreover we hate it when we lose money. When we are in a loss mind set we become more risky. The interesting thing is that monkeys do exactly the same thing.

Thus, monkeys can be taught to deal with money and they do the smart just as much as the irrational things we do with money. However, the key message is that the way humans act when they make financial decisions is really a deeply ingrained and ancient behaviour. This means that such habits are extremely hard to overcome. The good news is that we can overcome our limitations. The only thing is that we have to recognise these limitations.

About the Author

Katharina Lochner

Dr Katharina Lochner is the former research director for the cut-e Group which was acquired by Aon in 2017. Katharina is now a researcher and lecturer at the University of Applied Sciences Europe in Iserlohn, Germany. In her role at cut-e, she applied the research in organizational and work psychology to real-world assessment practice. She has a strong expertise in the construction and evaluation of online psychometric tools.

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