Financial Daily from THE HINDU group of publications
Sunday, Jun 12, 2005
Financial Daily from THE HINDU group of publications Sunday, Jun 12, 2005 |
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Investment World
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Economics Columns - Simple Economics Primate instinct B. Venkatesh
ECONOMICS is monkey business! A published working paper by Professor Chen and his colleagues at Yale University shows that monkeys apply economics just the way we do. Here is how: To start with, Professor Keith Chen and his colleagues taught the monkeys to use tokens as money to "buy" food. Soon, the researchers found that the monkeys could deal with price changes. Suppose one token could buy two grapes and one jello cube (two types of food offered to the monkeys). Assume that the price of grapes increases and that of jello cubes decreases. That is, a token can buy only one grape and three jello cubes. What would you do, assuming you like the food that the monkeys eat? If you are rationally inclined, you will prefer jello cubes because the decline in price means that you can consume more. Well, the monkeys acted the same way! The researchers then ran a test to see how the monkeys react to gambling decisions. And sure enough, they displayed tendencies of loss aversion effect. Those familiar with behavioural finance will recognise that Daniel Kahneman won a Nobel Prize in economics for documenting this effect on humans. Kahneman and Amos Tversky found that we take risks when faced with losses but play it safe when faced with gains. You may be displaying this behaviour everyday if you are an active trader in the stock market. What do we learn from all this? For one, Adam Smith was, perhaps, not farsighted when he said that the art of monetary exchange belonged only to humans. For another, this experiment shows that economics is not about esoteric concepts such as cobweb cycles or sunspot equilibrium. It is essentially what we do with our lives — exchanging goods, whether humans or animals.
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