Laurie Santos, in a recent remarkable TED Talks “A monkey economy as irrational as ours“, laid out two important biological bias in the way humans are making decision: a loss aversion and thinking in relative terms.
To prove this theory she built from scratch a framework of the financial market and make it test by brown capuchin monkeys. In the speech she demonstrates how this evolutionary relatives are making similar mistakes as we do.
The cornerstone of the demonstration is the test of the two following hypothesis:
Gain Scenario : You have been given $ 1,000, you now have to choose to either
- Take risk: (Head) You get $ 1,000 more – (Tail) You get $, 0 more
- Play it safe: You just get $ 500 more with certainty
Loss Scenario: You have been given $2,000, you now have to choose to either
- Take risk: (Head) You loose $ 1, 000 – (Tail) You loose $ 0
- Play it Safe: You just loose $ 500 with certainty
The bold propositions are the ones that humans tend to choose and the ones that monkeys took. This kind of decision played out in lots of bad way in humans. They are why stock investors hold onto losing stocks longer because they are evaluating them in relative terms. They are why people in the housing market refused to sell their house because they don’t want to sell at a loss.
For IT investments it could explains:
- Why maintenance contracts are more and more suspended, over loosing money by continuing them
- Why SOA investments are postponed to the benefits of cost cutting programs
Here are few practical examples where the enforcement of the underlying rule of these hypothesis apply in the CIO life.
Scenario 1 – Gain
| PREFER PLAY IT SAFE | RATHER THAN TAKE THE RISK |
| Fixing Old | Invest in new |
| Focus on control | Training the operation |
| Invest in best of breed | Implement an integrated software |
| Develop Security procedures & technologies | Develop responsible workforce |
| Incremental innovation | Disruptive innovation |
Scenario 2 – Loss
| PREFER TAKE THE RISK |
RATHER THAN PLAY IT SAFE |
| Stop paying maintenance fees | Continuing the support |
| Do nothing | Fixing |
| Outsourcing | Developing the workforce |
| Continue with a risky investment | Stop the project |
I hope these new insights will help the CIO community delivering an appropriate statement to their board when presenting their strategic investments and
- Focus on sure gain rather than potential benefits
- Focus on potential stability versus sure loss
- Lay out investment in relative terms when helping board select the right project
… of course all of this must be done to the benefit of the company and strong ethical behavior must apply.
I invite you to look at this fantastic talk “A monkey economy as irrational as ours” – about 20 minutes speech available in 13 languages. Great show.
Posted on September 20, 2010
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