What can pigeons tell us about our investing instincts?
When I think of Lexington, Kentucky, I think of thoroughbred racehorses on white-fenced farms -- I don't think of profligate sky-rats propped up at slot machines.
But two professors from the University of Kentucky, Lexington, have set up games of chance for our feathered friends, with the intention of studying how they, and we, weigh up the odds when gambling.
The results, published by the Royal Society, have implications for gamblers/investors of all species.
Pigeon casino
The researchers let the birds peck at lights to obtain rewards of food pellets. If the pigeons pecked on the left, they had a 20% chance of receiving 10 pellets, and an 80% chance of receiving none; on average, the reward for pecking on the left was 2 pellets.
But if the pigeon pecked on the right, he was sure of getting exactly 3 pellets.
One might expect a sensible, profit-maximising, pigeon to always peck on the right, where the expected reward was 50% higher, but most showed a definite preference for the lower-return gamble.
Why does this matter?
So what does this have to do with investment? The answer depends in part on whether you see parallels between investing and gambling, a debate we've had here in the past.
If the experiment points to sub-optimal decision making being hard-wired in higher animals such as ourselves, then this is something that investors need to be aware of.
Why would we have evolved to choose the less beneficial option? One theory holds that, in a foraging-for-food situation, the odds are not constant; the very fact of confronting a low-probability, high-reward, risk may in fact shift the odds in ones favour -- scaring away a competitor, for example. But while that might work on the savannah, or indeed at the poker table, is does not work at the roulette wheel or share-dealing platform.
Another explanation is that, even though we tend to be risk-averse, and even though the pain of losing is greater than the pleasure of winning the same amount, we still remember and over-emphasise large infrequent wins, and we downplay the significance of frequent small losses.
The wrong kit
We might like to think of ourselves as rational profit-hunters, value-seeking missiles, truth-finding machines, but the reality may be that evolution has not equipped investors to excel at their chosen game. Mother Nature may have sent us to the match with the wrong kit.
In the words of evolutionary psychologist Steven Pinker, "our brains are made for fitness not for truth".
Our human opponents are equally badly equipped, of course, and the good thing for readers of this article is that there is arguably a competitive advantage in at least being aware of our inherent tendency to make the wrong choices, rather than assuming that investing/gambling is something that we have evolved to be good at.
We should also remember that our competitors nowadays are not just humans, but also automated trading systems which don't directly suffer from this evolutionary handicap, although these too are programmed by humans with biases.
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