Читать книгу Mind Over Money - Claudia Hammond - Страница 11

4

TO HAVE AND TO HOLD

How we hate losing money more than we like making it, how Puerto Rican monkeys helped a researcher understand the financial crisis and why it’s a mistake to choose the same lottery numbers every week.

HEIRESSES AND TRUSTAFARIANS aside, most of us don’t ‘come into’ money. We acquire what money we have through a combination of the opportunities open to us and our own efforts. So it’s not surprising that what we have, we want to hold. What is surprising perhaps is that we seem to value this money so much that many of us would rather hang onto it than use it to acquire more money.

Try this test set by Daniel Kahneman.¹ You’ve been given £1,000. Then you’re offered a choice: double your money on the toss of a coin, or take an extra £500. What would you do?

Most people go for the certainty of taking home £1,500. I know I would. But what if the test is changed slightly?

This time you’ve been given £2,000, and your options are as follows:

1.Go for a coin toss that could result either in you getting to keep the bigger sum or losing half of it, in which case you’d be back down to £1,000.

2.Take a fixed loss of £500, which would mean you’d take home £1,500 – no more, no less.

This time the gamble probably feels more attractive to you. Yet of course the potential outcomes are identical. You either opt for a certain £1,500 or you take a gamble that results in you taking home £2,000 if you win or £1,000 if you lose. I know this test very well, and yet every time I read it, I still find myself tempted by the coin toss in the second version of the test. So why do we view the two sets of options so differently?

It’s all to do with presentation. In the first test, the safe option is presented as a gain. You had £1,000 anyway but without taking any risk you can increase the sum to £1,500. While in the second test, the safe option is presented as a loss. You had £2,000, now you’re being asked to surrender a quarter of it.

The fancy name for our different thinking in these two instances is loss aversion. Our general propensity to loss aversion is one of the most robust findings in behavioural economics, and it influences many of the decisions we make about money. We all like the chance to win, but we’ll put more effort into not losing. The thought of even a small loss holds more power over us than the prospect of a larger gain. Indeed as Amos Tversky and Daniel Kahneman, who developed the theory in this area, have demonstrated, our aversion to a loss is actually measurable. It is just over twice as strong as our attraction to a gain of the same size.

Another example of this aversion can be seen in our reaction to late deliveries. When we place an order for a new sofa, for example, we generally accept that it will take some weeks to arrive. Let’s say the seller in the furniture shop says a month. Fine, we say. But how do we react if the day before the delivery date the company tells us our sofa won’t now arrive for another fortnight? If the seller had said at the start that it would be six weeks we probably wouldn’t have objected. But now we do. Strongly. We demand compensation. And research has shown that we would expect that compensation to be higher than the price we would have been prepared to pay in the first place for a ‘guaranteed’ or ‘speedy’ delivery date of four weeks.² That unanticipated wait of a fortnight is now viewed as a definite loss – which we hate.

And we are not alone. It seems loss aversion is buried deep in our evolutionary biology, because it’s not just us humans who feel this way.

MONKEY BUSINESS

Anyone visiting the island of Cayo Santiago in Puerto Rico needs to wear glasses and a hat at all times to protect them from showers of urine. The culprits are the rhesus monkeys who delight in sitting high in the trees and peeing on the heads of the humans on the ground. Look up at the wrong moment without protection and you could find yourself not only wincing in pain and disgust, but contracting a kind of herpes called simian B virus, which can be fatal.

For Professor Laurie Santos from Yale University, the risks are worth it. Despite their antisocial ways, the Cayo Santiago monkeys have become habituated to humans, which means Santos and her research colleagues can get close enough to study their behaviour in the wild. One of the striking things about rhesus monkeys, and other species such as the tufted capuchins, is their skill at problem-solving. And that got Santos thinking . . . about the financial crisis.

Yes, that’s right. Santos was on a tropical island studying urinating monkeys, and this led her to ponder on the economic crash of 2008. Bear with me on this one. Santos had in mind those investors who were so resistant to accepting losses that they continued gambling on the stock market, hoping for an elusive win, even as their losses grew and grew. She thought too of people who refused to sell their houses for less than they had paid for them, even though these home-owners weren’t in negative equity and with prices slumping could have upgraded to a larger house. Both were classic examples of human loss aversion. The fear of losing out must be buried pretty deep in us, Santos thought. So could it be that the monkeys, our evolutionary cousins, were loss averse too?

To find out she had to return to the Comparative Cognition Laboratory at Yale, where she and her team have a group of captive capuchins. These monkeys have been trained to exchange shiny round tokens for food.

A capuchin called Auric heads to what researchers call the monkey marketplace. There he’s given a pouch filled with tokens. He sees two research assistants behind a glass window holding out their offerings, slices of grape in a dish or occasionally a marshmallow, and he knows that if he puts a token through a round hole in the glass window he’ll get some food in exchange. But Auric’s a smarter monkey than that. He’s also learnt to spot the best deals, choosing to go to the ‘traders’ who offer the most fruit or the biggest treat for the lowest number of tokens.

Like humans, Auric and his fellow capuchins ‘spend’ and ‘value’ their ‘money’ differently. Some use all the tokens in one go, while others hoard them. Some steal tokens from other monkeys, and do so even when they could have stolen fruit instead.

The capuchins are now familiar both with the way the marketplace works and with each of the ‘traders’. Some trust has been established. But then a bit of trickery is introduced. One trader starts to vary the number of grapes handed over in exchange for one token. Auric and his friends are expecting two grapes – the number the trader displayed. And half the time they get two. But the rest of the time they only get one.

To confuse matters even more a second trader settles into a pattern of appearing to be about to give just one grape for each token, only to add in a bonus grape at the last moment, but only half of the time.

Now I expect you can see what is happening here? Auric and the other capuchins are taking part in a similar test to the one Kahneman does on us humans. And as you’ll have realised, whichever trader the monkeys go to they have a 50/50 chance of getting two grapes or one grape. Even so, our furry friends demonstrate a clear preference for one deal over the other.

They head to the second trader 71 per cent of the time.³ And loss aversion would seem to explain why. For his last-minute offer of a second grape must seem like a gain, while the first trader’s late withdrawal of a grape feels like a loss. Just like humans, Auric and friends seem to hate a loss.

For Laurie Santos, this is evidence that the irrational bias towards loss aversion goes back a long way in our evolutionary history, perhaps as long as 35 million years. It’s deep-rooted in us and therefore hard to overcome.

But why does it exist and persist?

The neuroscientist Dean Buonomano suggests loss aversion stems from the time when the main obsession of humans was to find enough food; in other words, to a time when we were more like capuchin monkeys. Buonomano’s hypothesis is very simple. In these pre-historic times, human beings, like monkeys now, prized the food they already had over the prospect of gaining some extra food, especially as they had no good way of storing it. In these circumstances, getting extra food was welcome, but losing food could be catastrophic. It could result in starvation.⁴

This theory might get at the evolutionary root of loss aversion but doesn’t fully explain why we continue making the same decisions in the modern age. And a particular issue for us now is that loss aversion can lead us to make poor, sometimes disastrous, financial decisions. Just think back to investors refusing to cut their losses during a bear market. In such cases, loss aversion doesn’t just lead us to irrationally choose one option over another even though both options have the same outcome. It leads us to choose the option with the worst outcome.

THE BEST WAY TO LOSE WHEN PLAYING THE LOTTERY

Imagine you’re a student. You’re offered a free lottery ticket with the chance to win a 15 euro book token. You’re shown the ticket, and you notice the number on it. Then you’re given the chance to swap that ticket for a different one. In return for swapping tickets, you’ll get a free gift – a pen embossed with your university’s name. Would you agree to exchange the tickets or not?

When students at Tilburg University in the Netherlands were given this choice only 56 per cent of them went for it, even though their chances of winning the book token were the same and so they might as well have had the free pen.⁵

Perhaps you’re thinking it was the lousy gift that explained their reaction. Couldn’t the researchers have tempted the students with a slightly more enticing freebie? Maybe, but that’s not the issue. The important detail here is that the students were shown the number on the original lottery ticket. This meant that having swapped their original ticket for another, if the number on the original was drawn out of the hat, they would know they’d made the wrong decision. So they were prepared to pay what’s known as a ‘regret premium’; in other words missing out on the free pen (which was a guaranteed gain) in order to avoid the potential disappointment of missing out on a book token (which was a highly unlikely loss) later on.

Further proof of our tendency to behave this way comes from the fact that other students who were not shown the number of their original lottery ticket were much more likely to agree to the swap. For these players, the regret if their new ticket didn’t win was diluted. All they’d know (and they knew this in advance) was that this winning ticket could have been the one they swapped. But the chances were remote: one in a few hundred or a few thousand – depending on how many tickets were issued.

Here then is a tip for anyone thinking of playing the National Lottery. Always pick different numbers and make no attempt to remember the numbers you picked in the past. If you pick the same ones every week and for whatever reason miss a week, you expose yourself to the potential agony – infinitesimally remote as it is – that ‘your’ numbers will come up. That can’t happen if you adopt a random and amnesiac strategy. The exception is if everyone you work with belongs to a syndicate. If they have a big win, you’re definitely going to know about it. So unless you think you can cope with all your colleagues becoming millionaires overnight while you don’t, you might just have to join them to save the regret later. In which case it doesn’t matter whether you have the same numbers or not.

That said, if you live in the Netherlands, some lottery organisers are one step ahead. In a fiendish example of the exploitation of regret aversion, they’ve designed a lottery in which everyone’s unique postcode is automatically entered into the draw. Although you can only win if you’ve paid for a ticket, in any given week you can look up to see whether you’d have won, if only you had bothered to enter.

Here then is a second tip, this time specifically for Dutch people. Don’t do it. Don’t ever look to see whether yours was the winning postcode, unless you’ve bought a ticket. You’ll not be surprised to hear that researchers found that people anticipate far more regret over failing to enter this alternative postcode lottery than the Netherlands’ National State Lottery, where the numbers are random.⁶

Another example of this tendency happened in my own life – and again it relates to my recent house move. The timing of that move meant that the removal men we decided to hire (see Chapter 3) were going to pack all our belongings into their van on a Friday, then drive the van to their locked yard and park up, before moving everything into our new house on the Monday.

We found it somewhat unnerving that everything we owned would be spending the weekend unguarded on a deserted industrial estate somewhere on the outskirts of London. Wasn’t there a chance that however high the fences, thieves could break into the yard and steal the van? If that happened, there wouldn’t be any compensation, the company told me. But we could take out insurance if we wanted to.

That seemed sensible. Yet the cost was several hundred pounds. This sounded like a lot to insure our belongings for just one weekend against an event that was presumably extremely unlikely. Or did the high premium mean that theft was not uncommon? I was determined to make a rational decision about whether to buy the insurance or just risk it. So what do you think I decided to do?

In Chapter 10, we will see how poorer people sometimes don’t take out insurance because their poverty forces them to think about the difficulty of paying the premiums in the short term rather than the disastrous financial consequences of a fire, flood or theft in the long term. I didn’t have this problem. If I’d really wanted to, I could have afforded to pay for the policy.

Given we know costs like these can seem inconsequential in the context of a huge transaction like a house purchase, perhaps you think I opted to take out the insurance?

Well I did, but not out of relative thinking. And not because I was acting prudently either. No, the impulse to take the insurance in this case, as in many cases, was fear of loss. I wasn’t making a purely rational financial decision. Instead I was, as it were, insuring myself against anxiety in the present and potential regret in the future. Regret aversion was at play again.

As it happened, I struck lucky. The removal van wasn’t stolen over the weekend, but, more than that, it turned out the removal company had forgotten to take out the insurance policy on my behalf, so there was nothing to pay. The perfect outcome. No outlay and no regret.

THE POWER OF OWNERSHIP

Here’s a classic study conducted by Amos Tversky and Daniel Kahneman back in 1990: students were told they would be playing the parts of either buyers or sellers. The sellers were each given the gift of a coffee mug and told it was theirs to keep or theirs to sell if they chose to do so. The sellers then named the minimum price they would be prepared to sell the mug for.

Buyers were now shown the mugs and asked to name the maximum price they would offer for one. On average the buyers were happy to pay a top price of $2.25. But for the sellers this wasn’t enough; they wanted twice as much.⁷

Now you might suppose that both sellers and buyers were simply driving a hard bargain; that in the end they would settle on a mutually agreed price. But the sellers held out, even though it was pretty clear that, at nearly $5, they were asking for more than these buyers were prepared to pay.

This is called the endowment effect. In simple terms, it means we tend to value things we already own more highly. We endow them with a greater value. It happens even when we have only owned the items for a very short time. In this instance, the students hadn’t even seen these particular mugs until the morning of the experiment. They hadn’t paid for the mugs or even chosen them. And yet their determination to keep them was such that they named an over-inflated price.

It may seem hard to believe. Yet the findings of Tversky and Kahneman on the endowment effect have been replicated again and again in many similar tests. It’s one of the areas where the evidence is really strong.

Consider this scenario: I come into your living room and see a cushion on your sofa. You only bought it the other week, and so it can’t really be said to have great sentimental value. Yet even if I offered you a bit more than the price you paid for the cushion, I suspect you’d refuse my offer. The nuisance factor would come into your thinking, no doubt. You bought the cushion because you wanted a cushion. Sell it to me, and you have buy to another one. But it’s not just the bother. The cushion is yours now. In monetary terms, it doesn’t make a great deal of sense. How difficult would it be to replace the cushion with an exact replica? And by accepting my deal, you’d make a small profit into the bargain. But we don’t always think purely in mercenary terms. With loss aversion, we want to hold onto what we have. The same happens here.

Of course, this strength of attachment doesn’t apply to things we’ve acquired for the purpose of selling them. Successful traders want to make a profit, but they also want to shift their stock rather than hang onto it. And as sites like eBay demonstrate, there are things we own, sometimes for years, which we will happily sell on. That said, it’s often the case that inexperienced sellers start off setting the level of the bid threshold too high, probably because even though they don’t want that old sideboard any more, having chosen to buy it once upon a time and then owned it for a while, its value is higher in their eyes than in the eyes of others.

If you’ve ever witnessed the reluctance of children to swap with their sibling when they’ve opened the wrong Christmas present by mistake, then you have seen the endowment effect in action. In a study conducted in New Mexico five-, eight- and ten-year-olds were given either a ‘super-ball’ or a keyring shaped like a toy alien. When the children were asked beforehand what they thought of the two gifts, they rated the ball more highly. But even so, when the children who had received a keyring were given the chance to swap it for a ball, 40 per cent chose to hold on to it.

To check there wasn’t something peculiar about these two gifts, the exercise was repeated with other objects. Whether they were given the chance to trade a mechanical pencil for a highlighter or a calculator for a box of six coloured pens, the same thing happened. Children in all the age groups are on average twice as likely to stick with whatever they were first given than to agree to swap.⁸

Imagine you are looking to trade in your car and buy a new one. Your old car is in pretty good condition without too many miles on the clock and according to the Blue Book, the bible of second-hand car prices in the US, it looks as though you should get $6,000 for it. The first dealer you visit offers you $6,500 for your car and has the new model you want for $8,500. But knowing it’s always good to get a second opinion, you visit another dealer. This one says your old car is only worth $5,500, but they have the same new car you want for just $7,500. Which deal would make you happier?

The net result is of course exactly the same. Either way you pay $2,000 to swap your old car for the newer one, but in a finding which by now probably won’t surprise you researchers report that most people preferred the first deal. Yes, people would rather overpay for a new car provided they felt they were well compensated for the car they already own.⁹

The endowment effect is also at work when companies offer free trials. The inertia of most customers means that once people have been lured into taking out a subscription for a magazine with that apparently generous offer of six free copies, they generally maintain the subscription for years. But the second reason why free trials work is that people get used to having something – in this case, a magazine in the post – and by cancelling the subscription they are imposing a loss on themselves.

Let’s return one more time to the capuchin monkeys in that lab at Yale. It seems the endowment effect influences their behaviour too. When given the chance to trade a piece of fruit for an oatcake, a foodstuff they like equally well in other circumstances, the capuchins are reluctant. Perhaps offering them an extra oatcake would be an incentive? But no, the monkeys still preferred to hold on to what was already theirs. They would only trade the fruit they already had if they were given masses of oatcakes in return.¹⁰

So the instinct to hang on to what we’ve got is as strong in us as in apes. Money should help us overcome this instinct. Yet it appears that such is our attachment to money that sometimes, far from lubricating the wheels of commerce, it can act as a brake. Even when we’re offered more money, we won’t let go.

Of course there are many situations where the existence of money does facilitate exchange. That is the point after all. But key to making that happen is getting the price right. And it’s to that subject that we turn next.