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frequent double-teams, and a tough approach that made Jordan pay phys-
ically for any attempted slam dunks.
The Pistons™ strategy was built on top of a talented roster that included
Isiah Thomas, Joe Dumars, and Dennis Rodman. So the Pistons™ victo-
ries over the Bulls came from two complementary approaches. First, they
had great players with solid fundamentals appropriate for any basketball
game. Second, they used a specific, situation-driven strategy.
Similarly, investing success in a financial world that is often crazy
combines an approach that is timeless with opportunism driven by the
current situation. This chapter contains timeless suggestions for mean
markets, and the next chapter provides timely advice for this era.

Why Our Toughest Financial Battles Are
with Our Irrational Selves

“We have met the enemy, and he is us.” Walt Kelly coined this phrase in
the comic strip Pogo on Earth Day 1971. Because people cause pollution,
Kelly suggests that environmental progress must rely on modifying
human behavior. Similarly, this chapter focuses on why we are so often
our own worst financial enemies, and how to prevent this internal foe
from bankrupting us.
In early chapters, we reviewed the evidence suggesting that mean mar-
kets stem from individuals who are far from rational. Furthermore, we
found that the less-cognitive aspect of human mental abilities”the lizard
brain”often causes our problems. To organize and utilize solutions to
our financial shortcomings, it helps to understand why the lizard brain is
built to bankrupt us.
Humans act irrationally in some financial situations because we are
born without instincts that guide us to good solutions. In financial mar-
kets, we are fish out of water. The human financial situation is similar
to that faced by other animals that live in unnatural, novel environments.
232 Profiting from the New Science of Irrationality

It is something we share with our closest genetic relatives, the chim-

Rational and Irrational Apes

Chimpanzees in the wild can demonstrate remarkable mental sophistica-
tion. I learned this directly in the summer of 1997, when I was living at a
research station in the rainforest of western Uganda.
Harvard professor Richard Wrangham, who did some of his early
work with Jane Goodall, founded the center in 1987. A central goal of the
research was to follow and observe chimpanzees in their natural environ-
ment. When I arrived, the same group of chimpanzees (along with their
offspring) had been observed and documented for 10 years.
In my stay with the chimpanzees, I grew to respect their intelligence.
For example, one day I was following a group of wild chimpanzees when
they entered an area of thick vegetation. My fellow human observers and
I were unable to follow, and thus we lost contact with the animals.
Where could we find our chimpanzee group? My Ugandan compan-
ions suggested that we walk about two miles through the forest to a fig
tree that was producing ripe fruit. Furthermore, the men suggested that
we would arrive at the fig tree before the chimpanzees, and therefore we
would be able to take a lunch break.
The Ugandans knew that the chimpanzees keep track of which trees
are fruiting. Thus, the logical place to wait for them was at one of their
tasty food sources. But how could we know when the chimpanzees
would arrive? The answer is that the chimpanzees regulate their body
temperature, and this provided an estimate for their arrival time.
When chimpanzees eat in these fig trees, they often climb high enough
that they leave the shade of the forest floor and expose their dark and
hairy coats to the sun. The chimpanzees don™t like to overheat, so on
sunny days, the chimpanzees tended to visit this particular tree in the cool
Timeless Advice 233

morning. On cloudy days, like the one in question, however, the chim-
panzees tended to arrive later.
We marched off to the fruiting fig tree, ate our lunch, and had a nap.
The chimpanzees arrived right on schedule! I found this amazing. To get
to the right tree at the right time, the chimpanzees used a mental map of
the forest, they understood the seasonality of the fruiting, they under-
stood the weather, and they knew how to find their way. They did it per-
So chimpanzees can be really, really smart. The Ugandan men were
able to navigate their way through the forest only because of years of
experience. If I had been alone, I would have died in the forest long
before I found any food (or chimpanzees). So these chimpanzees were
able to solve this navigation problem better than most humans.
In contrast to savvy chimpanzees in the wild, those in zoos and
research centers often look less intelligent. I learned this lesson in a
humorous way from my friend Brian Hare, whom I met in Uganda that
summer when he was a college student. He subsequently earned his doc-
torate from Harvard, and is now an accomplished primatologist.
Brian did some of his early work with chimpanzees at the Yerkes Pri-
mate Center in Atlanta. As an enthusiastic young scholar, Brian decided
to see if he could get the chimpanzees to imitate him. Although one often
hears the expression “monkey see, monkey do,” there is very little evi-
dence that monkeys or apes (chimpanzees are apes, not monkeys) learn
through imitation.
Brian™s test of chimpanzee imitation took the following form. Each
day, he planned to do a headstand in front of the chimpanzees. Since
chimpanzees do not normally perform headstands, any such behavior
would be clear evidence of imitation. Brian explained his idea to the
workers who cared for the animals. Their experience with captive chim-
panzees had made them a bit cynical, and they laughed at Brian™s youth-
ful zest.
Undaunted, Brian proceeded to do a headstand in front of the captive
234 Profiting from the New Science of Irrationality

chimpanzees. What happened? Within a few moments, the chimpanzees
did respond, not by doing headstands, but by throwing their dung at
Brian. (Their aim was pretty good, and they seemed to especially enjoy
hitting him in the face.) He quickly abandoned his headstand project.
Captive chimpanzees exhibit lots of strange behaviors that seem very
different from the sophisticated rainforest navigation that I had observed
in Uganda. In their artificial settings, captive chimpanzees have little to
do (their food is provided), they do not travel long distances, and they
even weigh much more than their wild counterparts.
In short, captive chimpanzees sit around, eat too much, exercise too
little, and are so bored that they throw dung for entertainment. (Sound
like your boss?)
Are chimpanzees supersmart, or are they overweight, lazy, and bored?
The answer is that they are capable of both types of behavior; what they
do depends on their environment. When chimpanzees are in their natural
environment, their instincts guide them to appropriate behavior. In con-
trast, when chimpanzees are in certain types of unnatural environments,
such as zoos and research centers, those same instincts get them in seri-
ous trouble.

Humans as Zoo Primates

Humans can be thought of as self-domesticated apes or as zoo primates.
Our not too distant ancestors lived in small groups and earned their food
the old-fashioned way”by hunting animals and gathering plants.
Technological change, first in the form of agriculture, and later in the
industrial and information revolutions, has changed our world funda-
mentally. A modern city is as unnatural an environment for a human as a
zoo is for a chimpanzee. (A big difference, of course, is that we have built
and moved into our own zoos, while people placed other animals in zoos.)
In recent years, scholars have shown that some of our individual
irrationality can be explained by understanding the differences between
Timeless Advice 235

the human ancestral environment and the current world in which we live.
Just as zoo chimpanzees do crazy things, so do “zoo” humans.
This idea of a “mismatch” between human nature and industrialized
living conditions has been explored quite thoroughly in nonfinancial
areas.1 Perhaps the problem shared by most people is that we enjoy the
taste of foods that are bad for us. Why don™t we derive pleasure from
healthful foods? The answer, according to some theorists, is that our
ancestors lived in a world where both calories and dietary fat were scarce.
For our ancestors, this theory suggests, the more calories they ate, and
particularly the more dietary fat they consumed, the better. Ancestral
humans who ate more of what we would term “junk food” were better
able to survive and reproduce than their competitors.
Thus, our ancestors were built to love food, and to especially enjoy
fatty foods. The world has changed, and saturated fats, for example, now
cause heart disease. Nevertheless we are still built to feel joy at eating the
foods that helped our ancestors, not the foods that would help us today.
Professor William Irons of Northwestern University summarizes this
hypothesis as follows in an important scientific paper:

in ancestral environments, these preferences [towards different
foods] motivated people to come as close as their circumstances
allowed to optimal diets. However, in modern environments, the
abundance of different types of foods is vastly different, and these
preferences often motivate people to choose diets that are much less
healthy than are possible in their [current] circumstances.2

Because we live in a different world from our ancestors, our very human
nature pushes us toward food that is bad for us. In a famous scientific
article, “The Past Explains the Present: Emotional Adaptations and the
Structure of Ancestral Environments,” Professors John Tooby and Leda
Cosmides make the same argument about human logical abilities.3 What
was good for our ancestors can be bad for us living in a modern world.
Professors Cosmides and Tooby reason that it is simplistic”or
236 Profiting from the New Science of Irrationality

downright wrong”to say people are irrational. Rather, our behavior
depends on the context. In settings that were relevant to our ancestors, we
are able to perform brilliantly. In novel settings, however, even with our
big prefrontal cortexes, we look silly because we are fish out of water.
Using this logic, Professor Gerd Gigerenzer and colleagues are able to
rephrase the Linda-the-bank-teller question that tripped us up at the
beginning of this book in such a way that people behave rationally. Recall
from Chapter 2 on individual irrationality that most people commit the
“conjunction fallacy” by choosing answer (2) in the following problem
instead of the correct answer (1).

Linda is 31 years old, single, outspoken, and very bright. She
majored in philosophy. As a student she was deeply concerned with
issues of discrimination and social justice, and also participated in
antinuclear demonstrations.

Which of the following two alternatives is more probable?
1. Linda is a bank teller.
2. Linda is a bank teller and is active in the feminist movement.

Professor Gigerenzer changes the problem slightly to:

Linda is 31 years old, single, outspoken, and very bright. She majored
in philosophy. As a student she was deeply concerned with issues of
discrimination and social justice, and also participated in antinuclear
demonstrations. (This part is identical to the other wording.)

There are 100 people who fit the description above. How many of
them are:
Bank tellers?
Bank tellers and active in the feminist movement?

In this second version, the conjunction fallacy disappears as most people
get the question right.4 In a series of related experiments, Professor
Timeless Advice 237

Gigerenzer has shown that human brains work better when problems are
described in frequencies (e.g., how many out of 100?) as opposed to
probabilities (e.g., which is more probable?). Professor Gigerenzer
argues that human brains are built to deal with frequencies.5
Why are humans better at frequencies than probabilities? No one
knows for sure, but I always imagine humans in the ancestral environ-
ment thinking about outcomes in terms of frequencies. Something like,
“Remember when it last rained like this, we caught those tasty antelopes
on the west side of camp.” I never picture them saying, “The probability
of successful hunting increases by 7% during rains.”
The conclusion of the work by Professors Cosmides, Tooby, Gigeren-
zer, and others is to reconsider how we should interpret human acts that
appear to be irrational. This more nuanced perspective suggests that
humans are not designed to be crazy, but rather that we can be pushed to
crazy actions by certain situations.
There is an active debate within academia on the value of this ancestral
perspective. Interestingly, many of the leading behavioral economists,
including Professor Richard Thaler, see little value in considering how
human nature was shaped in ancestral environments.6 Others (including
me) see the ancestral perspective as a primary organizing principle under-
lying all study of human nature, including its irrational aspects.
This idea that human problems stem from living in an unnatural envi-
ronment helps to understand the deep cause of human irrationality, and it
provides the basis for the practical advice in the rest of this book. The key
hypothesis is that many of our financial difficulties stem from the fact
that, like captive chimpanzees, humans are built for one world yet live in
another. So humans are not built to make good financial decisions.
The lizard brain helped our ancestors achieve their goals, but in situa-
tions that were never experienced by our ancestors it often pushes us
toward self-destructive or seemingly irrational acts. When it comes to
financial decisions, the situation is far worse than a lack of natural talent.
There are three sorts of decisions that we face. For some decisions the
lizard brain™s effects are neutral, for others the lizard brain guides us
toward the correct solution, and for the third category the lizard brain is
238 Profiting from the New Science of Irrationality

systematically out of sync. Financial markets are this third and worst of
these settings.

Neutral Setting: The Lizard Brain Looks Silly
in Las Vegas


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