Endowment Effect in Monkeys?

1. Endowment Effect in Monkeys?

2. Adam Smith, Wealth of Nations • “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that.”

3. Notes from Chen’s Research • Chen, Lakshminarayanan and Santos: How Basic are Behavioral Biases? • Lakshmiraryanan, chen and Santos: Endowment Effect in capuchin monkeys

4. How Basic Are Behavioral Biases? • 1. Reference dependence • 2. Loss aversion Evidence that agents treat losses differently than comparable gains has been found in experimental markets as the endowment effect(Kahneman, Knetsch, and Thaler 1990), in the trades of individual investors who are reluctant to realize losses (Odean 1998), and in the behavior of house sellers who are unwilling to sell below buying price (Genesove and Mayer 2001).

5. Questions • Are biases such as loss aversion the result of social or cultural learning and specific environmental experiences? • Could they be more universal, perhaps resulting from mechanisms that arise regardless of context or experience?

6. Background: Neuroeconomics • Several recent papers have shed light on the foundations of behavioral biases. • Growing literature in neuroeconomics: use imaging technology to map brain activity as subjects make economic decisions and correlates these measures of brain activity to subjects’ decisions. • McClure et al. (2004): spacial distribution of brain activity is correlated with decisions involving intertemporal choice

7. Background: Evolutionary Forces • What types of evolutionary forces might have selected for organisms that display behavioral biases? • Rayo and Becker (2005): explore what types of evolutionary pressures would have produced both past payoff and social reference piotn effects • Samuelson and Swinkels (2006): explore under what conditions choice set effects might be evolutionarily optimal

8. More • Henrich et al (2001): perform behavioral experiments in 15 small-scale societies, all of which are relatively isolated and have had relatively limited market contact. • Finds large differences in how they play the ultimatum game.

9. Economic Experiments with Children • Harbaugh, Krause, Berry (2001): conduct experiments exploiting age instead of cultural or species variation. They conduct numerous simple budgeting experiments on children between the ages of 7 and 11 and find that violations of GARP are relatively rare. • Harbaugh, Krause, and Vesterlund (2001): find evidence of the endowment effect in children as young as 5 and find no evidence that the effect diminishes with age up through college • This suggests that the endowment effect is not reduced by market exposure, though it leaves open the possibility that children learn this behavior through experience they receive before age 5

10. Economic Experiments with Animals • Kagel, Battalio, Green, and their colleagues (1975 etc.) taught rats and pigeons to use levers that each deliver a unique reward . • They find that subjects’ choices during such a shift largely respected GARP; in fact, utility maximization does a much better job of explaining their data than any other available choice theory (including the canonical nonhuman psychological choice model, the • later experiments involving gambles, Kagel and his colleagues observed that, on balance, rats and pigeons obeyed expected utility theory but do display some systematic biases. • However, in contrast to results on human (and our capuchin) subjects, Kagel and his colleagues find that prospect theory does not explain the deviations from expected utility theory that are present in rats and pigeons matching law

11. Why the Capuchin? • They are relatively quick and adept problem solvers, skilled tool users • Close evolutionary neighbor to humans. • A con? Can’t get a good sample size. • Six adult capuchins, three male and three female ranging from 7 to 8 years old participated in the experiment.

12. The Experiments • Monkeys were endowed with a budget of tokens (identical inch-wide aluminium discs) and participated in trading – discs for food rewards. • First experiments established a trading scheme and taught the monkeys what kind and amount of food they were offering for a single token • The monkey could then choose to trade with whomever it chose.

14. Can the Capuchins behave broadly rationally in an economic market? • Presented monkeys with a choice between traders who offered two different kinds of food that the monkeys liked equally: apple slices and grapes. • The monkeys split their budget on the two fruits. • Now, introduce a compensated price shift: put one of the goods (apples) on sale by providing double the quantity for a single token. • The monkeys bought more apples!

15. Now introduce a risky choice... • One experimenter always offered (and gave) one piece of apple • A second experimenter always offered two pieces of apple, but half the time gave one piece and half the time gave two. (expected value = 1.5) • Here the monkeys chose the risky bet.

16. What these results told Chen • 1. Capuchins understand the market • 2. Capuchins used information about trader’s past behavior to make informed choices • 3. Monkeys appear to behave rationally in the market – trying to get a better deal. • Question – will they use heuristics like humans do?

17. Test • 1. one experimenter gave food by way of a perceived gain: he started out by showing the monkey only one piece of the apple but when paid gave an additional second piece of apple half the time. • 2. the other experimenter started out by displaying two pieces of apple but when paid took one of the pieces of apple away half the time • Expected value of the two traders is the same

18. Result? • Monkeys significantly preferred to trade with the experimenter who gave a perceived gain over the one who gave a perceived loss • Monkeys seem to evaluate their choices in terms of an arbitrary reference point, namely the initial amount of food that they were shown. • In a similar experiment: one experimenter showed one and gave one, another showed two and gave one... The monkeys preferred the first. • They are averse to losses!

19. The Endowment Effect • It may be unique to humans... The concept of “ownership” is a sophisticated notion that one can or should hold exclusive control over an object or good. • But maybe the source of the EE is just loss aversion. • Brosnan et al (2007) finds evidence of the EE in chimpanzees.

20. Chen’s EE test • Baseline session – subjects given 12 tokens and allowed to use the tokens to purchase rewards by placing a token into the hand of one of two experimenters. Could get fruit or cereal. Adjusted rewards to get it so the goods were equally liked (indifferent). • Experimental sessions: • 1. replaced subjects’ tokens with food • 2. presented only one experimenter as a trading option to the subject • Session 1: fruit for cereal • Session 2: cereal for fruit • Subjects could either eat the endowed food objects or trade them for the offered equivalent

21. Variations: Experiments 2, 3 & 4 • 2. Subjects were endowed with either cereal or fruit and could then trade it for a highly valued treat – Marshmallow fruit roll up. • 3. Tested to see if the EE existed even after subjects were compensated for the cost of transacting the trade: subjects could eat their endowed food objects or trade them for the equivalent food plus a small compensation (oats that were tested for how much a transaction “costs”) for the transaction cost of the trade. • 4. Temporal effect – can the subjects put off the pleasure of immediate eating? Tested between a slow-to-eat food like an almond in its shell or a quick food an almond without a shell.

22. Results: Experiment 1 • If ownership of foods does not impact the value the capuchins place on them, then monkeys should consume the same ratio of fruit discs to cereal as they did in the baseline. • In contrast, subjects consumed far more of the fruit discs when they were endowed with fruit discs and far more cereal when endowed with cereal.

23. Results Experiment 2, 3 & 4 • The draw of the excellent treat overcame the endowment effect. • Compensating for transactions costs did not overcome the EE • Immediacy of ingestion did not overcome the EE

25. Discussion • These results fit with a growing body of work suggesting that many of our own species behavioral biases appear to be shared with other primate species... Even those that are distantly related in evolutionary time. • Implication is that our human systematic biases might be the result of evolved cognitive strategies • Question: do the biases serve some evolutionary purpose?