Money behaving badly, the 35-million-year-old problem?

25 years ago the missing link between humans and monkeys was unearthed by an amateur fossil hunter. With no one knowing the value of the discovery, the remains of the 45-million-year-old lemur were hung on a collector’s wall. They remained there for 20 years. Eventually, the lemur or “Ida”, as she is now known, found her way into the proper hands and since has been used to prove the theory of evolution.

Although some of you may find it curious my post-secondary education was in animal sciences – I wanted to be a veterinarian – you will be pleased to know I am not switching careers. So, what is all this about monkeys, lemurs and fossils? You may find it odd but the courses in animal behavior have really served me well. Being able to interpret the thought direction of a human being is not that far removed from watching our animal friends decide if they want to cooperate or not.

In fact, we do a lot of things our fellow mammals do. Recently, while researching human behavior as it relates to financial behaviour, I discovered the most fascinating video here.

In my work you can imagine how often I find myself wondering…Why do so many of us make financial decisions we often regret? Laurie Santos, a young associate professor working with the psychology department at Yale University, provided the answer I was looking for. It just so happens that Dr. Santos had been wondering the very same thing herself. She wanted to know how such smart creatures could create such calamity in our lives, like buying products that nearly collapsed our financial markets or getting ourselves in more debt than we could afford to pay off.

In the video, Santos hypothesizes it is either that we humans were so smart we had built such a complex financial system that we made it too difficult to manage or our problem is more deeply imbedded than that. In other words, does our financial behavior lie in our DNA?

Dr. Santos and her team gave their small community of capuchin lab monkeys some money – not real money of course, rather unmarked coins the primates could use like money. This was to be her monkey economy and the coins were the currency. The team of researchers introduced the monkeys to a monkey market which they had created for them. They taught the monkeys how to use their coins to gain food and treats. Our primate cousins quickly got the hang of it and began using their monkey money with ease.

As it turns out, the monkeys got up to a few bad behaviors humans sometimes exhibit, like stealing the coins when no one was looking or taking them from other monkeys.

Things were humming along at the monkey market and then came the twist: the monkeys were given situations where they had to take risks. Dr. Santos wanted to see if the primitive friends would make the same mistakes we humans do when presented with financial risk. What they found is that monkeys, just like humans dislike loss more than they like gains.

In the end, Santos and her team discovered that indeed those impulses that drive our financial behavior were no different than those of our very prehistoric relative “Ida”, the lemur. Our financial behavior is indeed to some extent is in our DNA and a 35-million-year-old habit can be hard to break.

I surmise that the very same carnal impulse that causes us to zig when we should zag in the market also drive our behaviors around spending and debt. The very instincts that once upon a time kept us alive don’t always serve our financial best interest. The best part of Santos’ discovery is that we are not destined to repeat the monkey’s behavior or even our own. Our ability to see what we have done and make a different choice is remarkable.

Make no mistake behavior is a huge part of finance from the panicked investor wanting to sell at the worst possible time to the borrower purchasing a house they can’t afford. It’s coming from the same place in our brains. Offering clients’ behavior change recommendations as part of their work with you may go a long way to helping them make meaningful financial change without allowing irrational instincts to sabotage their efforts.

Check out my personal blog to join the four week challenge to “Be the change” in 2011.