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When it comes to realm of decision making, the classical view is that we humans are eminently rational1. According to neoclassical economists, we are utility maximizing agents, with stable preferences that are not influenced by context2.

To say that economic theory has impacted management practice is quite the understatement. Frederick Taylor’s scientific management was largely a manifestation of neoclassical economic theory, which helped spur the industrial revolution of the 20th century. To this day, Taylorism and its emphasis on rationality and efficiency pervade the business world.

Needless to say, homo-economicus is a mythical creature. Cognitive scientists such as Daniel Kahneman and Amos Tversky demonstrated empirically that people frequently violate the axioms of rational choice theory2. For example, people are on average twice as sensitive to losses than they are to equivalent gains—a tendency known as ‘loss aversion’3. Other psychological quirks weren’t given such neutral terms, and are instead commonly referred to as ‘biases’. Following from this cognitive revolution, the field of behavioural economics was born.

What behavioural economists neglected to answer is the ultimate question: why do people possess these psychological dispositions? Answering ultimate questions leads one to evolution, as the human brain has been honed by the forces of natural selection.

Soul searching in the wake of the 2007 Financial Crisis led businesses and governments to take behavioural economics as a discipline seriously4. Undoubtedly, behavioural economists have helped improve our understanding of human decision-making. However, by assuming people are essentially irrational and subsequently producing an endless list of cognitive biases, behavioural economists have arguably missed the forest for the trees5.

What behavioural economists neglected to answer is the ultimate question: why do people possess these psychological dispositions? Answering ultimate questions leads one to evolution, as the human brain has been honed by the forces of natural selection.

Evolution makes one appreciate the adaptive nature of our psychological make-up6. An oversimplification of evolutionary psychology is that these ‘adaptive biases’ helped us solve recurrent problems in our distant ancestral past, which are now frequently misaligned with the demands of the modern world. 

In a prehistoric world dominated by scarcity, avoiding losses may have been evolutionary advantageous. Living as a hunter-gatherer, it would have been sensible to place greater value on preventing losses rather than on obtaining gains, as a reduction of resources may well have resulted in death. In support of the evolutionary explanation, other primate species such as Capuchin monkeys also demonstrate an aversion to losses7.

What is so powerful about evolution is its theoretical parsimony. Evolutionary psychology helps reconcile a bewildering array of psychological theories, and provides greater predictive power than conventional psychology8. For example, evolutionary theorising led to the discovery that loss aversion is domain specific, being amplified or suppressed in different environments. Yexin Jessica Li and her colleagues demonstrated experimentally that activating ‘mating motives’ in men erases their aversion to losses. When considering romantic interest, men on average became more sensitive to gains (whereas women on average did not)9.

Consider rogue trading as a case in point. Seen through the conventional lens, rogue trading is merely irrational behaviour. From an evolutionary perspective however, doubling down on losses makes sense. Even at bad odds, risk taking can pay handsomely for males due to sexual selection– as a few survivors will go on be more reproductively successful10. It probably isn’t a coincidence that virtually all rogue traders are young men.

Loss aversion (or lack thereof) helps explain various aspects of organisational behaviour. However, the ‘adaptive toolbox’ of evolutionary psychology offers a vast array of such instruments11. Evolutionary psychology not only provides us richer models of human decision-making. A deeper understanding of human nature can help us create more effective organizations, and help us address real-world problems12.

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References 

1. Kenrick, D. T., & Griskevicius, V. (2013). The Rational Animal: How evolution made us smarter than we think. Basic Books.
2. Kahneman, D. (2011). Thinking, Fast and Slow. Allen Lane
3. Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The quarterly journal of economics, 106(4), 1039-1061.
4. Akerlof, G. A., & Shiller, R. J. (2010). Animal spirits: How human psychology drives the economy, and why it matters for global capitalism. Princeton University Press.
5. Collins, J. (2015) Please, not another bias! An evolutionary take on behavioural economics. Evonomics.
6. Haselton, Martie G.; Nettle, Daniel; Andrews, Paul W. (2005). “The Evolution of Cognitive Bias” . In Buss, D.M. The Handbook of Evolutionary Psychology. Hoboken: Wiley. pp. 724–746.
7. Haselton, Martie G.; Nettle, Daniel; 7. Chen, M. K., Lakshminarayanan, V., & Santos, L. R. (2006). How basic are behavioral biases? Evidence from capuchin monkey trading behavior. Journal of Political Economy, 114(3), 517-537.8. 
8. Van Vugt, M. & Ahuja, A. (2010) Selected: Why some people lead, why others follow, and why it matters. Profile Books
9. Li, Y. J., Kenrick, D. T., Griskevicius, V., & Neuberg, S. L. (2012). Economic decision biases and fundamental motivations: how mating and self-protection alter loss aversion. Journal of Personality and Social Psychology, 102(3), 550.
10. Gapper, J. (2011) What makes a rogue trader? Financial Times.
11. DeScioli, P., Kurzban, R., & Todd, P. M. (2015) Evolved Decision Makers in Organizations. In S.M. Colarelli & R.D. Arvey (Eds) The Biological Foundations of Organizational Behavior. University of Chicago Press
12. Nicholson, N. (2000) Managing the Human Animal. Thomson-Texere

Published On: April 4, 2018

Max Beilby

Max Beilby

Max Beilby is a Management and Organizational Psychologist and author of the Darwinian Business blog.

Follow Max on Twitter: @MaxBeilby

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