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Wednesday 20 April 2011

Unit Bias: Cooking, Dieting and Investing

Feast and Famine

Cooking is, of all the inventions that have propelled mankind to the top of the food chain, probably the most important. Our dubious ascent to mastery of all we survey, other than investment bankers’ bonuses, is founded not on the skills of the scientist or the warrior but those of the humble cook.

From this it follows that, if cookery is the bedrock of our civilisation, and civilisation is the trigger for the development of the invention of money, then we ought to look for parallels between food related biases and investment biases. Indeed, it rather looks like the latter may be at least partially founded in the former.

Protect Your Meals

As we’ve remarked before, in Eat Your Stocks, our fascination with money looks like a cultural effect mediated by evolutionary traits which were originally intended to keep us alive in a world where we were more likely to be eaten by a sabre toothed tiger than bankrupted by a silver tongued financial advisor. We’re risk adverse when it comes to protecting a gain and risk takers when it comes to trying to mitigate a loss.

In the context of a world where food is the primary currency this makes perfect sense: if you have to take risks to feed yourself and you’re already well fed you’re better off sitting on your tree branch snacking off nits on your mates. However, if you’re starving then hanging about in the jungle canopy is a one way ticket to oblivion, no matter how many of Shere Khan’s ancestors are skulking about in the undergrowth.

Wedged Up

Charles Darwin’s model of natural selection predicts that for any creature to survive it has to find its own niche and that to create this niche it will have to outcompete the opposition:
“Nature may be compared to a surface covered with ten thousand sharp wedges, many of the same shape and many of different shapes representing different species, all packed closely together and all driven in by incessant blows; the blows being far severer at one time than another; sometimes a wedge and sometimes another being struck; and one driven deeply in forcing out others; with the jar and shock often transmitted far to other wedges in many lines of direction; beneath the surface we may suppose that there lies a hard layer, fluctuating in its level, and which may be represent the minimum amount of food required by each living being”.
Fired to Success

Clearly, somewhere along the way, humanity got darned good at driving in wedges. It seems likely we edged out our hominid cousins, the Neanderthals, and there’s copious evidence to suggest that the arrival of humans in new territories was linked to mass extinctions of other animals in the food chain. But this doesn’t explain how the process got started, because by the time these things happened we were already pretty much set on our path to global domination.

Initially we were competing with some much fiercer and far better equipped animals such that survival must have been a difficult and dangerous business. Trying to get a foot on the food chain was a precarious step but it’s a reasonable guess that at some point our ingenuity enabled us to do something no other animal could do: we found a way of eating stuff that everything else regarded as inedible. We call this trick “cooking”.

Richard Wrangham has written extensively about this, most notably in his book Catching Fire: How Cooking Made Us Human. He gives a summary in this interview:
“Whenever cooking happened, it must have had absolutely monstrous effects on us, because cooking enormously increases the quality of the food we eat, and it enormously increases the range of food items that we can eat. We all know that food quality and food abundance are key variables in understanding animal ecology. But the amazing thing is that although at the moment there is no conventional wisdom that says when cooking evolved, social anthropology and all sorts of conventional wisdom say that humans are the animals that cook. We distinguish ourselves from the rest of the world because they eat raw stuff and we eat cooked stuff. ”

Cooking allows us to convert stuff that otherwise can’t be eaten into something that doesn’t kill us. In fact many of the ancestors of our current cereal crops required so much preparation that you wonder how anyone ever had the idea of eating them. Maize, for instance, required hours of preparation in order to make it cookable, let alone digestable. It’s so difficult the process has even got its own name: nixtamalization. Indigestible and unpronounceable.

Access to food stuffs that were unavailable to other animals allowed us to sidestep Darwin’s wedges and gave us monopoly access to energy sources – and those energy sources in turn allowed us to evolve the enormous, calorie devouring organ that sits atop our spinal column. It’s for good reason that many judges think that the invention of cookery was the trigger point for the expansion of humanity: around 1.9 million years ago, according to Wrangham.

Unit Bias

Still, for most of our history, our problem has been food shortages, not surpluses. Even with technological ingenuity such as improvements in crop yields through careful selection over generations and technological upgrades in fertilizer and agricultural technology it’s only in the latter part of the twentieth century that most of the planet found itself availed of excess food. Whereon we’ve promptly gorged ourselves stupid and are unable to prevent the automatic triggers from our brains inducing us to eat as much as we can, while we can.

There is, unsurprisingly, a behavioral bias underlying this: it's what Geier, Rozin and Doros call unit bias and it relates to our automatic consumption of “units” of food: a can of Coke, a fast-food portion, a chocolate bar or a whole roast hog. In essence we eat what’s put in front of us and if you want to diet then minimise your portions: you'll eat less. Tracing this to an evolutionary link to meal preparation and waste avoidance is one theory, although certainly not the only one.

From Food to Finance

It’s likely that unit bias generalises to other areas: the types of round-number biases we saw in Irrational Numbers: Price Clustering & Stop Losses may well arise from these more underlying and fundamental biases. That our superstructure of conflicting and poorly understood financial biases are built out of more basic concepts would be no surprise although it's odd that so little attention has been paid to this by financial reseachers.

These food-related fundamental behavioural issues show what happens when the risk side of the risk-reward equation is turned off. With riskless food gathering and huge portions many people simply eat as much as is put in front of them, all the time. Something similar happens with stock markets when optimism turns to euphoria: people forget about risk because everyone else does and gorge themselves stupid.

The analogy between investing and eating is a fascinating one, and it’s highly likely that similar behavioural issues underlie the problems we seem to have with both. In both cases evolutionary adaptations designed to aid our survival in prehistory are dangerous in modern life. The trick is always to do your analysis: count your calories and analyse your stocks. The analysis forces us to use our more developed forebrains and takes us away from reacting and into thinking.

After all, in the end, it is analytical thought that really sets us aside from the other animals. That, and the ability to produce a really nicely turned out soufflé.

Related articles: Eat Your Stocks, Irrational Numbers: Price Clustering & Stop Losses, Stocks Aren't Snakes

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