FinanceProfessor Best 100 Who Blog

Dr. Mahar is listed in the "100 Best Professors Who Blog" article dated October 12, 2009 posted on www.onlinecollege.org/blog/. He is listed at #76 under the Economics section. Check it out.

Monkey business in the School of Business!

As you may have heard, we launched a new graduate MBA Behavioral Finance class semester this semester. While the semester is not even half way over I wanted to report on the class. So far it is going very well even though we do not have a traditional text book and are relying on readings and a series of books.

The students have projects to do which either replicate existing behavioral economics work or extend the literature in interesting ways. For instance one student is testing the impact of learning on behavioral biases by testing introductory finance students as well as upper level students. Another student is examining the impact of social groups on portfolio changes following the market collapse. (Other projects include: determining if what consumers say is important in advance really is when the purchase is made; a look at risk taking by age and gender; and a survey of behavioral literature.)

In addition to the readings we have been using many short videos that address the brain and its impact on finance and economics (neuroeconomics). For instance recently we addressed what has traditionally been seen as a challenge to economists: why rational people would freely give money to others (charities).

Many hypotheses have been proposed that attempt to reconcile this apparent irrational behavior. These include the desire for public recognition, wanting to be apart of something, how you view yourself, and the popular "warm glow" which basically says it feels good to do good.

New technologies now allow researchers to peer into the brain to find the cause of this "warm glow". The findings suggest that there is more to it than meets the eye. Specifically the glow has roots as both an emotional (chemical) reaction as well as rational (thinking) response.

The thinking part suggests that people do want to be seen as generous and as the type of person that does "good" things. This is true even if the only person "seeing it" is the actual giver. In other words they behave as they do to fit their view of themselves.

The chemical side (which appears to be dominated by Oxytocin and Dopamin in case you were wondering) is particularly interesting since it begs the question of why would the body have such a response from an evolutionary perspective.

This led researchers to what in finance we would call an out of sample test; they considered monkeys. (Although I am not sure if they felt the monkeys were further evolved or less evolved that humans.)




The monkeys' behaviors are similar to that in humans that have vexed economic researchers and at least suggest that what at first glance appears to be irrational may be well grounded in our evolution.

Examples of monkey behaviors and their corresponding human counterpart:

* Monkeys shared their nuts. People give to charities. Why? It makes us (and probably the monkeys too, but they are not speaking right now) feel good to help others) (Uh, BonaResponds reference here? :) )
* Monkeys trusted each other. Without this trust the trades would not have occurred. People are the same way. We are hardwired to "trust others". This makes social living easier.
* Envy and Fairness both matter: Monkeys who were perfectly content with a dry cracker grew jealous and upset when other monkeys got a better prize. On one hand this is a long term motivator, on the other this can be to cause of fighting and unhappiness.

A fascinating class so far. Stay tuned, we are only half way!