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Monkey Business: What Two Gambling Monkeys Can Teach Us About Risk

Monkey Business: What Two Gambling Monkeys Can Teach Us About Risk

Posted by Michael Berman on Oct 5, 2018 11:10:13 AM
Michael Berman

Did you hear the one about the monkey gambling for drops of juice in a casino?

It’s not a joke with a punchline. It’s an actual experiment conducted by scientists at Johns Hopkins University in Baltimore, one that gives us insights into risk and decision making.

The Experiment

Scientists taught two monkeys to play a computer game that rewarded them with drops of juice when they won. (There was no need to force the monkeys to play. Apparently monkeys just really like to gamble.)

The monkeys were inherently risk seekers, choosing gambles with higher rewards even if playing it safe would have netted them more juice in the long run.

Once this pattern was established, the scientists deactivated an area of the monkeys’ prefrontal cortex by cooling it. This particular area of the brain is linked to eye movements and would light up every time the monkeys won. Once this area was deactivated, the monkeys became much less comfortable with risk and were far more likely to choose an option that gave them small amounts of guaranteed juice.

Scientists concluded that this was because monkeys found reward uncertainty less appealing. It did not change their estimate of the size or probability of the reward.

What Does This Mean for Risk Assessment and Risk Management?

This study reminds us that our view of risk is elastic. It’s not just the environment around us that changes. Our brains are capable of changing how we interpret the value of risk and whether it’s worth taking. Who knows what decisions we might make in a brain that’s constantly changing? Risk preference isn’t a mere personality trait. It’s something that can be altered.

That’s good news, especially when you consider how many risk-based decisions we make by relying on mental biases. An earlier study uncovered that monkeys are subject to something called “hot-hand bias.” Like humans, monkeys believe in winning streaks. Whether playing a game with two choices and a clear pattern or playing a randomized game, the monkeys make decisions as though they are on a winning streak.

Both monkeys and humans tend to look for and see patterns even when they don’t exist.

That’s why risk management can’t be a fly-by-the-seat-of-your-pants activity. We need structure, including a system for identifying, assessing, measuring, monitoring and mitigating risk.

When we examine risk at a “gut” level, we’re making decisions based on how we feel instead of using logical assessments and measurements. A cursory review of risk let’s our brain biases make decisions instead of providing it tools to help it see things from different perspectives.

Our brains are capable of changing how we interpret risk and whether it’s worth taking. We need systems that provide tools and guidelines that help us ensure that risk is evaluated consistently and compared to a well-thought-out risk tolerance no matter what state our brains are in or who at the organization is conducting the review.

It’s natural for an organization’s risk tolerance to change over time. Just make sure you understand the reasons why that decision is being made and how it impacts your overall strategy.

Topics: Risk Management, Banks, Nrisk, Product Insight, Risk & Compliance, Credit Unions