{"id":8771,"date":"2020-11-24T00:01:35","date_gmt":"2020-11-24T05:01:35","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=8771"},"modified":"2020-12-14T10:54:42","modified_gmt":"2020-12-14T15:54:42","slug":"a-theory-of-behavioral-finance-assumption-2-the-biological-factors","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2020\/11\/24\/a-theory-of-behavioral-finance-assumption-2-the-biological-factors\/","title":{"rendered":"A Theory of Behavioral Finance \u2013 Assumption 2 \u2013 The Biological Factors"},"content":{"rendered":"<p><span style=\"font-family: futural;\">For those of you stumbling on this article it is a part of a matrix of pieces making a case for <span style=\"text-decoration: underline;\"><a href=\"https:\/\/jasonapollovoss.com\/web2020\/11\/10\/a-theory-of-behavioral-finance\/\">A Theory of Behavioral Finance<\/a><\/span>. This work before you specifically explores with some depth the biological factors that contribute to the arising of behavioral biases.<\/span><\/p>\n<p><span style=\"font-family: futural;\">In my theory I said of Assumption 2, biological factors:<\/span><\/p>\n<ol start=\"2\">\n<li><span style=\"font-family: futural;\">Biological secondary factors affecting human behavior include:<\/span>\n<ul>\n<li><span style=\"font-family: futural;\">Human biology evolved with a preference to conserve energy and time<\/span><\/li>\n<li><span style=\"font-family: futural;\">Instinctual and habitual behaviors are efficient relative to energy conservation<\/span><\/li>\n<li><span style=\"font-family: futural;\">Working memory resources are, for practical purposes, fixed<\/span><\/li>\n<li><span style=\"font-family: futural;\">Self-awareness is energy inefficient in the short-term<\/span><\/li>\n<li><span style=\"font-family: futural;\">Intellectual thought is energy inefficient in the short-term<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<p><span style=\"font-family: futural; font-size: 20px;\">The Biological Component of Behavioral Bias<\/span><\/p>\n<p><span style=\"font-family: futural;\">Multiple authors have sought to explain behavioral bias via biology and primarily as the artifact of humans evolving with a preference to conserve energy. However, it is also the case that time is something that the brain conserves.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-family: futural;\">Energy Conservation<\/span><\/p>\n<p><span style=\"font-family: futural;\">Among the authors that explain behavioral bias as a problem of energy conservation is Daniel Crosby. He simply and cleverly summarizes brains as old, hungry, and impatient.<a href=\"#_ftn1\" name=\"_ftnref1\"><sup><span style=\"font-size: 8px;\">[1]<\/span><\/sup><\/a> It turns out that our most important of organs has evolved little over the last 150,000 years. So, today we are walking around with a brain built for survival in a world dominated by sabre-tooth tigers; 1,000-pound, 10 feet tall orangutans; packs of 300-pound cave hyenas; and 23 feet long monitor lizards.<\/span><\/p>\n<p><span style=\"font-family: futural;\">In other words, in the time before civilization and when people are believed to have been hunter-gatherers, calories were hard to come by and were available only inconsistently. Consequently, energy conservation was a matter of survival. Ergo, we conserve scarce energy resources. But why would this affect the brain so radically, which is such a differentiated and advantageous organ of homo sapiens?<\/span><\/p>\n<p><span style=\"font-family: futural;\">Our brain represents only 2% by weight, yet it consumes 20% of our daily energy. This is equivalent to the calories burned during 30 minutes of skiing, hiking, or swimming. So, for many of us, our brain consumes the same amount of energy each day as we expend in our daily exercise routine. The brain is easily the hungriest organ in our body. For this reason, it is forever looking for short cuts, referred to as heuristics, to minimize energy consumption while making thousands of decisions each day. The unintended consequence of the brain\u2019s bias toward conserving energy is an overuse of System 1, instinctual, processes because it is fast and energy efficient\/conserving.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-family: futural;\">Time Conservation<\/span><\/p>\n<p><span style=\"font-family: futural;\">I believe it is indisputable that behavioral bias is partially explained by a preference to conserve energy. However, this is not the only biological factor being conserved. As <a href=\"https:\/\/jasonapollovoss.com\/web2020\/11\/17\/a-theory-of-behavioral-finance-assumption-1-a-combination-of-factors\/\"><span style=\"text-decoration: underline;\">Var<\/span>tanian and Mandel\u2019s PCM model from Assumption 1<\/a><a href=\"#_ftn2\" name=\"_ftnref2\"><span style=\"font-size: 8px;\">[2]<\/span><\/a> proves, time is also a factor in our ability to make decisions. This is because the (C)entral component in decision making can only be done in a serial fashion. That is, one step must follow another linearly which creates a choke point, slowing down decision-making. Their work also demonstrates that when there are interruptions that our thinking slows down even further.<\/span><\/p>\n<p><span style=\"font-family: futural;\">To avoid this time bottleneck one of the first operations in that central component is the brain\u2019s quick check in with memory to see if the problem\/situation currently (P)erceived is similar to previous decisions that have been made. Problems believed to be similar typically activate brain regions associated with memory (i.e. we recall a similar problem), and the course of action followed previously is invoked quickly. This was, of course, essential for survival in the ancient world. This is analogous to problem-solving via System 1.<\/span><\/p>\n<p><span style=\"font-family: futural;\">If, on the other hand, there are multiple similar problems, or if the problem is unique and has no memory associated with it, the evidence shows that there is then a check in with the pre-frontal cortex (System 2) and its very slow, energy draining, serial methods of working.<\/span><\/p>\n<p><span style=\"font-family: futural;\">Additionally, the exceptionally limited bandwidth\/energy hogging working memory is invoked so that multiple courses of action may be considered. Vartanian and Mandel\u2019s model proves that our brains switch back and forth between the possibilities when evaluating multiple competing courses of action.<\/span><\/p>\n<p><span style=\"font-family: futural;\">Other research done by psychologists shows that <span style=\"text-decoration: underline;\"><a href=\"https:\/\/jasonapollovoss.com\/web2011\/12\/30\/leadership-lesson-for-the-eurozone-the-rule-of-small-groups\/\">the maximum number of ideas and their permutations that can be held in working memory at any one time is approximately 7<\/a><\/span>, with an ideal number being around 3 competing ideas. The various courses of possible action are then evaluated <em>emotionally<\/em> with the parts of the brain associated with different releases of hormones involved. Because the brain\u2019s evolution largely took place in historical periods where survival was dependent on having enough food\/energy and where quickly avoiding catastrophe meant survival, it is likely that the brain conserves, not just energy, but also time.<\/span><\/p>\n<p><span style=\"font-family: futural;\">But there is something else that we preserve that is lurking in the background, and to my knowledge not explored by behavioral finance researchers. Namely, if a decision works out and we survive a situation, then hormones associated with pleasure \u2013 dopamine and opioids<a href=\"#_ftn3\" name=\"_ftnref3\"><span style=\"font-size: 8px;\">[3]<\/span><\/a> \u2013 are released into the brain and body.<a href=\"#_ftn4\" name=\"_ftnref4\"><span style=\"font-size: 8px;\">[4]<\/span><\/a> Our memory of the result is therefore associated with pleasure. This gives preference to these solutions when similar problems are encountered in the future. These emotions, these physiological responses, are a part of what makes changing behaviors so difficult. Effectively, we have to undo something that brings us physical pleasure. Therefore, we are conserving pleasure when engaging in habits.<\/span><\/p>\n<p><span style=\"font-family: futural;\">Here is the problem with that: because many solutions to problems were arrived at many years ago before we had attained greater and deeper knowledge, it means that our preferred modes of reacting\/responding\/thinking are outdated intellectual technologies even if they are energy and time efficient, and they feel good. Ouch! In fact, the work of Van Hoeck, et. al (2015)<a href=\"#_ftn5\" name=\"_ftnref5\"><span style=\"font-size: 8px;\">[5]<\/span><\/a> demonstrates that to undo a thought requires the work of many brain regions and is time consuming. Specifically, the regions involved are:<\/span><\/p>\n<ul>\n<li><span style=\"font-family: futural;\">Medial temporal lobe and pre-frontal cortex, to simulate different outcomes<\/span><\/li>\n<li><span style=\"font-family: futural;\">Fronto-parietal and cingulo-opercular network, to provide cognitive control<\/span><\/li>\n<li><span style=\"font-family: futural;\">Limbic regions and ventro-medial pre-frontal cortex, to provide motivation and the power to evaluate possible outcomes<\/span><\/li>\n<\/ul>\n<p><span style=\"font-family: futural;\">Invoking this many brain regions is energy and time inefficient.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-family: futural;\">Self-Awareness is Energy Inefficient<\/span><\/p>\n<p><span style=\"font-family: futural;\">I argued in my previous article that a lack of self-awareness \u2013 which science formally calls metacognition \u2013 in the (P)erceptual stage of decision-making is responsible for all of the behavioral biases. In my next article I discuss the psychological aspects of metacognition more fully, but there is a biological phenomenon which needs reporting here. Specifically, meta-cognition appears to be primed by prior expectations:<a href=\"#_ftn6\" name=\"_ftnref6\"><span style=\"font-size: 8px;\">[6]<\/span><\/a><\/span><\/p>\n<p style=\"padding-left: 40px;\"><span style=\"font-family: futural;\">\u201c\u2026perceptual decisions which are congruent with valid perceptual expectations lead to increased metacognitive sensitivity, independently of attentional allocation.\u201d<\/span><\/p>\n<p><span style=\"font-family: futural;\">What this means is that to overcome behavioral biases is made even more difficult because the primary mechanism for undoing them \u2013 metacognition \u2013 is itself biased. Biologically-speaking then it is very costly energy and time-wise to change how you think. Additionally, the pleasurable feelings generated by engaging in biased thought must also be overcome.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-family: futural;\"><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> See Chapter 2 in Daniel Crosby\u2019s book <em>The Behavioral Investor<\/em> Vol. 49, No. 8 (2018)<\/span><\/p>\n<p><span style=\"font-family: futural;\"><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> PCM is a description of the problem solving sequence the brain takes, with a Perceptual component; a Central thinking component; and an action-taking Motor component.<\/span><\/p>\n<p><span style=\"font-family: futural;\"><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> Winkielman, Piotr, Brian Knutson, Martin Paulus, and Jennifer L. Trujillo. \u201cAffective Influence on Judgments and Decisions: Moving Towards Core Mechanisms.\u201d <em>Review of General Psychology<\/em> (2007). Vol. 11, No. 2: 179-192<\/span><\/p>\n<p><span style=\"font-family: futural;\"><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> Vartanian, Oshin and David R. Mandel (Eds.). (2011). Neuroscience of Decision Making. New York and Hove: Psychology Press.<\/span><\/p>\n<p><span style=\"font-family: futural;\"><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> Van Hoeck, Nicole, Patrick D. Watson, and Aron K. Barbey. \u201cCognitive neuroscience of human counterfactual reasoning.\u201d <em>Frontiers in Human Neuroscience<\/em>. (2015): Volume 9:420<\/span><\/p>\n<p><span style=\"font-family: futural;\"><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a> Sherman, M.T., A.K. Seth, A.B. Barrett, and R. Kanai. \u201cPrior expectations facilitate metacognition for perceptual decision.\u201d <em>Consciousness and Cognition<\/em> 35 (2015): 53-65<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>For those of you stumbling on this article it is a part of a matrix of pieces making a case for A Theory of Behavioral Finance. This work before you specifically explores with some depth the biological factors that contribute to the arising of behavioral biases. In my theory I said of Assumption 2, biological [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":8750,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[407,3],"tags":[408,244,289,23,22,411,409],"class_list":["post-8771","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-behavioral-bias-deep-dive","category-the-blog","tag-a-theory-of-behavioral-finance","tag-behavioral-bias","tag-behavioral-biases","tag-behavioral-economics","tag-behavioral-finance","tag-biological-factors","tag-vartanian-and-mandel"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/8771","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=8771"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/8771\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/8750"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=8771"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=8771"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=8771"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}