Aug 13, 2011

Honeybees and Investors

Between Jason Goldman's macroeconomic neuroses by day, and Livia's naturalist fascinations pervading our dinnertime conversation, my mind becomes jumbled with combinations. It's surprising how many similarities tend to emerge. Often I've thought to write about these interesting mashups, so here is an example involving honeybees and investors.

Lately, Jason has been cautioning me about flight-to-quality—a financial market phenomenon set off by a surprise unsettling event or series of events. The ensuing financial tumult causes a sudden shift in behavior by investors whereby they seek to sell assets thought of as risky in favor of purchasing traditionally trusted, safe assets they understand better.

Pessimistic thinking, or a belief that the worst will happen, is apparently not unique to financial markets. In fact, it's possibly a universal adaptation advocating prudence when confronting the unfamiliar in turbulent times. Behavioral scientists at Newcastle University in England have recently shown that among other animals, honeybees become pessimistic when stressed.

The scientists trained bees with two odors. One odor always lead to sugar, the other always lead to bitter quinine. Having learned the association between odor and taste, the bees regularly attended the sugar. Next, the researchers vigorously agitated half the bees as if their hive were under attack and left the other half alone. Turbulent times, indeed!

Within five minutes, the research team exposed both groups to the familiar two smells as well as three new smells. The bees from the continuously calm group willingly investigated these new smells to see if there was anything potentially interesting—more sugar, perhaps. However, bees from the shaken group refused all new smells in favor of the one guaranteeing sugar.

It seems that whether we are human, dog, rat, bird, or bee, we are capable of pessimistic cognitive biases especially after stressful situations. These bees seemingly reacted the same way investors might after being shaken by some disturbing event. In summary, by listening to Jason and Livia, I am becoming an amateur, cross-species, evolutionary psychologist.