Sunday, February 19, 2006

Are experienced meditators better investors?

People often make bad investment decisions, at least by the lights of classic economic models. They become attached to the status quo, whether good or bad. In a classic experiment, students given coffee mugs worth $6 wouldn’t sell them for less than $5.25, but those who hadn’t received mugs wouldn’t buy them for more than $2.75. Since the recipients were chosen at random, one would expect that the very same people who wouldn’t part with a mug for more than $5 would be unwilling to pay even $3 for the same object. The only difference was ownership.

Applied to investment, this means that investors tend to be unwilling to liquidate a losing position in a market, even though it would be the “rational” thing to do. We become attached to things, to an unwise degree.

A related behavior is loss aversion: people tend to strongly prefer avoiding losses over acquiring gains. It’s not just people; an experiment with capuchin monkeys showed the same behavior. The monkeys were asked to choose between spending a token on one apple, though half the time the experimenter gave them two instead of one; or to spend it on two visible apples, when half the time the experimenter only gave them one. Economic theory predicts that rational consumers should not care which of these outcomes they receive since they are essentially both 50-50 shots at one or two pieces of food. The capuchins, however, vastly preferred the first gamble, which is essentially a half chance at a bonus, than the second gamble, which is essentially a half chance at a loss. Just like humans, they avoided the possibility of a loss.

The Buddha taught that suffering is caused by attachment – this is the second of the “Four Noble Truths”. Meditation training seeks to weaken the cravings and aversions which are the symptoms of attachment. If such training is effective, then experienced meditators should show less loss aversion and status quo bias than average people.

Neuroscientists have become interested in studying how meditation affects the brain. For example, experimenters at Massachusetts General Hospital in Boston have found that meditating increases the thickness of the cortex in areas involved in attention and sensory processing. I look forward to experiments that investigate the intersection of meditation and economics.