The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary...

The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary Economics | Michael Shermer | A Scientific Foundation for Economics

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The Mind of the Ma...

	The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary Economics Michael Shermer Times Books, 2007 - 336 pages average customer review:based on 26 reviews view larger image
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Great intro to evolutionary economics

Michael Shermer has focused his career on differentiating between myths and science. His related books I have read are excellent, including: Why Darwin Matters: The Case Against Intelligent Design, Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time, and The Borderlands of Science: Where Sense Meets Nonsense. In this book, he advances a unifying theory of evolutionary biology and modern economics that leads to a new discipline: evolutionary economics.

Evolutionary economists knew that Charles Darwin had studied Adam Smith as he modeled his theory of natural selection after Smith invisible hand. Quoting one such evolutionary economist, Thomas Sowell: "Life, like the economy, is about the efficient allocation of scarce resources."

This unifying theory entails that nature and the marketplace evolve over time following similar mechanisms. He calls nature and the market place complex adaptative systems (CAS). Those CAS learn as they evolve from simple to complex. They are autocatalytic, meaning they contain self-driving feedback loops. For nature, the driving feedback loop is natural selection underlying evolution. For the marketplace, the equivalent driving feedback loop is the "invisible hand" or the law of supply and demand. Per Shermer, the geniuses of Charles Darwin and Adam Smith were in uncovering a simple process to explain an incredibly complex outcome (diversity of nature and economies).

Shermer rebuts two concepts: The first one is that the theory of evolution has no place in the social science. Social scientists have fought Darwin (under the misunderstood caption of social Darwinism) with as much energy as creationists. Yet, Shermer shows the multiple connections between natural selection and the law of supply and demand.

The second one is the concept of "Homo Economicus" that human beings are strictly rational. There he cites behavioral economists showing the myriad of ways in which our brains are wired to make irrational choices. For further studies I recommend the excellent books The Psychology of Judgment and Decision Making and Inefficient Markets: An Introduction to Behavioral Finance (Clarendon Lectures in Economics).

He is addressing three problems related to "The Mind of the Market": The first one is how the market has a mind of its own. As mentioned, the law of supply and demand is a driving self-organizing force within the market. One byproduct of Shermer's theory is that the markets are pretty efficient. He mentions that many studies show that professional investors don't perform better than index funds. Market efficiency extends way beyond stocks. And, is applicable to nearly everything as prediction markets have shown recently (betting on sports, politics, and entertainment outcomes). For an excellent treaty on the subject, I recommend The Wisdom of Crowds.

The second one is how minds operate in markets. That's where he rebutts "Home Economicus." We make plenty of irrational market related decisions. Our human biases such as valuing losses twice as much as gains have been tested in laboratories with both humans and monkeys. This loss aversion has been wired into our brains for millennia to enhance our survival. And, it affects our investment decisions often to our disadvantage. This is why the gambling industry makes money off gamblers.

The third one is how minds and markets are moral. The market has embedded economic incentives for participants to behave so as to generate trust and credibility to encourage transactions with each other. Reputation and status is important. This is why reputation metrics such as EBay sellers' ratings have arisen on the Internet as self-governance agents. Trust and credibility lead to greater commerce productivity. They decrease credit risk, liability risk, lower legal and negotiating costs, and increase and speed up transaction flows.

This third concept leads to the main theme of this book. Shermer clarifies what is understood by evolution and natural selection. In his own words "... it is a myth that evolution is driven by selfishness, it is ... driven by adaptability... the most adaptable thing you can do to survive and reproduce is to be cooperative and altruistic." Shermer indicated that Adam Smith had first explored the identical phenomenon in economics within his book The Theory of Moral Sentiments - Adam Smith that he wrote much before The Wealth of Nations (Bantam Classics). Later in the book, Shermer goes on the same topic: "If biological evolution in nature was really founded on ... winner-take-all..., life on earth would have been snuffed out hundreds of millions of years ago; if market capitalism was winner-take-all, it would have collapsed centuries ago." So, evolutionary economics is governed more by cooperation rather than competition.

Shermer exploring the economic implication of cooperation, and leveraging the economic research from Paul Zak, indicates that trust within a nation leads to greater investment, higher GDP per capita, higher standard of living, and more trade. He also shares that trust is highly correlated to economic freedom. Trust among the citizen of a nation creates a virtuous economic cycle that boosts GDP growth. Zak indicates that if the proportion of Americans who trust each other rose from 36% to 51% income per person would rise by a full 1%. Paul Zak also found that the Oxytocin hormone is responsible for generating the feeling of trust. Thus, Shermer stated: "Oxytocin is the social glue of society. It is what keeps us together as a civilization." Shermer also refers to Guns, Germs, and Steel: The Fates of Human Societieswhen stating that trade between nations decreases the likelihood of war.

Shermer explores what makes us happy. Referring to Ed Diener's research, happiness is associated with the following traits: high self-esteem, personal control, optimism, and extroversion. Referring to Flow: The Psychology of Optimal Experience happiness is also a result of high engagement and achievement giving purpose and meaning to one's life. Per other references, psychological profile variance is 40% heritable (genes), 30% family environment, and 30% all other causes. Scientific research shows that economic self-reliance makes people happier than economic dependency. This is supported by studies on international happiness and freedom. People are happier in societies with greater levels of autonomy and freedom.

If you find this review interesting, you will find this well researched book fascinating.

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A Scientific Foundation for Economics

Michael Shermer provides Free Market Economics with a scientific foundation grounded in psychology and evolution.

Shermer, an adjunct economics professor at Claremont University and the founder of Skeptic Society, explores the evolutionary roots of our sense of fairness and justice, and shows how this rationale extends to the market. Drawing upon his expertise as a scientist and noted economists, Shermer argues humans are not self-centered. The market itself is moral. Modern economies are founded on our nature.

Drawing on neuroeconomic, behavioral and evolutionary biology studies, Shermer discusses what brain scans reveal about decision-making processes and negotiating. Using studies I was unfamiliar with, he builds on Eric Beinhocker's comprehensive study of complexity economics, Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics

Shermer argues economics is far from "dismal."

1. It is undergoing its most dynamic revolution since Adam Smith penned The Wealth of Nations. Evolutionary, complexity and neuro economics are adding richness and understanding to it.

2. People are passionate about their personal economics and finances. Far being a science of mind-boggling mathematical models, these new sciences add richness and predictability to its study.

Shermer is one of those rare writers with the ability to weave insights from science into economics. His insights bring new understanding to how our human minds create the human markets.

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Great Read!! A Wonderful Intro to Evolutionary Economics

I truly enjoyed this book. Michael Shermer has a rare gift of keeping the readers attention even while drifting off on tangents. This is a true treat for anyone interested in behavior or evolutionary psychology as well as anyone who has capitalistic taste. If you like pop-econ books, this quick read is worth your time. My only criticism is his excessive use of bicycling (his passion) examples and his annoying habit of describing irrelevant attributes of each individual he brings into the conversation

Jeremiah Dyke
http://radical--thought.blogspot.com/

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Good biology and psychology, questionable economics

Michael Shermer is uniquely gifted, holding a Masters degree in psychology and a Ph.D. in the History of Science, being one of the top science popularizers in the world and the founder of the Skeptic Society, and having been a top professional athlete (cycling). Shermer is a professional skeptic, but this book is a serious outlier---it is Shermer's profession of faith.

Shermer believes in two Big Ideas, free markets and Darwinian evolution, especially as applied to understanding our species (sociobiology, evolutionary psychology). The book conveys Shermer's infectious enthusiasm for both Ideas, and his exposition of sociobiology is accurate and fairly up to date. I would definitely recommend this book to a friend or relative who wanted to know what sociobiology is all about (Shermer does not use the word, though).

In economics, Shermer was weaned on Ayn Rand and objectivist philosophy, which he rejected in favor of the more scientific and less cultish Austrian school of economics (von Mises and Hayek). He draws free market economic theory and evolutionary biology together by treating both as dynamic nonlinear competitive, decentralized systems with emergent properties (he mention Beinhocker's exegesis of complexity economics in support of this view, and stresses the notion of `technological natural selection'). He also treats both as absolutely, beyond a doubt, scientifically grounded doctrines, so that critics of market systems (e.g., many American liberals and all socialists, anarchists, and communalists) have the same status as Creationists and Intelligent Design believers as critics of evolutionary biology.

In a kind of comic way, Shermer's book is a return to Social Darwinism, although his espousal of free markets has none of the strident right-wing tenor of the old order of Social Darwinists. He achieves a warm-fuzzy version of free market economics by simply avoided all the difficult issues. His exposition of economics is purely 19th century in its stress on verbal and philosophical argument, as though there have been no developments in economics since 1920 or so. This is quite a contrast with his treatment of evolutionary psychology, which is almost cutting edge.

I cannot imagine how Shermer teaches in a graduate economics department (Claremont Graduate University), surrounded by high-powered economists, while not having a clue what economics is really all about. The standard arguments against the notion of a free market economy with a minimal state were consolidated from 1950 to 1970, and have not been shaken since. Even Milton Friedman, who was right about so many things, and has much of importance to say about state-market interaction, was no more than an ideological hack in his parrot-like admonitions against the modern state.

Modern economies are intricately interaction systems of market and state, both sets of institutions having grown inexorably and in a unified manner for at least two centuries. There is no example of a high productivity social system without both a highly developed market and a highly developed state. Free marketers are thus like flat Earthers and Creationists---they must deny the fact to preserve their precious ideologies.

Perhaps Shermer has some critique of the standard economic growth model. If so, he spares the reader. This is a strange stance of a man who has always cherished the data and fought for empirical substantiation.

Shermer's embrace both of the aristocratic free marketer von Mises and the brilliant and vitriolic anarchist Kropotkin is refreshing, if bizarre. Of course, there have always been sub rosa libertarians among the evolutionary psychologists (John Tooby, Lida Cosmides, and Vernon Smith surely fit the bill), but evolutionary argument for libertarianism has not often been so clearly articulated. Clearly, yes, but unconvincingly. One cannot trump science with 19th century Continental philosophy, after all.

Shermer deeply believes that liberal democratic capitalism is the best system possible, and attempts to prove this using philosophical hand waving and vague analogies to Darwinian evolution. I believe that liberal democratic capitalist is the best system around, and the proof is purely empirical---just look around at the performance of actual social systems.

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reviews: 1, 2, page 3, 4, 5, 6

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