The Situationist

The Market as Situation and Situational Character

Posted by The Situationist Staff on January 16, 2008


Publisher’s Weekly describes Michael Shermer’s new book, The Mind of the Market, as follows:

Shermer provides an in-depth examination of evolutionary economics. Using fascinating examples — from monkeys that balk at unfair distributions of rewards after completing a task to humans who feel cheated when offered $10 of free money if a partner is given $90 — Shermer 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 the works of noted economists, Shermer argues convincingly that human beings are not exclusively self-centered, the market itself is moral, and modern economies are founded on our virtuous nature. He explores how we mind our money, the value of virtue, why money can’t buy happiness and whether we are really free to make choices. Though dense in places, this book offers much insight into human behavior and rationales regarding money and fairness and will be of interst to serious readers of science or business.

Below we’ve excerpted a brief section of the book’s prologue (the entire prologue is here) and included a 14-minute video of Shermer’s TED talk on “Why People Believe Strange Things.”

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In Jesus’ Parable of the Talents, recounted in Matthew 25:14–29, the gospel author recalls the messiah as saying in the final verse: “For to everyone who has, more shall be given, and he will have an abundance; but from the one who does not have, even what he does have shall be taken away.” Out of context this hardly sounds like the wisdom of the prophet who proclaimed that the meek shall inherit the earth, but in context, Jesus’ point was that properly investing one’s money (as measured in “talents”) generates even more wealth. The servant who was given five talents invested it and gave his master ten talents in return. The servant who was given two talents invested it and gave his master four talents in return. But the servant who was given one talent buried it in the ground and gave his master back just the one talent. The master then ordered his risk-averse servant to give the one talent to the servant who had doubled his investment of five talents, and so he who earned the most was rewarded with even more. And thus it is that the rich get richer.

Jesus probably had in mind something more than an economic allegory about selecting the right investment tool for your money, but I want to employ the story as a parable about the mind of the market. In the 1960s, the sociologist of science Robert K. Merton conducted an extensive study of how scientific ideas are discovered and credited in the marketplace of ideas — in this case treating science as a market — and discovered that eminent scientists typically receive more credit than they deserve simply by dint of having a big name, while their junior colleagues and graduate students, who usually do most of the work, go largely unnoticed. A similar well-known effect can be seen in how both innovative ideas and clever quotes gravitate up and are given credit to the most famous person associated with them.

Merton called this the Matthew Effect. Marketers know it as Cumulative Advantage. In a broader economic context I shall refer to it here as the Bestseller Effect. Once a product gets a head-start in sales it signals to consumers that other people want that product and therefore it must be good thereby causing them to desire it as well, which leads even more people to purchase the product, sending more signals to other consumers that they too must have it, and so it climbs up the bestseller list. Everyone in business knows about the effect, which is why authors and publishers, for example, try so fervently to land their book on the New York Times bestseller list. Once you are on the list bookstores move your title to the “bestseller” bookcase (sometimes even labeled “New York Times Bestseller List”) and to the front of the store where copies of the book are stacked like cordwood. This sends a signal to potential book buyers entering the store that this must be a good read, triggering an increase in sales that gets reported to the New York Times book review editors, who bump the title up the list, sending another signal to bookstore buyers to order even more copies, which secures the title more time in the bestseller list that increases sales even further, and round and round the feedback loop goes as the richest authors get even richer.3

To find out if the Bestseller Effect is real, the Columbia University sociologist Duncan Watts and his collaborators Matthew Salganik and Peter Dodds tested it in a web-based experiment in which 14,000 participants registered at a Web site where they had the opportunity to listen to, rate, and download songs by unknown bands. One group of registrants were only given the names of the songs and bands, while a second group of registrants were also shown how many times the song had been downloaded. The researchers called this the “social influence” condition, because they wanted to know if seeing how many people had downloaded a song would influence subjects’ decision on whether or not to download it. Predictably, the Web participants in the social influence condition were influenced by the download rate figures: songs with a higher download number were more likely to be downloaded by new participants, whereas subjects in the independent group who saw no download rates, revealed dramatically different song preferences. This is not to deny that the quality of a song or a book or any other product does not matter. Of course it does, and this too is measurable. But it turns out that subjective consumer preferences grounded in relative rankings by other consumers can and often does wash out the effects of more objective ratings of product quality.

Markets that traffic in rankings, ratings, and bestseller lists seem to operate on their own volition, almost like a collective organism. In fact, this is only one of many effects we shall see in this book that demonstrate just how much the mind influences the market, and in a broader sense how markets seem to have a mind of their own. Consider another economic parable with an evolutionary lesson related to the Bestseller Effect.

Shermer’s Mind of the MarketImagine that you are a banker with a limited amount of money to lend. If you advance loans to people who are the poorest credit risks, you are taking a great gamble that they will default on their loans and you will go out of business. This sets up a paradox: the people who most need the money are also the worst credit risks and thus cannot get a loan, whereas the people who least need the money are also the best credit risks and thus once again the rich get richer. The evolutionary psychologists John Tooby and Leda Cosmides call this the Banker’s Paradox, and they apply it to a deeper evolutionary problem: to whom should we extend our friendship? The Banker’s Paradox, they suggest, “is analogous to a serious adaptive problem faced by our hominid ancestors: exactly when an ancestral hunter-gatherer is in most dire need of assistance, she becomes a bad ‘credit risk’ and, for this reason, is less attractive as a potential recipient of assistance.”

If we think of life as an economy, and if we count resources as anything we have that could help others — including and especially friendship — by the logic of the Banker’s Paradox we have to make difficult choices in assessing the credit risk of people we encounter. In evolutionary theory the larger problem to be solved here is altruism: why should I sacrifice my genes for someone else’s genes? Or, more technically, an altruistic act is one that lowers my reproductive success while simultaneously raising the reproductive success of someone else.

Standard theory suggests two evolutionary pathways to altruism: kin selection (“blood is thicker than water”) and reciprocal altruism (“I’ll scratch your back if you’ll scratch mine”). By helping my kin relations, and by extending a helping hand to those who will reciprocate my altruism, I am helping myself. Thus, there will be a selection for those who are inclined to be altruistic … to a point. With limited resources we can’t help everyone and so we must assess credit risks, and some people are better risks than others. Here again is the Banker’s Paradox: those most in need of assistance are the least likely to be given help, and so yet again the rich get richer. But not always, because fair weather friends may be faking their signs of altruistic tendencies and later fail to come to our aid when the weather turns decidedly stormy. By contrast, true friends are those who are deeply committed to our welfare regardless of the potential for reciprocity. “It is this kind of friend that the fair weather friend is the counterfeit of,” Tooby and Cosmides continue. “If you are a hunter-gatherer with few or no individuals who are deeply engaged in your welfare, then you are extremely vulnerable to the volatility of events — a hostage to fortune.” The worse the environment the more important it is that we have true friends, and the environment of our evolutionary past was no picnic.

Evolution, it is suggested, would have selected for adaptations to work around the Banker’s Paradox dilemmas, including selecting us to

1. seek recognition from our fellow group members for our trustworthiness and reliability,
2. cultivate those attributes most desired by others in our group,
3. participate in social activities that recognize and reinforce such pro-social attributes,
4. avoid social activities that lead to untrustworthy actions and therefore a negative reputation,
5. notice similar attributes of trustworthiness in others, and
6. develop the ability to discriminate between true and fair weather friends.

Thus, Tooby and Cosmides conclude, the Banker’s Paradox leads us to an evolved psychology where “if you are unusually or uniquely valuable to someone else — for whatever reason — then that person has an uncommonly strong interest in your survival during times of difficulty. The interest they have in your survival makes them, therefore, highly valuable to you. The fact that they have a stake in you means…that you have a stake in them. Moreover, to the extent they recognize this, the initial stake they have in you may be augmented.” Through such augmentation can the poor become rich through the evolved foundation of friendship.

If this sounds like I have reduced human relationships to nothing more than credit calculations and reciprocal relations, in my previous book, The Science of Good and Evil, I demonstrate how kin selection and reciprocal altruism led to the evolution of deep and real moral emotions that include love, friendship, and trust, because it is not enough to fake being a good and faithful spouse, friend, or partner; you actually have to believe it yourself, and actions follow beliefs. Thus it is that morality is real and transcendent, and human relations genuine and deeply ingrained in our nature.

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One view that I am writing against in this book, ironically, is the belief that Darwin and the theory of evolution have no place in the social sciences, especially in the study of human social and economic behavior. Whereas scientists are up in arms about attempts to teach creationism and Intelligent Design in public school biology classrooms (see my book Why Darwin Matters), and are distraught by the dismal state of science education and the lack of acceptance of Darwin’s theory (less than half of Americans believe that humans evolved), most scientists — especially social scientists — have resisted with the emotional intensity of a creationist any attempts to apply evolutionary thinking to psychology, sociology, and economics. The reason for this resistance — understandable at the time — was the equation of evolutionary theory with Social Darwinism and especially the extreme hereditarian views that led to enforced sterilization of the mentally retarded in America, and to the Nazi eugenics program that led to the Holocaust. As a consequence, post-World War Two social scientists steered a wide course around any attempts to employ evolutionary theory to the study of human behavior, and instead focused almost exclusively on socio-cultural explanations.

A second view that I am writing against is the theory of Homo economicus, which holds that “Economic Man” has unbounded rationality, self-interest, and free will, and that we are selfish, self-maximizing, and efficient in our decisions and choices. When evolutionary thinking and modern psychological theories and techniques are applied to the study of human behavior in the marketplace, we find that the theory of Homo economicus — which has been the bedrock of Traditional Economics — is often wrong or woefully lacking in explanatory power. It turns out that we are remarkably irrational creatures, driven as much (if not more) by deep and unconscious emotions that evolved over the eons, as we are by logic and conscious reason developed in the modern world.

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To read the entire prologue to The Mind of the Market, click here. To watch a one-hour talk by Shermer about his new book at the CATO Institute, click here.

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