Customer Reviews

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

5 star:		(14)
4 star:		(11)
3 star:		(5)
2 star:		(14)
1 star:		(3)

 

 

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.

Anyone who knows who Michael Shermer is knows that he is anything but a neoconservative. He created The Skeptics Society, a non-profit, focused on replacing pseudoscience with good science. He's written extensively on the problems with Intelligent Design, and he acknowledges the existence of man-made global warming. Needless to say, he's no Rush Limbaugh.

Bearing these facts in mind, Shermer's book may come as a surprise to some. The primary points I've seen in his latest work are: 1.) Natrual Selection and The Invisible Hand describe essentially the same phenomena. 2.) Evolution and Economics are both Complex Adaptive Systems that rose from simpler systems. 3.) Too much government intervention into the economy is inefficient, misguided, and immoral. 4.) Adam Smith's and Charles Darwin's ideas weren't so different. 5.) It's ok to be a libertarian.

With all of these comparisons between Capitalism and Evolution, one might think Shermer supports the idea of Social Darwinism. This, of course, would be wrong. Shermer denounces Social Darwinism. He says that "survival of the fittest" is a misleading term that most biologists don't believe in. Later on, he says that corporate culture is overall a good thing. Enron's corrupt model is the exception, and Google's "Don't be Evil" model is the rule. He doesn't rely on many mainstream economists to support his thesis. Instead he turns to psychologists, biologists, etc.

Overall, this book was a GREAT read. Anyone who likes any of Shermer's previous books will probably enjoy this one. You will get to see more of Shermer's political side and the evidence he used to arrive at his ideas. If a fraction of the ideas presented in this book are incorporated into mainstream economics, it will probably change the field forever.

I liked this book. Michael Shermer argues that ideas from biology, particularly Darwinian evolution, apply to the financial markets. It's an interesting idea.

Shermer makes his living as a self-proclaimed skeptic. And he does have one of the marks of the skeptic -- careful analysis. Shermer rarely takes things at face value. Instead, he challenges ideas that others take for granted. That trademark Shermer approach makes this book interesting and thought-provoking. Few authors do that as well as Shermer.

One example -- the evolution of the QWERTY keyboard. How often do we hear that the QWERTY keyboard shows a pitfall of standards? People moan that the QWERTY keyboard is terribly inefficient. But it became locked in early on as a standard. So we are stuck with it. Right?

No. Shermer looks back at the history of the QWERTY keyboard. Turns out that the QWERTY keyboard is not so bad after all. In fact, it's actually pretty good. There may be a more efficient arrangement of a keyboard. But it is hard to say -- tests show there is not much difference in typing speed between QWERTY and its top competitors.

That's just an example of the way Shermer approaches his topic. He uses the QWERTY example to show that evolution in the product market tends to produce an optimum. According to Shermer, standards like the QWERTY keyboard and a Windows-like operating system become standards for a reason. They survive evolutionary forces because they work, and work well.

In this book, Shermer pulls together ideas from biology, psychology and neuroscience. He then uses them to analyze the modern capitalist economy. That gets him to some interesting conclusions. Thoughtful conclusions that make a lot of sense.

To sum up his conclusions very briefly, Shermer gives a good theoretical grounding in solid science for two powerful ideas: Market forces usually work. Government intervention in the market usually doesn't work.

So libertarians, take heart. Voters may not support you. But it looks like science does.

Michael Shermer's "The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary Economics" is yet another insightful, and provocative book from him, making the best, most persuasive case why accepting evolutionary theory ought to be sound economics for my fellow conservatives. Shermer persuasively argues that Charles Darwin and Adam Smith were essentially looking at the same phenomena, observing that evolution via natural selection is basically nature's "marketplace" operating under laissez-faire principles as expressed in Smith's concept of the "Invisible Hand". Shermer makes his arguments primarily from biology and psychology, without relying much on economics, and yet they are quite convincing. Indeed conservatives ought to be delighted with his cogently argued reasons why government intervention into national economies is often doomed to failure, arguing instead that natural processes inherent in the marketplace are often the only - and best - remedy for economic malaise. He also explains why "Social Darwinism" is a gross distortion of Darwin's thought, misapplied to social engineering and economics, and that both Earth's biosphere and the market are highly organized complex systems that have arisen from simpler ones, giving the false illusion of "being designed" by some external, omnipresent "Intelligent Designer". Without question, "The Mind of the Market" is a most remarkable book which deserves ample readership from the broad body politic, from both liberals and conservatives.

This was a very interesting book, but be aware that "Market" in the book's title refers to "marketplace" in general, not the stock market; and the book is about economic behavior in general, not investing. There is some discussion of investing behavior, of course, but not that much, so if you're looking for a book specifically about investing, you might want to look elsewhere.

The book uses the data and principles of complexity theory, game theory, evolutionary biology, behavioral psychology, and neuroscience to explain economic behavior (i.e., the allocation of scarce resources that have multiple uses). Shermer argues that today's economy is a complex adaptive system that evolved out of a much simpler system by adapting to historical contingencies. Adam Smith showed how national wealth and social harmony were unintended consequences of individual competition among people, and Darwin followed in his footsteps by showing how complex design and ecological balance were unintended consequences of individual competition among organisms.

Some of the data (such as the neuroscience data about the roles that different parts of the brain play in different behaviors) are a bit technical, and the jumping around from behavioral psychology to neuroscience to economic theory was hard to follow in some places, but the information was so interesting that it usually more than made up for those drawbacks. (It would have been nice to have had at least a basic diagram of the brain's anatomy though.)

It was particularly interesting reading about the animal behavior studies that showed our primate-relatives reacting to test situations so similarly to the way we ourselves react. The evolutionary implications are obvious, of course. It's fascinating to see that monkeys display the same sensitivity to changes in supply and demand as people, and even display loss aversion, one of the most powerful elements in all of human behavior.

Shermer spent quite a bit of time on primate social behavior. The connection to economic behavior seems a bit tenuous, but the stories and data were still pretty interesting. The studies done by de Wahl, Milgram, Zimbardo, and Asch were really thought-provoking, and the "Man in the Gorilla Suit" study was hilarious.

I wouldn't say this is a great book on economics, but it was certainly interesting.

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.

The Mind of the Market is tour de force. One of its ideas is the similarity between the complexity that develops naturally both in the biological sphere and in the economic sphere, one the result of evolution, the other of Adam Smith's invisible hand. Another strand in this splendidly multidisciplinary book is the role of cognitive illusions and psychological foibles and the role they play in finance and everyday economics. Yet another trope is that Darwinian "survival of the fittest" does not mean the nastiest and most cut-throat survive, but often the eusocial and most reciprocating. These and other great ideas expertly woven together!

In "The Mind of the Market" Michael Shermer presents a compelling case for using the tools of evolutionary biology in understanding the dynamics of economic processes. This is largely a vechile in which to setup his libertarian worldview not only as the only scientifically valid view of economic discourse but as the only moral view on such. Here he overstretches the utility of his conclusions & neglects all but the most basic counter argument. In doing so he critically weakens the thesis of the book forcing me to give the two star rating.

Shermer does do an excellent job of pulling data from evolutionary psychology & using that to dispel such economist myths as the "rational actor" etc. His analysis of the data on fMRI scans, primate behavior, & psychological research is careful & directly pertinent to his claim that humans make their economic (& moral) choices not using purely rational means (as has been long supposed by economists) but thru irrational processes that were adaptive behaviors selected for by the Paleoethic environment in which the first humans evolved. On this point I urge the reader to read the book & learn for themselves.

However, the work has its most critical failings when it tries to link these conclusions & findings to the legitimacy & "morality" of "hands off" libertarian economic policy. Here Shermer's careful analysis breaks down & reveals an argumentative strategy blinded by almost doctrinaire dogmatism.

Example:
In decrying anti-trust legislation as immoral & an violation of our right to free trade Shermer writes:
"When stripped of the obfuscatory language of bureaucratese, the Sherman Antitrust Act and the precedent setting cases that have been decided in the courts in the century since it was passed allow the government to indict an individual or company on one or more of four crimes: (1) price gouging (charging more than the competition); (2) cutthroat competition (charging less that the competition); (3) price collusion (charging the same as the competition), monopoly (having no competition)" (p.31)

Shermer conveniently forgets to mention that price collusion is not simple charging the same as your competition, but conspiring with the competition to charge the same price, i.e. "price fixing"; hence, the term "collusion". And since such collusion usually involves setting the price higher than it would have been if competition had been allowed, that is in fact "price gouging", not charging more than the competition but, charging more than what a fair market price would have been without collusion & price fixing.

Shermer backs this mischaracterization of anti-trust law with debatable cases concerning Alcoa Aluminum & Microsoft Windows. NOWHERE does he address the robbers barons of the early twentieth century such as Standard Oil & Pacific and Southwestern Railroad that held a stranglehold on the political & economic life of the United States & California (respectively) and as protection from whom the Sherman Anti-trust Act was passed.

Example:
Shermer writes on Wal-mart & the backlash against it:
"By dramatically slashing prices and undercutting the competition of smaller retail chains and mom-and-pop stores- causing many of them to go out of business Wal-Mart has hurt the American economy, right? Wrong By employing 1.3 million people (about as many as the military), and keeping retail prices low through quantity purchasing, a McKinsey & Company study estimated that Wal-mart alone accounted for a whopping 13 percent of U.S. productivity gains in the second half of 1990s... Nevertheless during the 2004 presidential campaign, John Kerry called Wal-mart `disgraceful' and emblematic of `what's wrong with America.' That's from a producer-directed perspective, of course. From a consumer-directed perspective, consumers consume Wal-mart products because they can save money doing so, and workers work at Wal-mart because they perceive it to be in there best interests." (p. 36)

Shermer acts as if the only criticism that has been leveled at Wal-mart is that it bad for the economy in that it puts mom-and-pops out of business. He neglects the criticisms that Wal-mart not only forces mom-and-pops out of business but, in doing so helps break down neighborhood ties that such business help maintain, promotes the homogenization of our culture, rides roughshod over local & municipal sensibilities & environmental concerns, causes excess traffic congestion in smaller localities, & creates aestheticaly displeasing "eyesores" with their "big box" design. But, all of this is difficult to put a dollar value on or quantify so Shermer neglects it. And he never address the criticisms leveled at Wal-mart that it's managerial culture invades the personal lives of its employees or that Wal-mart ruthlessly suppresses all union activity (i.e. right to free association).
Even when promoting Wal-mart's benefits he neglects crucial detail. Yes, Wal-mart creates 1.3 million jobs. But, what kind of jobs? The vast majority are low paying or miniumun wage, part-time jobs without benefits. The reason Wal-mart can claim such a high staff number is because it has a long standing policy of employing people to work just under the minimum nessecary for designation for full time work. In this way it avoids dealing with medical & pension benefits for its staff. Keeping prices low. It simply employs another part-time worker to make up for the man hours. The interests of paying people a living wage in Shermer's world is simply "producer" centered, however.
Also, in extolling the productivity gains Shermer forgets to mention that worker productivity is largely a matter of getting them to work more for less compensation.
And in flippantly stating that workers work there out of there own perceived self-interest, Shermer would have us presume that Wal-mart's largely low skilled workers have perfect choice in serving there own self interest. He neglects the fact that these workers are largely confronted by a plethora of identically bad choices: Wal-Mart, Target, etc.; choices that are largely hemmed in by the identical exploitive working conditions of these big box stores. Saying people work at Wal-mart out of self-interest is like saying that a homeless man eats out of a garbage can out of self interest: it's technically true but, given the alternatives it's hardly an endorsement.

Finally, Shermer performs numerous bits of conceptual slight of hand and bait & switch concerning his advocacy of libertarian economics.
Example:
In writing on the Enron scandal,
"If [the Enron & WorldCom type disasters did not still make headlines] - if such corporate catastrophes caused by egregious ethical lapses were so common that they were not even worth covering on the nightly news- free market capitalism would go the way of the dinosaurs." (p. 217)

Here Shermer begins with corporate structure & effortlessly switches that for free market capitalism. Never mind the fact that corporate structure & free market capitalism, while often linked, are by no means causative of each other, one can exist without the other. And that many have made the argument that corporatism inhibits free market capitalism by leading to monopolism & the inhibition or assimilation of small start up entrepreneurs.
Also, his assertion that if free market capitalism and/or corporatism were so egregious they would have ended now is like the arguing for feudalism in the 13th century by saying, "If it was so bad, it wouldn't have lasted as long." While I support free market capitalism this kind of justification for it is simply lazy thinking unlikely to convince anybody.

In sum, Shermer makes cogent points concerning our evolutionary past & how it impacts our current economic behavior. But, as this is largely in service of his greater thesis concerning the inherent morality of markets when left to "libertarian" principles & that thesis is critically weakened by arguing against straw-men & neglecting substantive counter argument, his work largely suffers.

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.

Michael Shermer is always an engaging and informative writer, and this book is no exception. There is quite a bit of good science in here, and plenty to stimulate discussions (I used the book as a summer reading with my biology graduate students, and we all enjoyed it). However, Michael at times gets a bit too close to the evolutionary psychology perspective on things (which I am very critical of), and his libertarianism shows up here and there (again, a position I don't share). Some of my students found that there are too many personal anecdotes, though of course that's a matter of personal stylistic preferences. Again, more than worth the money!