Friday, February 13, 2009

Evolution Challenges Homo Economicus

Gary Marcus, a professor of psychology at New York University, is author of "Kluge: The Haphazard Evolution of the Human Mind" (Houghton-Mifflin, 2008), tell us to: “Forget About Survival of the 'Fittest'” in Wall Street Journal, HERE:

Evolution usually makes do with 'good enough'

“To the extent that evolution has often been forced to make do, contemporary economics has a serious problem. A great deal of contemporary economic theory has been premised on the assumption that individual human beings are "rational agents," people capable of reliably acting in their own self-interest, assessing costs and benefits with a sure eye toward making optimal choices.

If we were really creatures that invariably acted in the interests of our "selfish genes," the so-called homo economicus or "rational man" theory would have some substance. It would make sense to try to predict the actions of the multitudes by assuming that each individual would act in the interest of his (or her) own selfish genes.

In reality, we often don't. Although any fool will instantly realize that winning $5,000 is better than $500, daily life is filled with decisions that cannot be said to be rational, optimal or otherwise maximally fit. At the micro-level, we'll drive across town to save $25 on a $100 microwave, but not to save the same $25 on a $1,000 flat-screen TV, showing both that we are blind to the cost of our own labor, and confused about the fact that money is an absolute rather than relative commodity.
The average American watches three to four hours of television a day, which does nothing for our "reproductive fitness" or even for our happiness (regular TV viewers are actually less happy than those who watch rarely, as several studies have shown). Our brains often have trouble keeping our minds on track, even when vital decisions are at stake. We procrastinate on important projects until we have too little time to complete them properly, often making careless errors as a result, and we frequently sabotage long-term goals (like living a long, healthy life) in favor of ephemeral short-term pleasures (like smoking cigarettes). Such self-defeating choices afflict even the powerful and the brilliant (witness the decline and fall of Eliot Spitzer -- or the many who lost millions by investing in Bernie Madoff).
All this matters because endeavors like economics and social policy are all built around theories about what human beings are and how they function. We allow consumers access to credit cards, for example, because we assume (despite ample evidence to the contrary) that they will be smart enough to balance their short-term needs as consumers with their long-term capacity to maintain a fiscally sensible reality.

The new discipline of behavioral economics is aimed at addressing these issues, but is not taken seriously enough. Even now, in the eye of the worst fiscal storm in recent memory, we trust citizens to do the "right thing," without factoring in the quirks of our evolved psychology.

As we deal with the current crisis and in the years to come, it will behoove us as a society to recognize that evolution equipped us not with foolproof, steel-trap rational minds, but something more like a "kluge," a clumsy and inelegant mental patchwork that is good enough to get the job done, but far from perfect.

If humans were truly the fittest possible creatures one could imagine, the rational-man model would make sense. But the "fittest" that survived are not necessarily the fittest possible. We are flesh and blood creatures, filled with cognitive quirks that are the detritus of evolution. If we are to move past perpetual cycles of fantasy-driven booms followed by devastating busts, we must recognize evolution's limits, and confront them head-on.”

Comment
I am a regular critic of Homo economicus and rational agents, so I feel able to offer a correction to the statement from Gary Marcus, without being misunderstood:

“A great deal of contemporary economic theory has been premised on the assumption that individual human beings are "rational agents".

The correct statement is slightly, but importantly, different. Gary Marcus should have written:

“A great deal of contemporary economic theory has been premised on the assumption that individual agents in their theoretical models are "rational agents".

There can be no pretension that in the real economy individuals act as ‘rational agents’, nor that ‘Homo economcus’ is other than a theoretical abstraction first postulated in the late 19th century when the first steps were made by ‘smart’ economists to abandon ‘political economy’ in favour of mathematical make-believe.

Gary Marcus is absolutely correct in the general tenor of his article. Myths of ‘rational agents’ being representative of human beings are now so firmly entrenched in our discipline (often with a mixture of enthusiastic pride and disdainful put-downs to those who protest that far too much is concluded about so much of economic life from too narrow a connection with reality).

Any study of evolutionary theory, and of human history (and pre-history!) shows how varied are any species in their behaviours in their multiple environments, including at, and beyond, their normal localities.

Indeed, natural selection shows many biological cul-de-sacs, so to speak; social evolution among humans shows as many ‘dead-ends’ in social forms, of which the large stone detritus strewn around Europe and beyond, and small stone artifacts, cave paintings, and ‘grave goods’, strewn everywhere else, are strong reminders.

The ‘religion’ of rational man is due for a quiet burial. It offers little as a reliable explanation of the current crisis (it caught its exponents ‘off-side’, as we say in football). Whether ‘behavioural’ economics is the answer remains to be seen, but it certainly looks like a step forward.

[I have ordered Gary Marcus's "Kluge: The Haphazard Evolution of the Human Mind" and shall report in due course on its merits.)

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5 Comments:

Blogger Don said...

I look forward to your review. For interested readers, here are a couple of links on behavioral economics, if that's kosher:

http://edge.org/3rd_culture/thaler_sendhil08/thaler_sendhil_index.html

http://www.econ.yale.edu/~shiller/course/527/ec527075.rl.htm

Don the libertarian Democrat

4:51 pm  
Blogger Oz Andrew said...

Gavin,
i agree with what you say but there is something not quite right with your update to GM's quote. Perhaps it should read:

"A great deal of contemporary economic theory has been premised on the assumption that individual agents are as in their theoretical models of "rational agents"."

A for the rational homo-economicus model itself, it will be staying in place until someone comes up with a superior and complete alternative. No amount of data contradicting the model can change that.

1:42 am  
Blogger Brian Shriver said...

Our mental capacity ranges from the sublime to the barely competent, depending on the task. We can navigate through crowds at speed (a very challenging computation) but get confused by bids and asks when changing money. We are very observant of things below the horizon line of site, but are hardly aware of what is overhead. And our conscious experience is constructed in such a way that these flaws and inconsistencies are swept under the rug.

Getting back to your title, I would argue that Adam Smith was referring to the emergent nature of economic systems when he coined the phrase "invisible hand". His point was not that markets are fully self-regulating, his point was that they were self-forming.

FWIW.

4:56 pm  
Blogger Gavin Kennedy said...

Oz Andrew

Thanks for your suggestion. I have re-cast the suggested GM quote:

"A great deal of contemporary economic theory has been premised on the assumption that individual agents in their theoretical models are "rational agents" ", and posted it.

Homo economicus cannot be improved; it is just plain wrong as it pretends to model behaviour in an economy representative f the real world. It isn't. It models behaviour in an imaginary economy that does not exist.

It's like Des Cartes' model of the solar system with 72 concentric circles, which Adam Smith discusses in his "History of Astronomy" (1744-?).

That is the point I tried to make.

Unlike the solar system, a better model was developed which can predict eclipses ten, a hundred, a milllion years hence. Homo economic cannot predict anyhting outsode of the asumptions of the model.

6:48 pm  
Blogger Gavin Kennedy said...

Brian

Thanking for your suggestions.

"Getting back to your title, I would argue that Adam Smith was referring to the emergent nature of economic systems when he coined the phrase "invisible hand". His point was not that markets are fully self-regulating, his point was that they were self-forming."

A look through my posts on Lost legacy ('Invisible Hand') respond to your suggestion.

Smith's use of the invisible hand metaphor did not refer to 'emergent systems' - it referred in the single case he used it in Wealth Of Nations to the consequences for some merchants of their 'risk avoidance ('their own security', page 456, WN IV.ii.9).

Overall, in Smith's Works (all of them) there is a common social- evolutionary thread which together implies an 'emergent nature', but which, in my considered view, has nothing to do with the metaphor of 'an invisible hand'.

I discuss in my: "Adam Smith: a moral philosopher and his political economy", Palgrave Macmillan, 2008.

See also, James Otteson: Adam Smith's Market Place of Life, 2002, Cambridge University Press.

See also forthcoming, Warren Samuels new book on the modern treatment of 'invisible hand explanations', from Cambridge University Press, 2009

7:01 pm  

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