FQ.07.49: Favorite Quote for This Week

Humans have strongly ingrained rules about fairness and reciprocity that override calculated "rationality." ... We have deep rooted behaviors that reward cooperation and punish free riders.  While some economists might view these behaviors as irrational, [they] in fact provide the cornerstone for the social cooperation that is essential for wealth creation.
—Eric Beinhocker, The Origin of Wealth

Comments

[Steve Dalton]

Now balance that economic quote with the social media explosion and ask the question: "Is social media really the newest version of economic wealth creation reality?"

http://chrisbrogan.com/marketing-is-not-social-media-social-media-is-not-marketing/

[Jason Goodbody]

There are few truer statements than this one.

It can be argued that economics is merely an emergent property of human society, operating off of ingrained biological rules of societal interaction. If so, then our ability to understand and predict which rules and policies will bring us success and which will bring us failure should improve.

If we stay clear of the diagrams and charts and instead look into the psychology of what constitutes a fair exchange and what further lays a foundation for good business relationships I think the "dismal science" becomes a lot more interesting and certainly more practical.

Beinhocker's quote and observation is fundamentally supported by Robert Triver's work on "reciprical altruism" in the 1970's.

Triver's work is referenced in any decent popular science book on evolutionaly biology, human/primate psychology, and any college level biology text. My favorites have been:
"The Moral Animal" - Robert Wright
"The Selfish Gene" - Richard Dawkins
"Naturalist" - E.O. Wilson
"Red Queen" - Matt Ridley
"How the Mind Works" - Steven Pinker
"A Companion to Business Ethics" -Robert Frederick

J

[Bob]

Great post Jason. While a mere novice at best in economics the more I learn the more I think that it belongs more in the behavorial, soft sciences than what appears to be more hard, mathematical science.

I'm not sure how one would measure the pyschological part of it though looking at manias is a good start. Tulips, dotcoms, that sort of thing.

And really, how much technical analysis of financial instruments is nothing more than a graphical or numerical representation of human behavior?

[Jason Goodbody]

Bob,
I agree with you that economics finds itself well within these "soft" sciences. However, and fortunately for the advancement of human knowledge, the social sciences such as psychology, sociology, and anthropology are now tougher to discriminate from the hard sciences.

Theories and research in these soft sciences must now be reconciled with other fields of knowledge such as neurology, evolutionary biology, biochemistry, system dynamics, etc. They must use statistics to quantify and assess significance to their output. Its very exciting, this confluence of fields of knowledge.

And so economics finds its way to its roots again, roots that have become stronger. Adam Smith would be thrilled.

Your mention of manias is interesting. Mackay's book "Extraordinary Popular Delusions & the Madness of Crowds" is a classic and can best be appreciated when read with Surowiecki's "The Wisdom of Crowds"

Mackay talked about popped bubbles and crowd psychology such as the Dutch Tulip mania, France's Mississippi land scheme, witch hunts (literal and figurative), alchemy, and the Crusades.

Surowiecki writes instead about the collective wisdom of crowds, only when they diversely and independently decide as individuals.

This is why a group of visitors at a fair can better guess the weight of an ox or the number of gumballs in a bowl when all their guesses are combined and averaged. They will often come closer as a group than any one expert. (This is why your most effective lifeline is to "ask the crowd" - the guessers will even out across the choices while those with an inkling will find themselves sitting at a peak amongst the distribution of answers).

This goes back to the original post. Market judgement is better than what the experts say, optimization can occur via the coordination of individuals' actions, and networks of trust trump centrally planned systems.

Cheers

[Paul Novell]

I am hopefully getting Beinhocker's book for Christmas. Can't wait to read it.

Paul