The Mind of the Market: How Biology and Psychology Shape our Economic Lives
Shermer believes that economics is undergoing the most dynamic revolution since Adam Smith’s foundation of the science and publication of his book The Wealth of Nations. Fresh ideas and hybrids are breathing new life into an old science – blending social sciences with evolutionary, behavioural and neuro economics. Shermer’s book draws together extensive research on this new thinking on markets, minds and morals to try and explain how we moved from being hunter-gatherers to consumer-traders, and how those early influences remain. Avid readers of books in the same genre will see some familiar material here, but with an evolutionary perspective.
Comparing the $100 annual earnings of the hunter-gatherer YanamamÖ people still living on the border of Brazil and Venezuela, and the $40,000 wage of the average Manhattanite – Shermer highlights how long it took for this leap to be made – gradual increases in income being made over thousands and thousands of years until the relatively recent explosion in income and product choices.
“The first ninety thousand years of our tenure as hunter gatherers created a psychology that has often led us to behave irrationally in the last ten thousand years….” Michael Shermer
Trying to explain this evolution and ‘great leap forward’ – which Shermer calls Evolutionary Economics – is the foundation to the book, which he breaks down as –
- How the market has a mind of its own – evolving from hunter-gathering to consumer-trading
- How minds operate in markets – how our brain evolved to function in a hunter gatherer economy but must now work in a consumer-trader economy; and
- How minds and markets are moral – how emotions evolved to help us co-operate and establish free and fair trade
Shermer uses examples from Darwin, modern day corporate and personal life to explore these arguments and his belief that while capitalism may not need promoters, it does need a scientific foundation grounded in psychology and evolution.
Interesting ideas explored include:
- Cumulative advantage: which Shermer also calls the Bestseller Effect: if a product gets a head start in sales, it signals to consumers that other people want that product and therefore it must be good, causing books to climb (and keep climbing) the bestseller lists; more music to be downloaded if others have already downloaded it; and the publishers of those books or music to grow rich
- Banking: In the Banker’s paradox, people in most need of money are viewed as the worst credit risks and therefore find it difficult to get a loan, while people who least need the money are the best credit risks and therefore become even richer. But there are ways around this – if you’re valuable to someone else, they have an interest in your survival, and you also have a stake in them – building trust through this friendship, the poor can become rich
- Enron: Shermer links together ideas such as Philip Zimbardo’s prison experiments at Stanford University – which pitched students as either guards or prisoners, and watched as they became either increasingly brutal or increasingly powerless – to Enron’s collapse to show how ‘good apples’ can turn bad in the wrong environment
- Google: He also highlights how Google’s ‘Don’t be Evil’ corporate philosophy produces a good-barrel environment that maximises the good-appleness of its employees and customers. Despite recent controversies, this guiding principle is seen as a moral standard towards which to aim, not an unrealistic sinless existence
- The QWERTY keyboard: Sherman delves into the myth surrounding the QWERTY keyboard – a myth that suggested it was not as good as competitors, but has survived because it was so entrenched in training methods, manuals and computer manufacturing that other options will never be viable. In fact, research shows that it was just as good as its competitors, and that initial market advantage alone will not make a product endure
In his epilogue, Shermer makes the case for trade leading to trust between nations, culminating in lasting peace and prosperity. Citing French economist Frederic Bastiat: “Where goods do not cross frontiers, armies will,” he writes passionately about how greater freedom in terms of liberal democracy and free market capitalism to open up borders will break down the natural animosities between strangers while elevating trust. Perhaps something that our ancestral hunter-gatherers, who began trading tools from the earliest times, may have instinctively known.
About the author
Dr Michael Shermer is an established author, and founded The Skeptics Society & Skeptic magazine. He is a contributing editor and columnist, for ‘Scientific American’ and is adjunct professor at Claremont Graduate University and Chapman University. He frequently appears on television and radio as a scientific expert.
“Economists who understand Charles Darwin are almost as rare as biologists who understand Adam Smith. Yet the two are essentially saying the same thing – that order emerges un-ordained from competition and innovation”
Matt Ridley, author of The Origins of Virtue
“Compelling…Take(s) us on an intimate tour of the best of the last half-century’s work in behavioural economics and neuroscience”
New York Post
Author: Michael Shermer