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

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.