biology in economics

Please, not another bias! An evolutionary take on behavioural economics

Below is a transcript of my planned presentation at today’s Marketing Science Ideas Xchange. The important images from the slide pack are below, but the full set of slides is available here.

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Please, not another bias! An evolutionary take on behavioural economics

Thank you for the invitation to speak today.

I accepted the invite because natural selection has shaped the human mind to take actions that have, in our past, tended increase reproductive success.

That statement isn’t as creepy as it sounds. I did not calculate the direct reproductive opportunity of this speaking engagement. Rather, our evolutionary past means that we are inclined to pursue proximate objectives that lead to the ultimate goal.

For example, we seek status – and what could be more status-enhancing than speaking here. And we engage in the costly signalling of our traits – such as intelligence – to the opposite sex, allies or rivals.

Another place where I signal is my blog, Evolving Economics. A copy of these slides and the text of what I plan to speak about today – which should approximate what I actually will speak about – will be posted onto Evolving Economics before the end of today’s talk. That text includes links to the studies I will refer to.

To explain why I engage in this costly signalling – conference speaking, blogging and the like – I will first take a step back and explain how the evolutionary approach to decision making relates to other approaches, starting with behavioural economics.

And I should say that I am going to refer to “behavioural economics” today, even though what I am going to talk about is more rightfully called “behavioural science”.

I once had an online discussion about this point with last year’s MSiX headlining speaker Rory Sutherland. I was in the behavioural science camp, but he said that the term behavioural economics was fantastic marketing and is effective in getting the attention of economists. Even though calling it behavioural economics is a slight to the psychological foundations of this work, we should live with it.

Now that I work in this space and I have used the terms behavioural science and behavioural economics with a range of clients and colleagues, I am convinced that Rory was right. I receive blank looks when I use the term behavioural science. I attract immediate interest when I use the term behavioural economics.

So, to content. And I am going to start with a complaint. In some ways I am following the traditional format of a behavioural economics talk, which sets up the rational homo economicus straw man, and beats it to death with a series of examples of how irrational we really are. But for a change, I am going to start by beating up on behavioural economics.

And I should say that, despite this bit of bashing, I have a soft spot for behavioural economics. It’s my day job for a start – helping clients in the private and public sectors better understand how their customers, employees and citizens make decisions, and how they can help them to make better ones. It’s just that behavioural economics could be so much more.

There are not 165 human biases

WikipediaSo, I want to take you to a Wikipedia page that I first saw when someone tweeted that they had found “the best page on the internet”. The “List of cognitive biases” was up to 165 entries on the day I took this snapshot, and it contains most of your behavioural science favourites … the availability heuristic, confirmation bias, the decoy effect – a favourite of marketers, the endowment effect and so on ….

But this page, to me, points to what I see as a fundamental problem with behavioural economics.

Let me draw an analogy with the history of astronomy. In 1500, the dominant model of the universe involved the sun, planets and stars orbiting around the earth.

Since that wasn’t what was actually happening, there was a huge list of deviations from this model. We have the Venus effect, where Venus appears in the evening and morning and never crosses the night sky. We have the Jupiter bias, where it moves across the night sky, but then suddenly starts going the other way.

CassiniPutting all the biases in the orbits of the planets and sun together, we end up with a picture of the orbits that looks something like this picture – epicycles on epicycles.

But instead of this model of biases, deviations and epicycles, what about an alternative model?

The earth and the planets orbit the sun.

CopernicusOf course, it’s not quite as simple as this picture – the orbits of the planets around the sun are elliptical, not circular. But, essentially, by adopting this new model of how the solar system worked, a large collection of “biases” was able to become a coherent theory.

Behavioural economics has some similarities to the state of astronomy in 1500 – it is still at the collection of deviation stage. There aren’t 165 human biases. There are 165 deviations from the wrong model.

So what is this unifying theory? I suggest the first place to look is evolutionary biology. Human minds are the product of evolution, shaped by millions of years of natural selection.

A hierarchy of decision making

To help you understand what an evolutionary lens adds to our understanding of human decision making, I am going to place evolutionary biology in a hierarchy of possible ways to consider the mind.

The first four reflect a hierarchy presented by Gerd Gigerenzer in his book Rationality for Mortals (if you haven’t read any Gigerenzer, do).

First, we have the perfectly rational decision maker, homo economicus, who exhibits unbounded rationality. If you have been to enough behavioural economics presentations, you have already seen this model beaten to death.

The next is a model provided by economists in response to some of the behavioural critiques – a model of decision making under constraints. If you add costs to information search – there is your role for advertising and marketing – and possibly some limits to computational power, we get different decisions. It is a nice idea, but an even less realistic version of how people actually think. If you have done any late secondary or early tertiary mathematics, you will know it’s typically harder to make calculations with constraints than it is to be the unbounded rationaliser.

The third model is the heuristics and biases program of behavioural economics. Gigerenzer calls this work the search for “cognitive illusions.” I have already complained about that.

Next comes what Gigerenzer calls ecological rationality. I want to spend a moment or two talking about this as it is very similar to an evolutionary approach, minus one important feature.

Ecological rationality

The ecological rationality approach involves asking what decision making tools the user possesses. You then look at the environment in which those tools are used, and then you can assess how those tools perform in that environment. The decision making tools and environment in which they are used are two blades of the same scissors (Herbert Simon used this description) – and you need to examine both the tool and the environment to understand the nature of the decision that has been made.

Through this approach you might see what are called “biases” emerge, but an ecological rationality approach allows you to understand the basis of the bias. Instead of just noting someone has made a poor decision, you might note why they were wrong and in what alternative environments those decision rules might be more effective.

Let me give you an example – the gaze heuristic (a heuristic is a mental shortcut). The gaze heuristic is a tool that people – and dogs – use to catch balls. The heuristic is simply this – maintain the ball at a constant angle of gaze. If you move to keep this angle constant, you will end up where the ball lands. Obviously, this is easier than calculating where you should be from the velocity of the ball, angle of flight, the effect of wind resistance and so on.

But it results in a strange pattern of movement. Suppose you are close to the point where the ball is first hit into the air. As it rises you will tend to back away from the ball. As it then starts to fall, you will move back in. If it is hit up to the side of you, you will move to the ball in a curve. Now, if you had a behavioural economist look at the path you took to catch the ball, they might call it the curve bias or something like that – but it is actually the result of a very effective decision making tool.

There are also some circumstances where it works better, and some where it fails. It tends to work best when the ball is already high in the air. If you catch sight of a ball hit straight up before it has risen far, using the heuristic for its entire flight could require an impossible feat of first running away from the ball and then toward it. When we see fielders messing up a catch when the ball is hit straight up, it can be the backfire of this heuristic.

Understanding this is a much richer understanding than saying that the fielder is biased because he did not run straight to where the ball was going to land. It also points to the power of heuristics. Try to train someone to run straight to where a ball will land and watch them fail. Don’t see these decision making shortcuts as poor cousins of the “more rational” approaches.

Let me give another more marketing orientated example – the recognition heuristic. The heuristic runs along the line of “If I recognise one of two objects and not the other, then infer that the object I recognise has higher value.”

Obviously, people might use the recognition heuristic when shopping for a product. If I recognise one brand but not the other, I might assume the brand I know is superior.

The recognition heuristic will work when recognition is correlated with the quality of the product. I am sure you know plenty of products where brand strength is a good indicator of quality. And of course, one of the jobs of marketers is to make sure the recognition heuristic delivers success for their client – you are trying to achieve brand recognition. Then again, there are other products where brand strength probably leads people to make some poor decisions. My personal view is that the recognition heuristic works particularly poorly when it comes to beer.

Evolutionary rationality

Now, I consider Gigerenzer’s approach to be superior to the biases and heuristics or “cognitive illusions” approach. But it still leaves open the question of where these heuristics and other decision making tools come from. And this is where we get to the fifth level – what I will call evolutionary rationality. The toolbox that we use today has been honed by millennia of natural selection.

Anticipating two common responses to this point, I am not going to spend today trying to convince the doubters in the audience that the human mind is a product of evolution – although I am happy to do that over a drink later.

And I will highlight that humans are cultural and well as biological creatures. That we have a range of universal instincts and preferences shaped by natural selection does not say that culture is not important. What we see is a combination of evolved preferences, social norms, technologies and the like, each interacting with and shaping the others. Yes environment matters, but if you ignore the biology, you will do a poor job of understanding why consumers act the way they do.

So what does an evolutionary approach tell us about the human mind?

For a start, it tells us something about our objectives. Those who are in the audience today – all of your ancestors, without fail, have managed to do two things: survive to reproductive age, and reproduce. As little as you might like to think about it, your parents, grandparents and so on all the way back until the evolution of sex have always successfully attracted a partner to reproduce with.

This does not mean that we literally walk around assessing every action by whether it aids survival or reproduction. Instead, evolution shapes proximate mechanisms that lead to that ultimate goal. And consumer preferences are manifestations of our innate needs and preferences.

For example, on survival – we are obsessed with food – and in particular, crave sweet and fatty foods – which in historical times increased survival. Most of the successful global fast-food restaurants target those evolved tastes (in fact, you could say that the market has evolved to match those propensities).

We have an innate sense of danger – for example, we (and other animals) are quicker at detecting snakes than other stimuli, even when we have never seen them before.

On reproduction, we enjoy sex – which has obvious reproductive benefits, at least before the spread of effective contraception. We accumulate resources far beyond those required for survival. And so on.

Before going on, however, I should say that the shaping of proximate rather than ultimate mechanisms for survival and reproduction has some interesting consequences. Our evolved traits and preferences were shaped in times vastly different to today. Our taste for food was shaped at a time when calories were generally scarce and provided in the form of meat, tubers, nuts, vegetables and Glyptodons. The gorging that would occur after the occasional slaughter of a large prey is very different to the eating that occurs in today’s age of grain and calorie abundance. Today, we are effectively calorie unconstrained.

And the joy of sex that once led us to have children clearly isn’t working as efficiently as it once did. Fertility across the developed world has plunged – although I’d be happy argue later over a drink that evolutionary forces will tend to drive fertility back up.

This backfiring of our evolved traits and preferences is known as mismatch. Our evolved traits do not always match the new modern environment – and this is something that makes Gigerenzer’s model of looking at the interaction of the decision making tools with the environment such a useful tool for analysis. Sometimes the tool works. Sometimes it doesn’t.

So what does evolutionary biology tell us about human decision making, behavioural economics and marketing?

Sex

FerrariSo, let’s do a quick quiz. Tell me two things about the driver of this Ferrari (I have stolen this example from University of New South Wales evolutionary biologist Rob Brooks).

First, the driver was male. Yes, men and women are different – we will touch on the reasons for this in a moment – although I expect most marketers already knew this.

Second, the driver is likely young (in this case, 25).

So why is this the case?

Females – and in biology, this is in part how females are defined – produce a large immobile egg. Males produce a smaller gamete – sperm. The egg is the scarce resource. Women are born with a million or so eggs, but they release only one or so a month. Men produce 1,500 sperm a second. Each man in this room will produce enough sperm during this talk to fertilise every egg the women in this room will ever produce.

Then there is what happens when a sperm and an egg are joined. The woman spends nine months carrying the baby – and is unable to reproduce during that time. She then provides the majority of infant care. Men are less constrained by any such barriers.

Then throw in that women are certain of maternity, whereas men may not be certain of paternity, and you have vastly different patterns of reproduction between the sexes.

More men than women have zero children – the worst possible evolutionary outcome. A man who applies no standards to a mate choice may still go without. A woman would never have that problem.

Then, for a few men, the rewards are vast.

As one example, approximately 16 million men in central Asia carry the same Y chromosome – the Y chromosome is passed from down the male lineage from father to son. This chromosome originated in Mongolia around 1000 AD with around 8 per cent of the men in the region carrying it (0.5% of the world’s male population) – they all trace their male lineage back to the same man.

One possibility is that this chromosome was so successful as it was carried by Genghis Khan and his close relatives. Genghis had multiple wives and a harem. He may have fathered thousands of children. His grandson Kublai Khan was famous for the size of his harem – I have seen some estimates that it contained 7,000 women (although haven’t been able to reliably source those estimates). Whether that number is accurate or not, it is feasible that Kublai Khan could have been having hundreds of children a year.

No woman could ever have that level of success – but for men, the evolutionary rewards to success can be vast.

This brings us back to our Ferrari driver. As a male, the risk-reward calculation in evolutionary terms is quite different from women. Men face a higher probability of evolutionary oblivion, and small chance of an evolutionary extravaganza. It makes sense to take risks that may lead to inordinate evolutionary success – or at least to avoid evolutionary oblivion.

One of my favourite examples of this comes from research by Richard Ronay and Bill von Hippel. They got some young male skateboarders to perform tricks, including a difficult trick that they could complete only half the time. Halfway through filming, a woman rated as highly attractive (corroborated by “many informal comments and phone number requests from the skateboarders”) walked onto the scene. Once she appeared, they took more risks and were less likely to bail a trick half-way through, instead riding all the way through to the crash landing (a story on ABC’s Catalyst demonstrates this effect).

First, this risk taking should be seen in the context of what they are trying to achieve – attracting the female. So much of economics – and behavioural economics – is looking at the wrong objective.

Second, this change in risk preference in the presence of a women points to one of the most important findings in evolutionary psychology – our decision-making changes with the immediate context. We might be considered to be different personalities. Evolution has not shaped an all-knowing computer, but rather a modular computer for making different decisions based on different contexts.

As an example of this, show one group of people the movie The Shining, the other half a romantic movie starring Ethan Hawke. Then manipulate the ads they see during the movies to either accentuate the uniqueness of the product, or its popularity.

Those watching The Shining are more likely to prefer popular products – safety in numbers as their danger avoidance personality is triggered. For those watching the romantic movie, they wanted unique products so that they would stand out from the crowd. Their mating motives have been triggered. You effectively get a change in preferences based on which movie they are watching and which self is answering the questions about the products. The effectiveness of social proof varied with context.

Present bias

Let’s look at a traditional behavioural economics problem – present bias, which is the strong preference for present rewards over those in the future. The largest discount for the initial delay.

If I ask you the following question, some of you will choose A, and some B.

Choose between:

  1. One apple today
  2. Two apples tomorrow

But if I ask you the following question, almost no-one will choose A:

Choose between:

  1. One apple in one year
  2. Two apples in one year and one day

This change in preference shouldn’t be seen if we discount the future consistently. And if I asked you to revise your choice in the second question at the one year mark, I am effectively asking you the first question and some of you might change your mind.

On the one hand this seems irrational. But what if the immediate objective isn’t maximising lifetime consumption of apples?

In an experiment by Margo Wilson and Martin Daly – two of the pioneers of evolutionary psychology, and I recommend you read their book Homicide if you haven’t – they exposed men and women to either pictures of attractive faces or pictures of cars before undergoing tests of their degree of present bias.

The men who had seen the attractive faces became more severe discounters than those who had seen the cars. They became focused on the present – the mating opportunity.  The women did not become increasingly severe discounters in this experiment – although there may be a smaller effect that the experiment did not have the power to detect.

So here, what might be called a very strong present bias has a degree of rationality to it in that the objective of the participants is mating. Obviously, they didn’t have a chance to mate with these pictures – so there we have the issue of mismatch – but you can see the evolutionary foundation of their decision. If they did manage to capitalise on that moment and manage to mate, their evolutionary future is set.

MantisAn extreme example of this is seen in other species. A male black widow or preying mantis would allow themselves to be eaten at the moment of mating – this picture is of a male preying mantis getting lucky but losing his head as a consequence – massive present bias in terms of the typical measures an economist might use, highly rational from an evolutionary perspective.

Costly signalling

Now I want to move to what I believe is the most important idea I will communicate today.

Shortly after publishing The Origin of Species, Charles Darwin wrote “The sight of a feather in a peacock’s tail, whenever I gaze at it, makes me sick!”. He wrote this because, to him, the tail simply did not make any sense. It harmed the peacocks chance of survival. Why would a female mate with a long-tailed male and subject her long-tailed son to the same dilemma.

But in the mid-1970’s an evolutionary biologist, Amotz Zahavi, proposed that signals such as peacock tails can be a trusted as they handicap the bearer. Only a high quality peacock can bear the cost. If a sickly peacock tried to carry such a large tail, they’d be toast. In evolutionary lingo, the peacock’s tail is an excellent fitness indicator.

Biologists argued about whether signals could be honest because they create a handicap for fifteen or so years after Zahavi espoused this theory. But in the early 1990s it was agreed that the maths checked out, and the idea is now broadly accepted by biologists.

This handicap principle also applies to human signalling. When humans are seeking a mate, you want to know as much as you can about them. You want to know their intelligence, their health, the level of conscientiousness, their kindness, the resources at their disposal and so on. You can’t just see this straight away – so people seek to signal these traits. And the products they buy are a major part of that signal.

Conspicuous consumption

The most obvious example of this type of signalling is conspicuous consumption. Conspicuous consumption is a signal of resources and the traits required to acquire those resources.

One of the most expensive watches in the world is the Patek Philippe Calibre 89. I first heard of this watch when I read Robert Franks Luxury Fever. Only four were made, with the first selling for $2.5 million and the last auction price I can find was over $5 million.  The watch has 1728 components, gives you the date of Easter each year, and unlike most mechanical watches, will not record the years 2100, 2200 and 2300 as leap years, while still recording 2400 as one (as per the order of Pope Gregory XIII in 1582). It has 28 hands and there are 2800 stars on the star chart.

Since it is mechanical, it includes a tourbillon, a mechanism to improve accuracy by accounting for the earth’s rotation. But the funny thing is that my cheap quartz watch does not require such a mechanism, as gravity does not affect the vibrations of the crystal. The Calibre 89 also weights over a kilo and is the size of a hockey puck. For several million dollars less, I have scored a more accurate watch that I can wear.

But it is the waste inherent in the Calibre 89 that makes it a reliable signal of resources – and the qualities required to accumulate those resources. All that extra expenditure is effectively waste that a man with low resources cannot bear. Think of all the most expensive consumer goods – super yachts, high quality sports cars, gold Apple watches. In terms of transport or timekeeping there are much cheaper and in fact much more reliable methods, but the waste inherent in these goods makes them an excellent signal of resources.

So, does this conspicuous consumption actually work as a signal?

There’s a decent size literature on this topic, so let’s look at two typical experiments – one on the desire of men to conspicuously consume, a second on the effect of that consumption on women.

Take a group of men and show them pictures of attractive women and then ask them what they will do with their money. The mating prime makes men more likely to engage in conspicuous consumption or conspicuous charitable donation, but has no effect on inconspicuous consumption.

Women can also be affected by mating primes, although in that particular experiment their change in behaviour in response to pictures of attractive men was an desired increase in volunteering in a public way (but no increase in private benevolence).

The difference reflects the different traits each are communicating – men are communicating resources and the traits required to accumulate them, women their conscientiousness.

Dunn et alOn the effect of the signal, in one study men and women were shown pictures of members of the opposite sex in either a red Ford Fiesta or a silver Bentley. Unfortunately the photos in the paper are provided in black and white – as shown in this slide – but these indicate the types of images the experimental subjects were shown.

The result – the expensive car made the male more attractive to the females, whereas there was no effect on male perception of the female drivers. The increase in male’s attractiveness was equivalent to around 1 point on a scale of 1 to 10.

Signalling other traits

Of course, signalling involves far more than conspicuous consumption. We don’t only signal resources, but want to signal intelligence, conscientiousness, agreeableness or other features.

We buy a Cassini 1100 mm reflecting telescope to signal our intelligence. We subject ourselves to year’s of post-secondary education to signal intelligence and conscientiousness. We buy hybrid cars to signal our agreeableness. And we don’t only signal to potential mates. We also signal to friends, relatives and rivals.

Importantly, good signals are difficult to fake. It is difficult to exploit many products if you don’t have the right personality traits – faking education below certain levels of intelligence or conscientious is too difficult, faking wealth will run a poor person dry, faking appreciation of jazz if you have low openness will drive you nuts – the handicap is what makes the signal reliable.

Ultimately, this approach indicates that there is an important question to be asked when marketing a product. How does your product or brand allow the consumer to signal their traits to potential mates, their spouse, allies or rivals?

Unfortunately, it’s not as simple as communicating this point directly to a potential consumer in your advertisements. A sports car ad for young males does not directly inform them that it will attract more females.

That is, unless you are Lynx, or Axe as it seems to be called in most countries. Lynx states the strategy overtly – “Lynx gives guys the edge in the mating game”.

But is this actually the strategy for most products? It is just a question of how many times removed the product is from mating outcomes. The product will increase your status, giving you an edge in the mating game. This product will intimidate rivals, giving you an edge in the mating game. This product will indicate your wealth, giving you an edge in the mating game. This product will allow you to get a high paying job to buy a sports car to indicate your wealth to give you an edge in the mating game.

So when a man sees a billboard with an attractive woman on a billboard, it gets attention. And from an evolutionary perspective, this is exactly the sort of thing that would draw attention. In our evolutionary past, an attractive woman would have been right there – you might think you are in with a shot.

But there is another more important, subtle message. This product will help you in the mating game. The girl on the car gets attention, but the more important implicit message is that this car can get you the girl. I understand there is the saying “sex sells”, and then the rebuttal, “sex sells, but only if you are selling sex”. Well, far more of you are selling sex than you realise.

Personally, I’d like to see more research in this area. Survey the buyers of different cars for number of sexual encounters too see if there is a difference. Of course, we have selection bias issues with those who buy the cars – so maybe we need some random allocation of sports cars to get some reliable results.

A reading list

Now, I have only scratched the surface over the last half hour or so, but if you are interested in this area, here are a few books to get you started – and I should say that these books heavily influenced what I have talked about today.

MSiX readingThe Red Queen: Sex and the Evolution of Human Nature by Matt Ridley was the first book that made me realise that evolutionary biology was at the core of understanding human behaviour. The first half gives a great synopsis of the origins of sex – that is, why we have sex as opposed to budding off clones – and the second asks what this means for human interactions.

In Spent: Sex, Evolution and Consumer Behavior, Geoffrey Miller asks whether the signalling we engage in in a mass-consumerist society does a good job of signalling the traits of interest. A consumer culture has a degree of self-deception – that above average products can compensate for below average traits. We get to know each other in minutes and are quite good at judging other people’s qualities from our interactions – that is, our intelligence, conscientiousness and so on. We can see through the product haze, and most products do a crap job of signalling the traits we think we are.

Next, Gad Saad is the pioneer of examining consumption through an evolutionary lens. The Evolutionary Bases of Consumption is a more technical book, while The Consuming Instinct: What Juicy Burgers, Ferraris, Pornography, and Gift Giving Reveal About Human Nature is an easier read. By the end of those two books the idea that evolutionary theory is important for understanding consumption decisions will have been well and truly hammered into you.

I spoke a lot about signalling, and Amotz Zahavi was the person in the mid-1970’s who first saw how important this is in biology. The Handicap Principle: A Missing Piece of Darwin’s Puzzle is his popular book on the topic. Robert Frank’s Luxury Fever extends the examination of signalling to conspicuous consumption.

Gerd Gigerenzer’s Rationality for Mortals: How People Cope with Uncertainty is from where I stole the first four stages of human decision making. If you do start reading Gigerenzer’s books, I suggest you don’t stop there.

The Rational Animal: How Evolution Made Us Smarter Than We Think by Douglas Kendrick and Vlad Griskevicus in some ways does what I did in the early part of the presentation – they show that many apparently irrational actions are actually quite rational from an evolutionary perspective. They are behind a lot of the studies I have referred to.

And then there are some related articles that I also recommend reading – particularly by Owen Jones who writes a lot about the need to interface behavioural economics and evolutionary biology.

I have a longer reading list on my blog, where I have reviews of many of these books and links to interesting papers.

Three thoughts to chew on

So, having said all this, here are three ideas for you to walk away from this presentation with.

Obviously, to understand humans you need to understand our evolutionary past. An evolutionary lens provides a guide as to what people are looking for in a product. As Gad Saad points out in The Consuming Instinct, try selling Harlequin-type romance novels to men and see where that takes you – some strategies will be doomed to failure because they do not align with our evolved preferences.

Second, a large part of our evolved behaviour involves our desire to signal important traits and qualities to potential mates, allies and rivals. When buying a product, what traits does the consumer believe they will be signalling?

And third, our evolved minds are sometimes out-of-sync with our modern environments. Use Gigerenzer’s framework (or Herbert Simon’s scissors) – what are the decision making tools we have evolved to use, what is the environment we intend to use them in, and what is the resulting decision? Biases, purchases and a large range of human behaviour will make much more sense when look at them under this lens.

 

The Evolutionary Foundations of Economics

I posted this paper on SSRN a few months ago, but neglected to blog about it – I’ve written (with my supervisors) a review of the literature incorporating evolutionary theory into economics. The abstract:

The Evolutionary Foundations of Economics

As human traits and preferences were shaped by natural selection, there is substantial potential for the use of evolutionary biology in economic analysis. In this paper, we review the extent to which evolutionary theory has been incorporated into economic research. We examine work in four areas: the evolution of preferences, the molecular genetic basis of economic traits, the interaction of evolutionary and economic dynamics, and the genetic foundations of economic development. These fields comprise a thriving body of research, but have significant scope of further investigation. In particular, the growing accessibility of low cost molecular data will create more opportunities for research on the relationship between molecular genetic information and economic traits.

The paper is fairly flat in tone as I wrote it as the introductory review chapter for my thesis. If you’re familiar with the blog, you will have read some more critical pieces on the papers covered in my article before. Links to some of those critiques can be found down the bottom of my evolutionary biology and economics reading list page.

And the disclaimer – this paper isn’t about “evolutionary economics” in the way that term is typically used. I’m interested in the biological angle:

The subject matter of this paper needs to be distinguished from what is commonly called “evolutionary economics”. Evolutionary economics uses biological concepts, such as natural selection, and applies them to the dynamics of firms, business processes and institutions. The economy is seen as a complex adaptive system in which innovation and change are central considerations. The origin of evolutionary economics is often traced to Veblen (1898), and was revived by Alchian (1950) and later Nelson and Winter (1982), whose seminal work inspired a vast literature. The subject matter of this paper differs from evolutionary economics in that we focus on human biology rather than seeking to apply a biological analogy to higher levels such as firms. This paper is about the application of evolutionary biology to economic processes at the level of humans and their genes and their interactions at the population level.

Genes and socioeconomic aggregates

In April, a Conference on Genetics and Behaviour was held by the Human Capital and Economic Opportunity Global Working Group at the University of Chicago.

The videos for the conference are now up, so as I watch through them, I’ll post links and some brief thoughts. The first session, with videos linked below, was on Genes and Socioeconomic Aggregates. The video and audio are average at times, and you might want to get the slides (links provided where available) as they are hard to read in the video at times. However, there are some good bits in all of the presentations.

Gregory Cochran: Genetics and Society (slides)

Cochran laid out some ideas that should be in the minds of economists, although he does not focus much attention on selling the ideas. Unfortunately, the questions at the end got derailed by epigenetics (my views approximate Cochran’s). One interesting argument by Cochran is that human environments tend be variable, as, in a Malthusian world, good times (when people breed like mad) tend to be followed by bad (too many people) which tend to be followed by good (people died in the bad). As a result, epigenetic transmission based on the current environment may be a poor strategy.

When Cochran posted this video on his blog, some interesting discussion followed in the comments – they are worth checking out.

Enrico Spolaore: Ancestry and the Diffusion of Economic Development: Facts and Questions (slides)

Spolaore touches on his work concerning genetic distance and the diffusion of development (I have posted about it here, here and here). He is extending this work to look at the diffusion of fertility reduction from France (where the demographic transition first occurred), and is getting similar results.

Steven Durlauf: Two Remarks on the Inference of “Macro” Genetic Effects (slides)

I did not get much from Durlauf’s presentation, although some of the questions were interesting. Steve Hsu deflates the “it’s all too hard” message when he points out that animal breeding is now using genetic data.

Henry Harpending: Some Quantitative Genetics Approaches

Harpending discusses his work on how assortative mating can mimic strong selection. I sense this presentation might be difficult to follow if you aren’t familiar with his work (a link to that is here). Not much value in the question session, which gets derailed by issues concerning scaling when estimating heritability.

Aldo Rustichini: Determinants of Inequality and Intergenerational Mobility (slides)

A tough presentation to follow – you need to use the slides to have a chance of getting across it – and not recommended for those not mathematically inclined. The highlight is Greg Cochran trying not to jump out of his chair between the 7 and 8 minute mark due to some comments about heritability. Cochran also deflates the idea that there is a high level of false paternity in humans – for more on that, check out this post by Razib Khan.

Becker on evolution and economics

Gary Becker was one of the first economists to seriously contemplate the role that evolutionary biology could play in economics. In 1976, he wrote:

I have argued that both economics and sociobiology would gain from combining the analytical techniques of economists with the techniques in population genetics, entomology, and other biological foundations of sociobiology. The preferences taken as given by economists and vaguely attributed to “human nature” or something similar – the emphasis on self-interest, altruism toward kin, social distinction, and other enduring aspects of preferences – may be largely explained by the selection over time of traits having greater genetic fitness and survival value.

Over the last two days, a couple of people have classed him as the greatest social scientist of the last 50 years. I am happy to grant the title of greatest economist over that period, but I’ll reserve the social scientist title. Becker broke down a lot of barriers in other fields, but I am not sure that many of his applications will outlast approaches grounded in biology. In the long-run, E.O. Wilson and his groundbreaking work starting with Sociobiology might be the more important piece.

In the meantime, below are links to some posts over the last few years I have written about Becker’s work:

  1. Rotten kids and altruism.
  2. Altruists and the knowledge problem.
  3. Consumption and fitness.
  4. Deriving the demand for children.
  5. The evolution of happiness.

Cooperation and Conflict in the Family Conference wrap

Over the past year I have posted several times about the Cooperation and Conflict in the Family Conference, which was held in Sydney this week. It turned out to be a great conference, and I am very pleased with how it panned out.

The conference has increased my optimism about the potential for more work to be carried out at the inter-disciplinary boundaries between economics, evolutionary biology, anthropology, psychology and so on. When I compare it to the Social Decision Making: Bridging Economics and Biology conference I attended almost three years ago (an excellent conference), we managed to drag in a broader range of economists and other social scientists to this event. I suspect this is evidence for increasing interest on the part of social scientists in how sciences such as biology can add to the social science toolkit.

As a result, I hope this conference is the first of a continuing series (although hopefully with a wider group of organisers). An interesting challenge for the next iteration will be to pick an appropriate theme. In this case, the Cooperation and Conflict in the Family theme was useful in pulling together people who may not have necessarily considered that there were useful insights in other disciplines. We would not have gotten such an interesting mix of people if we had pitched the topic specifically around the integration of disciplines.

It was interesting to see the different presentation styles across disciplines, and I have to say that the biologists (on average) have the edge in presenting their work in an easy to understand way – particularly in relation to the submitted presentations. Us economists are still too tied to our equations to dump them. This was best illustrated in the presentations of two plenary speakers – Michael Jennions and Hanna Kokko – who used simple cartoons and illustrations to describe their models. If you go to their papers (particularly the supplementary materials), there can be some relatively hefty math behind them. Yet they are able to present the ideas without relying on the equations. And maybe this should also be taken as an indication for how economists write their papers – more of the math in the supplementary appendix, more time in the (shorter) main paper on the important intuition. And then dump the math when we intend to communicate our ideas verbally.

The conference also reminded me of how hard it is to work across disciplinary boundaries without full immersion in both sides (or having someone from both sides engaged in the work). Again turning the Michael Jennions presentation, he talked about Bateman’s gradient and the operational sex ratio, and about what each of them actually show (the paper on this is here). I thought I knew what each were about, but am now revisiting my understanding.

Finally, we recorded most of the plenary and submitted presentations and are exploring ways to make sure that the outputs of the conference do not disappear into the ether. When we do put some material together and post it online, I’ll put a note here and on the conference website.

Economic cosmology – Equilibrium

Although most of my interest in integrating evolutionary biology into economics concerns treating people as evolved (or evolving) animals, I consider that economists can also learn a lot from the dynamic analysis of biological systems. This thought is shared by John Gowdy and colleagues and is the subject of their third economic cosmology, equilibrium, in their article Economic cosmology and the evolutionary challenge from the Journal of Economic Behavior & Organization special issue, Evolution as a General Theoretical Framework for Economics and Public Policy (the first two cosmologies, the rational man and the invisible hand, are the subject of two earlier posts).

As Gowdy and colleagues put it, ecosystems are complex, often out of equilibrium and rarely tend towards an equilibrium state. It was not always seen that way and some of the equilibrium mind-state remains (particularly in common conceptions), but an equilibrium view of ecosystems has been abandoned. That is not to say that individual agents or groups within an ecosystem should never be treated as tending toward an equilibrium (say, a gene moving to fixation), but as a whole, ecosystems do not maximise anything.

Gowdy and colleagues suggest that economic concepts of equilibrium should be seen in the same way, and discarded as was the concept of harmonious natural order in biology. I am sympathetic to their argument, although Gowdy and colleagues pick some interesting points with which to make it.

Their first relates to Milton Friedman’s The Methodology of Positive Economics (worth a read), in which Friedman argued that inefficient firms will be driven out of business, leaving only the efficient profit maximising firms in the competitive market. This allows firms to be treated as pure profit maximisers. Gowdy and colleagues suggest that the problem with Friedman’s approach is not that it is evolutionary, but rather that it is not evolutionary enough. This is a fair enough point, as adaptionist hypotheses such as this require testing to move beyond a ‘just-so’ story. For example, Gowdy and colleagues refer to studies suggesting that firms that are narrowly focussed on profit are more likely to go out of business. However, this might not be evidence that profit maximisation does not lead to firm success, and could point more to the complexity of running a business in a modern economy. Gowdy and colleagues highlight this complexity when they relate Nelson and Winter’s important point that firms shape the environment themselves, adding a further layer of complication to any strategic consideration.

More importantly, however, what does this mean for the concept of equilibrium? Even though an ecosystem may not maximise anything, the individuals within it may do. In studying them, the biological agents are often treated as maximisers. Similarly, an economy doesn’t maximise, but treating firms as maximisers may serve some purposes. This allows us to get to the more substantial point. In a complex, shifting landscape, as firms struggle to maximise profits with varying strategies and degrees of success, changing the environment as they go, there is no guarantee that they will maximise profits across the economy at any time. A strategy that maximises profits at one moment may not the next. And even if profits tend to be maximised, what of general wellbeing or other economic measures?

The flip side to this observation is the massive increases in wealth of the last 200 years. Even though there is no guarantee that an economy will tend towards an equilibrium that maximises wellbeing, modern economic structures have done a pretty good job of creating stable upward growth.

Gowdy and colleagues focus more attention on the policy implications of overturning the concept of equilibrium than they do for the other two cosmologies. They note that although there has been a marked increase in material prosperity driven by market competition, there has been increased risk taking such as environmental degradation and resource depletion. Myopia, biased time preferences or other behavioural anomalies may drive that risk-taking, with Gowdy and colleagues noting that markets have not yet constrained them.

Further, they consider that evolutionary theory may be of use in managing threats to prosperity. This could be through an understanding of how small groups interact (a subject of a later article in the special issue) and of the constraints that must be applied to self-interest to achieve the common good. It is on this point that I am more skeptical. While we should take the lesson of biology that equilibrium is a shaky concept, the lack of equilibrium does not immediately point to the benefit of economic interventions. After all, if firms can’t even maximise their own profits, we need to be humble about our ability to control higher level outcomes. Our experience in trying to manage ecosystems suggests that ‘managing’ an economy is a difficult task.

John M. Gowdy, Denise E. Dollimore, David Sloan Wilson, & Ulrich Witt (2013). Economic cosmology and the evolutionary challenge Journal of Economic Behavior & Organization, 90S DOI: 10.1016/j.jebo.2012.12.009

My series of posts on the Journal of Economic Behavior & Organization special issue, Evolution as a General Theoretical Framework for Economics and Public Policy, are as follows:

  1. Social Darwinism is back – a post on one of the popular press articles that accompanied the special issue, a piece by David Sloan Wilson called A good social Darwinism.
  2. Four reasons why evolutionary theory might not add value to economics – a post on David Sloan Wilson and John Gowdy’s article Evolution as a general theoretical framework for economics and public policy
  3. Economic cosmology – The rational egotistical individual – a post on John Gowdy and colleagues’ article Economic cosmology and the evolutionary challenge 
  4. Economic cosmology – The invisible hand – a second post on Economic cosmology and the evolutionary challenge 
  5. Economic cosmology – Equilibrium (this post) – a third post on Economic cosmology and the evolutionary challenge

I will extend the list and put up links to the other posts as I develop them.

Four reasons why evolutionary theory might not add value to economics

In the lead article to a recent Journal of Economic Behavior & Organization special issue, Evolution as a General Theoretical Framework for Economics and Public Policy, David Sloan Wilson and John Gowdy examined four potential reasons why someone may not need to consult an evolutionary framework in examining economic and policy questions. The four arguments are riffs on the same theme, but the distinctions between them are worth making.

The first claim is that smart people will come to similar conclusions even if they use different approaches. Wilson and Gowdy note that this argument does not hold because people do not always come to the same conclusion. The neoclassical view of absolute utility maximisation differs from the evolutionary measure of relative fitness, and this relative measure should be reflected in economists’ utility curves. Smart economists have not come to the same conclusions as people using evolutionary theory.

This possibility of drawing different conclusions is why I am a fan of the evolutionary approach, although I would offer a different example, that of behavioural economics (or as I am becoming more inclined to call it, behavioural science). Many behavioural and neoclassical economists haven’t come to the same conclusions. And given the lack of theory in behavioural science (giving an observed bias a name is not theory), not only have people come to different conclusions, but they lack a theoretical basis to reconcile them.

The second reason provided by Wilson and Gowdy relates to design. If an object or process is well designed, it does not matter what process designed it – be that evolution or god. But as Wilson and Gowdy point out, knowing the design process will tell you if there actually is design. And if you don’t know if there is design, you may come to the wrong conclusions about causative processes. As an example, if you see that children resemble their parents, what is the causative process? By not knowing about the evolutionary design process, you may miss a major pathway by which this resemblance occurs.

The third reason has some truth. Why speculate with evolutionary theory when you can study the real thing? An example that I have posted about before is that estimates of time preference from evolutionary models tend not to reflect empirical measures. So why spend time finding the basis when you can measure the actual trait? Essentially, there are limits to what can be achieved without theory. Wilson and Gowdy ask us to imagine trying to examine adaptations in a bird by just looking at the brain. The behavioural science example also provides an illustration. Studying the real thing has gotten behavioural science to a certain point, but theory is likely needed to pull the list of heuristics and biases into something coherent. And even if theory has not generated rates of time preference that reflects empirical estimates, theory is likely required to deal with observations such as preference reversals.

Finally, Wilson and Gowdy take on an argument that I regularly hear, being that we don’t need to consult every branch of the sciences all the time. Biologists don’t consult with quantum physicists on a regular basis. Wilson and Gowdy’s response to this question is nice, and reflects a theme through the article that for many economists it makes sense not to have an evolutionary framework as part of their analysis. But the problem arises if every economist does not have an evolutionary framework, or if those economists who do use an evolutionary framework never have their work incorporated across the broader field. In that case, there is potential for simply coming to the wrong conclusion (see point one) as the foundation block of the analysis is wrong. As an example, most people don’t consider the basis of their utility functions – they typically use standard forms. But what is the basis of that standard form?

This point also relates to some of the recent debates I have had about obesity. Feel free to come up with an explanation that has no reference to the physical processes of weight gain, or the evolutionary processes that shaped them. But if the explanation is inconsistent with these processes, something is likely wrong with your explanation.

David Sloan Wilson, & John M Gowdy (2013). Evolution as a general theoretical framework for economics and public policy Journal of Economic Behavior and Organization, 90S DOI: 10.1016/j.jebo.2012.12.008

My series of posts on the Journal of Economic Behavior & Organization special issue, Evolution as a General Theoretical Framework for Economics and Public Policy, are as follows:

  1. Social Darwinism is back – a post on one of the popular press articles that accompanied the special issue, a piece by David Sloan Wilson called A good social Darwinism.
  2. Four reasons why evolutionary theory might not add value to economics (this post) – a post on David Sloan Wilson and John Gowdy’s article Evolution as a general theoretical framework for economics and public policy
  3. Economic cosmology – The rational egotistical individual – a post on John Gowdy and colleagues’ article Economic cosmology and the evolutionary challenge 
  4. Economic cosmology – The invisible hand – a second post on Economic cosmology and the evolutionary challenge 
  5. Economic cosmology – Equilibrium – a third post on Economic cosmology and the evolutionary challenge

I will extend the list and put up links to the other posts as I develop them.

Social Darwinism is back

A couple of weeks ago I flagged the Journal of Economic Behavior and Organization’s (JEBO) special issue Evolution as a General Theoretical Framework for Economics and Public Policy. I plan to post on some of the papers in that issue over coming weeks and months, but I thought I would open my commentary on the special issue by examining one of the popular press articles that accompanied its launch, a piece by David Sloan Wilson called A good social Darwinism.

A couple of years ago Wilson wrote a series of posts at his blog Evolution for Everyone called Economics and Evolution as Different Paradigms (maybe the blog is still alive, but there hasn’t been a new post for over a year). I wrote a series of posts in response to Wilson (hereherehere and here) setting out my issues with Wilson’s approach, particularly the caricatured version of economics. I also considered that Wilson sold the potential for evolutionary biology in economics a bit short, and was somewhat pessimistic about what might come out of the Evolution Institute (I should say that this JEBO special issue has seen the Evolution Institute exceed my expectations.)

Wilson’s latest article continues in a similar vein, with a marginally more subtle perspective on economics, although still missing some of the richness. He starts by painting economics as torn between two ideas: Adam Smith’s “invisible hand” that could lead to benevolent outcomes despite no-one intending them; and Smith’s fear of naked self interest. By going too far in either direction, there can be significant costs, which Wilson suggests includes the Industrial Revolution (surely not) and the Great Depression on the one hand, and Communism on the other.

What Wilson sees as lacking is the ability of economics to navigate between these two extremes. He points to some of the attempts of economics to traverse this middle course, in which he includes Walrasian general equilibrium and the development of homo economicus. These concepts survived critiques by the likes of Thorstein Veblen to be adopted by, among others, Milton Friedman (I addressed Wilson’s views on Friedman’s The Methodology of Positive Economics in an earlier post).

Wilson then suggests that evolutionary theory can offer something here (concur), including a less Newtonian view of the world. The most interesting part of the article, however, is Wilson’s desire to rehabilitate the idea of the invisible hand through multi-level selection – that is, selection occurring at levels higher than the individual. While lower level units of selection (say, the gene) do not have the higher level units in mind, selection of higher level units shapes the traits of the lower level units such that they contribute to the good of the group. Wilson suggests that the invisible hand can operate in human groups as selection at the level of groups has shaped us that way.

As an example of this, Wilson points to the work of Elinor Ostrom, sadly unknown among most of the economics profession until her Nobel Memorial Prize in Economic Sciences in 2009. Ostrom did fantastic work on common-pool resources (such as fisheries, farm land or water) and showed that, under certain conditions, institutional arrangements could emerge without either private ownership (a typical policy recommendation by libertarians) or government intervention. Wilson then notes work (the subject of one of the JEBO papers) which suggests that these design principles can be expanded to a broader range of groups than just those managing common-pool resources. As a result, Wilson suggests that an evolutionary approach can offer a basis for “steering an intelligent middle course between extreme laissez-faire and ham-fisted regulation that have proven so disastrous in the past.”

But this is where Wilson misses one important interpretation of Ostrom’s work. Ostrom’s work was well-known and highly regarded before her 2009 prize by some economists who researched public choice and institutional development, many of whom were libertarians (and from the Austrian school of economics in particular). The reason they cherished Ostrom’s work was that it showed that the tragedy of the commons does not always require a solution to be imposed from above. Decentralised groups develop the rules that allow a solution to the commons problem to emerge cooperatively through voluntary association. As such, Ostrom’s work could be argued to support the laissez-faire end of the spectrum (although Ostrom was not a libertarian).

While it is possible to argue that it is the group that is autonomous, not the individual, another problem arises where the specific conditions that Ostrom identified are not met, such as clear group boundaries. For many economic questions, those group boundaries simply do not exist, leaving us back where we started in trying to steer the middle ground.

It is also not clear that evolutionary theory takes us to the middle. An evolutionary view of the humans in government and bureaucracies may lead to a rather pessimistic view of the ability (or motivation) of government to address “market failures”. The recent meeting of the Mont Pelerin Society (of which none other than Milton Friedman was a founder and past president) on Evolution, the Human Sciences and Liberty saw many make the argument that human nature points to a free society as the optimal state. Paul Rubin wrote the excellent Darwinian Politics: The Evolutionary Origins of Freedom as an argument that liberal society is the best fit for our evolved human natures. It is fair to say evolutionary arguments can and have been used to support all points on the political spectrum.

But let me close with some praise for Wilson. Although I find many specific points to disagree with him, from his interpretation of the invisible hand to his use of multi-level selection arguments, I am somewhat in awe of his productivity and energy. My initial pessimism about the Evolution Institute is turning into optimism. Even though Wilson has his perspectives, he seems to have a drive to bring interesting people and ideas together to address some economic questions that could truly benefit from an evolutionary approach. I hope I can be a part of it.

My series of posts on the Journal of Economic Behavior & Organization special issue, Evolution as a General Theoretical Framework for Economics and Public Policy, are as follows:

  1. Social Darwinism is back (this post) – a post on one of the popular press articles that accompanied the special issue, a piece by David Sloan Wilson called A good social Darwinism.
  2. Four reasons why evolutionary theory might not add value to economics – a post on David Sloan Wilson and John Gowdy’s article Evolution as a general theoretical framework for economics and public policy
  3. Economic cosmology – The rational egotistical individual – a post on John Gowdy and colleagues’ article Economic cosmology and the evolutionary challenge 
  4. Economic cosmology – The invisible hand – a second post on Economic cosmology and the evolutionary challenge 
  5. Economic cosmology – Equilibrium – a third post on Economic cosmology and the evolutionary challenge

I will extend the list and put up links to the other posts as I develop them.

A week of links

Links this week:

  1. A few articles on the recent JEBO special issue on economics and evolution – Jag Bhalla in Scientific American, commented on by Mark Thoma, commented on by Mark Buchanan.
  2. Larry Arnhart has posted about the recent Mont Pelerin Society meeting in the Galapagos – Evolution, the Human Sciences, and Liberty. Here are posts on presentations by Robert Boyd, Robin Dunbar and Charles Murray. I expect more posts will follow. You can also download copies of the presentations here.
  3. Will dementia decline due to the Flynn effect?
  4. A great Econtalk on charities.
  5. Sexual Economics and the Forgotten Men by Andrea Castillo

A week of links

Links this week:

  1. The Journal of Economic Behavior and Organization has a special issue out “Evolution as a General Theoretical Framework for Economics and Public Policy”. You can also access the papers through the Evolution Institute website and there is a series of summary articles in Evolution: This View of Life. Many look worth a read, and I’ll post about them over coming weeks/months.
  2. David Sloan Wilson (one of the editors and authors in the JEBO special issue above) has an article in aeon magazine critiquing economics from an evolutionary angle.
  3. Also in aeon magazine, an interesting take on obesity (HT: John Hawks). It’s fair to say that a simple “calorie in-calorie out” analysis doesn’t cut the mustard anymore. (But I don’t buy the bit about lab animal food staying the same).
  4. Another article from Evolution: This View of Life that is worth a look – Daniel Hruschka on collectivism versus individualism.
  5. Support for Gregory Clark’s argument that analysis of social mobility over a single generation overestimates its extent – a child’s socioeconomic position is determined by their grandparents, not just their parents (blog post on this article to come soon).
  6. Britain is undergoing a baby boom. I expect this will be a common developed country observation over the next decade.