Shuji Kajiyama
Armine Yalnizyan is a senior economist with the Canadian Centre for Policy Alternatives
The "science" of economics has for most of its history relied on theory more than experimentation, which is quite literally the testing grounds of all "real" science. The birth of behavioural economics in the 1970s permitted economists to start testing theory rigorously, by borrowing empirical methods from psychology and other social sciences to lift the veil behind what makes us, and markets, really tick. How do incentives work?
This 10 minute fly by of economic research on the topic by the Freakonomics team examines a core tenet of economics - utility maximizing. It shows that self-interest is not the only utility that people seek to maximize. Though they may be able to do better on their own, time after time, research shows that people gravitate towards acting as a community when given the opportunity, both giving and taking.
That doesn't mean our instincts our altruistic either, but "Altruism isn't irrational, because if it were, the only rational people would be sociopaths."
That quote comes from an article entitled Altruism in Economics , which discusses an interesting hypothesis: that working together provides an evolutionary advantage.
To see just how short that evolutionary path is, take a look at psychologist Laurie Santo's Ted Talk, A Monkey Economy as Irrational As Ours.
Observing a group of chimpanzees she had trained to use currency to trade for food, Ms. Santos found monkeys don't like to save. They often steal from one another and from the market "salesman". And they display a tendency towards greed. Sound familiar?
There's more, and it speaks profoundly to what makes rapidly expanding markets so prone to increasing risk. Confronted with complex decisions we make mistakes, panic and revert to basic instincts. One such instinct is a bias towards thinking in relative, not absolute terms. Another is a bias towards loss aversion.
Both lead to a simple and potentially disruptive truth: Humans don't like to lose anything of value that they've obtained, and will actually take on more risky behavior with the object of value in a misguided attempt to save what they already had.
The research gives the lie to the notion that markets are rational. It sheds important light on ways to reduce risk and improve performance. And it suggests why markets tend towards greater concentration, an inherently unstable distribution of resources and power because it reinforces both greed and fear.
Greed and fear are powerful predictors of reckless risk-taking. Both can bring down the irrational decision-makers and everyone around them, as the recent global economic crisis so vividly showed us.
Yet over the centuries economic evolution has been shaped by human instincts that have collectively sought to reduce the concentration of power (think democratic institutions, anti-trust laws, better access to economic opportunity and legal recourse).
Leadership and policy can encourage or discourage the prevalence of risky business, by setting the tone and setting the rules.
The big lesson is that, smart as we are, we still live in a monkey-see-monkey-do world. Bad behavior begets bad behavior, but the converse is also true.
Happily we are more capable of exercising control over our behavior than chimpanzees. How we exercise that control is our choice.
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