Tag: Evolutionary psychology

The Social Instinct, by Nichola Raihani

The pandemic has been a stark reminder of just how much we rely on one another. Like plagues of the past, the novel coronavirus has exploited our social nature. But our sociality is also our Get Out of Jail Free card.

Billions of people complying with strict lockdowns and the race to roll-out COVID-19 vaccines in record time are examples of our extraordinary ability to cooperate. This begs the question: why do we cooperate with each other in the first place?

In her new book The Social Instinct: How Cooperation Shaped the World, Nichola Raihani claims that this may be the most pressing scientific question of our time. To get to the bottom of this, Raihani takes us on an intellectual journey, chronicling some of planet Earth’s most successful social species.

The ‘we’ in ‘me’

Nichola Raihani is a professor of psychology at University College London, who actually trained as a zoologist (making her a rare breed of psychologist). Unearthing exactly what humans do and do not have in common with other animals has been the mainstay of Raihani’s scientific career.

Whether it’s the Taj Mahal or the International Space Station, staggering feats of human cooperation are clear for all of us to see. “Every human achievement we can think of, from the trifling to the truly magnificent, relies on cooperation”, Raihani writes. “From the most mundane of activities, like a morning commute, to our most tremendous achievements, such as sending rockets into space. Cooperation is our species’ superpower.”

Invisible to the naked eye is the vast array of cooperation that takes place at microscopic levels, even under our own skin. In The Social Instinct, Raihani reminds us that we are multicellular organisms, composed of trillions of cells working around the clock to keep us alive and kicking.

To let this sink in, Raihani invites us to look in the mirror and see ourselves as a Russian doll.

You are you on the outside, but this external appearance isn’t all there is. If you prise the outer shell open, you’ll find another version of you looking inside, which itself contains another version and another within. You are simultaneously an individual and a collective. Your body is made up of trillions of cells- around 37.2 trillion to be precise. For perspective that’s more than 5,000 times the number of people on earth. Most cell types contain forty-six chromosomes and each of these accommodates genes, ranging in number from a few hundred to many thousands.

From this perspective, Raihani argues that the most pivotal moments in human history were not the dawn of agriculture or the invention of the wheel. Rather, they were a coalescing of chance events millions of years ago that led to our multicellular existence.

This expansionist view of cooperation explains many wonders of the natural world, including how social insects appear to morph into superorganisms. Like separate parts of a car, the vast array of roles social insects play only really makes sense when we understand the overarching ‘vehicle’, which in this case is the insect’s colony. According to Raihani, social insects’ colonies mirror our multicellular bodies, where the Queen is akin to egg-producing ovaries, and the sterile workers resemble cells in our bodies responsible for general maintenance and repair.

Worker bees working hard. On hot days, some workers are tasked with collecting water and spraying it over combs to cool the hive down. Photo credit: London Economic Times.

Some public intellectuals also describe human societies as a form of superorganism, arguing that our ‘hive-like’ civilisations are the products of evolutionary forces clashing at higher levels of organisation. Despite the parallels, Raihani pours cold water on the idea that human groups resemble insect colonies. To make her case, Raihani draws lessons from everyone’s favourite business TV show: The Apprentice.

There is a fundamental difference between groups that are formed on the basis of high relatedness, and those whose members interests only align because of happenstance… On The Apprentice, goodwill rapidly evaporates when contestants find themselves in the losing team. When there is no rival team to unite against, a contestant’s tenure in the competition depends on their ability to outmanoeuvre their teammates. A familiar pattern usually results: people swiftly turn on one another, erstwhile allies become vicious rivals. Insults fly around the room, as contestants tried to absolve themselves of blame while incriminating their useless colleagues. When between-group competition is no longer relevant, then competition within the group becomes much more apparent. 

Although Raihani casts doubt on natural selection acting on human groups, she seems to tacitly endorse a new variant of the theory called ‘cultural group selection’. After all, how did a hominid species that evolved for life in small groups go on to build chiefdoms, nation states and corporations?

Social living

Others see our humanity reflected in the faces of our primate cousins. Chimpanzees and bonobos are our closet living relatives on the evolutionary tree of life, where we share over 98% of our DNA with them. The similarities between us and these great apes are striking. That said, Raihani convincingly argues that comparing ourselves to these primates can only reveal so much about us. How come?

Most of the food early humans ate had to be hunted or gathered, which is essentially impossible to do alone. Therefore, our distant ancestors had to band together if they wanted to avoid starvation. Other primate species didn’t face this pressure. Gorillas essentially live in ‘giant salad bowls’, and chimpanzees mainly snack on fruits. Their ‘fast food’ meant these primates didn’t need to collaborate to survive, which narrowed their evolutionary strategy. In contrast, we humans had no choice but to cooperate not only to eat, but to teach each other critical life skills and to raise our helpless infants.

In The Social Instinct, Raihani details the rich social lives of animals she’s studied intimately, such as the cleaner fish that roam the Great Barrier Reef. Although the similarities between us and these exotic creatures may not appear obvious, we apparently have a surprising amount in common: world-class cooperation. These cleaner fish essentially operate underwater ‘hairdressers’, where male and female cleaners frequently do business together. Raihani and her colleagues have shown that if a female cleaner mistreats a client by biting them in no-go areas, their male partners will punish them. Despite male cleaners acting like domineering arseholes (they also cheat), Raihani argues this sort of behaviour resembles ‘third party punishment’ in humans, which is one of the building blocks of large-scale societies.

A bluestreak cleaner wrasse giving an oriental sweetlip the spar treatment. Photo Credit: Boris Pamikov / Shutterstock.

Although The Social Instinct is in many respects a celebration of cooperation, it’s evident that competition can also lead to good in the world. For example, Raihani and her colleague Sarah Smith trawled through Just Giving’s fundraising pages of people running the London Marathon, with the hunch that Charles Darwin’s grand theory of sexual selection may help explain why people bother donating to charity in the first place. They found that if an attractive woman had previously received a generous donation from a man, other men would subsequently try to outcompete one other by posting larger donations on her fundraising page (I know, shocking).

This is what evolutionary psychologists call ‘competitive altruism’, where people behave altruistically because of the benefits that come with flaunting one’s virtue. Raihani suggests these tournaments are the human equivalent of the peacock’s tail. But instead of showing off their physical prowess, these men are signalling their generosity (or rather, they’re flashing their stacks of cash).

The renegades within

Just as competition can be a force for good, cooperation also has a dark side. Where there is cooperation, cheaters and shirkers lurk in the shadows. At the microscopic level, this truism can help us understand the scourge of cancer. Cancers are essentially renegades within our multicellular bodies. They are cheating cells that ignore instructions, refuse to cooperate, and proliferate to the detriment of our health.

Seen from another angle however, cancerous cells are actually cooperating with one another. Although cancers disrupt their cellular societies, they band together to further their own selfish interests, however suicidal their mission may be. This reveals the paradox of cooperation etched in The Social Instinct. “Cooperation and competition are simply two sides of the same coin”, Raihani writes. “What looks like cooperation through one lens will often be felt as competition through another.”

Scientists are converging on this understanding of cooperation as a way to outcompete rival groups. Although this theoretical breakthrough enriches our understanding of cooperation, it also reveals an uncomfortable truth: if cooperation is a way to get ahead, then a corollary of this is that cooperation usually has victims. “In fact, cooperation without victims is the most difficult kind to achieve”.

This truth bomb helps us make sense of the corruption that plagues societies across the world. We can view corruption as a form of cooperation where the goodies go to our nearest and dearest, which subsequently undermines the integrity of our formal institutions. Preferentially hiring a member of your family for a job or greasing the palm of an executive to secure a lucrative contract are both cooperative acts, Raihani argues, as they both involve helping and trust. But of course, it is society at large that ends up footing the bill.   

As stated by Raihani:

If someone were to ask you whether it would be acceptable to lie in court to exonerate a family member, what would you say? What about if you were asked whether you had a moral duty to hire the best candidate for a job rather than a less qualified friend? Answers to these sorts of questions are neither straight forward nor universally endorsed, because cooperating at one scale is often traded off against cooperation at another. Our sense of what is moral or immoral depends on how we feel these competing interests ought to be balanced. To put it put this another way, one might mistrust someone who ‘always helps his friends’. But a similarly damning accusation can be levelled at someone who ‘doesn’t help their friends’.

Eric and Donald Trump campaigning in Ashburn, Virginia, August 2, 2016. “Nepotism is kind of a factor of life,” Eric Trump said during an interview with Forbes. Photo credit: Evan Vucci/ Shutterstock.

These different scales of cooperation also help explain the setbacks of the global vaccination programme. Few politicians would disagree with COVAX’s maxim that ‘no one is safe unless everyone is safe’. Yet rich countries have essentially gobbled up the globe’s supplies of COVID-19 vaccines, and are prioritising booster shots for their citizens over immunising the rest of the world. To put it another way, intense cooperation within their borders has come at the expense of poorer nations– which inadvertently prolongs the pandemic and makes all of us less safe.

This double-edged nature of cooperation, Raihani argues, is the essential ingredient and also the biggest threat to humanity’s success. “Our supreme commitment to cooperation is the key to solving the massive global problems we now face”, Raihani writes. “But it is our ability to cooperate that might also be our eventual downfall.”

Think global, act local

The human population will soon pass the 8 billion mark. This is an extraordinary achievement for a primate that is physically weak and not exceptionally bright either. Cooperation is undoubtedly a key element of our success, and Raihani credits our social instincts for our very existence. That said, our domination of planet Earth forces us to transcend our social instincts.

The problems humanity faces in the 21st century are daunting, and require greater global cooperation than has ever been mustered. Despite the chaos created by the novel coronavirus, Raihani states that pandemics are far from our only challenge. For example, global warming and the mass die-off of species are two devastating own goals that humanity has scored. And although the world’s nuclear stockpile has decreased dramatically since the peak of the Cold War, there are still enough nuclear weapons to blow ourselves to smithereens.

We have right to be concerned about the world our children will inherit. However, Raihani argues that we must not lose hope. Unlike any other creature on Earth, human ingenuity and adaptability allows us to work around the laws of nature and to crawl our way out of sticky social dilemmas. “We are not simply stuck with the games that nature gives us: we can change the rules.”

To overcome these seemingly insurmountable challenges, Raihani says we need to ‘think global and act local’. This catchphrase was coined by the late Elinor Ostrom, who challenged conventional economic thinking and proved that the ‘tragedy of the commons’ can be overcome with hybrid forms of governance. Acknowledging the magnitude of her contributions, Ostrom was awarded the Nobel Prize in economics.

There is almost a fairy-tale to be told about cooperation, Raihani concludes. “If used well it will deliver riches, but in the wrong hands or used in the wrong ways, it will bring ruin”. The decisions our leaders make over the coming decades will determine if this story has a happy-ending, or serves as a cautionary tale for future civilisations.

Written by Max Beilby for Darwinian Business.

The Social Instinct: How Cooperation Shaped the World is published by Penguin. Click here to buy a copy.

No Best Way, with Stephen Colarelli

Here’s an episode I recorded with Stephen Colarelli for This View of Life podcast.

Stephen Colarelli is professor of psychology at Central Michigan University. His research explores how evolutionary theory can influence how we think about, conduct research on, and manage behaviour in organisations.

Steve and I discuss the application of evolutionary psychology to Human Resource Management. We cover Steve’s academic career, and his books No Best Way: An Evolutionary Perspective on Human Resource Management, and The Biological Foundations of Organizational Behavior (which Steve co-edited with his colleague Richard Arvey). We also explore the impacts of the coronavirus pandemic on the world of work.

Strategic Instincts, by Dominic Johnson

Among political scientists and policy wonks, it’s widely believed that cognitive biases are not only detrimental, but responsible for some of history’s worst policy blunders.

Whether it’s the Bay of Pigs fiasco, Chernobyl, or the Global Financial Crisis, it’s easy to think of colossal disasters that back this up. But is this really the whole story?

In his new book Strategic Instincts, Dominic Johnson challenges this worldview, arguing that seemingly irrational behaviour can, with the right dosage and in the right context, actually enhance performance in the arena of international politics.

Drawing on insights from the field of evolutionary psychology, Johnson makes the case that cognitive biases act as ‘strategic instincts’, which can provide politicians with a competitive edge in policy making— particularly in high stakes, and highly uncertain, military confrontations.

To test his theory, Johnson takes his readers on a tour of recent history, and places a trio of influential cognitive biases— overconfidence, the ‘fundamental attribution error’, and ingroup favouritism— under the microscope.

Fortune favours the bold

Dominic Johnson is a Professor of International Relations at Oxford University. Holding not one but two PhDs (what have you achieved in life?), Johnson has dedicated his academic career to exploring how the latest scientific findings from evolutionary biology are challenging our understanding of global conflict and cooperation.

To start off our intellectual journey, Johnson turns the clock back to the 18th century and places us on the battlefield of the American War of Independence.

By combing the historical and biographical accounts of the Revolutionary War, Johnson argues that the United States benefited in no small measure from a remarkable confidence— arguably overconfidence—that emanated from its charismatic founder, George Washington.

Before delving further, what does Johnson mean when he says George Washington was ‘overconfident’?

A well-established finding from modern psychology is that mentally healthy people are generally overconfident (with men being particularly cocky). What this body of research suggests is that we individually tend to overestimate our abilities, as well as our control over life events, and we also underestimate our vulnerability to risk (although these are technically termed ‘positive illusions’, Johnson uses the catch-phrase ‘overconfidence’ for simplicity’s sake). In sum, we tend to think more highly of ourselves than who we really are (‘we’ largely being ‘Westerners’. More on this point later).

Despite the substantial personal and social costs of pervasive positive illusions, Johnson argues overconfidence, in moderate amounts and in right context, can present a wealth of benefits. For example, those of us who are the most optimistically overconfident reap many benefits in life, including greater health and career success. Similarly, Johnson’s research outlines how overconfidence can give armies an upper hand on the battlefield.

According to Johnson, George Washington’s remarkable overconfidence encouraged him to fight and sustain the revolution against the British— despite the formidable odds stacked against his rebels. In the long and gruelling war in which Americans lost most of the military battles against the Red Coats (and struggled to even keep an army in the field), Johnson argues ambition and boldness paid off handsomely for Washington and his comrades.

As stated by Johnson:

Britain was the world’s leading military and economic power before and after the war. It was by no means yet in decline and was the odds-on favourite to win the war, or at least to end it on favourable terms. I suggest that Washington, in no small part by virtue of his great confidence, was able to turn the tables and seize victory from the jaws of defeat, an achievement epitomised by his daring raid across the Delaware. Joseph Ellis wrote that “the British commander, William How, could probably have won the war and ended the American Revolution in November of 1776 with more aggressive tactics. The Delaware crossing thus becomes a sudden reversal of fortune, as if an American mouse, chased hither and yon by a British cat, brazenly turned turns about and declares itself a lion”. And lions, not mice, win wars.

Washington’s bold crossing the icy Delaware river on Christmas night, 1776, in what many deem as the turning point of the war. Emanuel Leutze (1816-1868). Image credit: Metropolitan Museum of Art.

Know your enemy

Next, Johnson revisits the lead up to World War II, where he probes Britain’s perceptions of Adolf Hitler in the 1930s. Here, Johnson draws on the fundamental attribution error— a psychological quirk that journalist Robert Wright describes as ‘the most underappreciated cognitive bias’— to illustrate the logic of strategic instincts.

For those of us less familiar with the theory, what is the error exactly? The late Lee Ross coined the term ‘the fundamental attribution error’ back in the 1970s, in a scientific paper that has had an enduring impact on social psychology. When explaining the behaviour of other people, Ross and his intellectual descendants found that people generally place too much emphasis on other’s disposition (that is, on their innate personality and essential ‘nature’). Conversely, people tend to put too little emphasis on the situation in explaining other’s behaviour (that is, on the circumstances that people find themselves in, and how this influences what they do).

What does this mean for international politics? Johnson clarifies that the fundamental attribution error doesn’t necessarily make us see other people’s behaviour as threatening, but it can make us see threatening behaviour as intentional. Similarly, Johnson claims that the fundamental attribution error can lead governments to be hyper vigilant and assume the worst from other states.

Intriguingly, Johnson makes the case for the fundamental attribution error’s absence in the lead up to World War II— and points to this as evidence for the cognitive bias’s effectiveness.

To elaborate, Britain’s appeasement of Hitler offers a reverse case where those in power behaved in contrast to what the fundamental attribution error would predict. At the time, the UK’s Prime Minister Neville Chamberlain strongly resisted attributing dispositional causes to Hitler’s behaviour, and instead emphasised situational causes (where Chamberlain stressed the German desire to redress the restrictions of the Treaty of Versailles, and to retain security over their remaining territory). Despite mounting evidence of Hitler’s real intentions, Chamberlain continued to give Hitler the benefit of the doubt— which Johnson claimed led to the disastrous policy of appeasement and the Munich crisis of 1938.

Neville Chamberlain at Heston Airport on his return from Munich after meeting with Hitler, September 1938. Chamberlain read out to the crowd the famous agreement, signed by Hitler, stating “the desire of our two peoples never to go to war with one another again”. Later that day, during a speech outside 10 Downing Street, he declared “peace for our time”. Image credit: Central Press/Getty Images.

Johnson therefore raises an unusual, counterfactual question: where was the fundamental attribution error when the world needed it most? After all, there were actors waiting in the wings whose thinking did in fact align with the fundamental attribution error (not least Winston Churchill, who insisted that Hitler was acting out of intentions to aggressively expand German territory and redouble their military power). Had the fundamental attribution error been stronger and more widespread among Western leaders at the time, Johnson argues that Britain could have stood up to Hitler earlier and more effectively, which as a result, would have avoided the atrocities of World War II (including the Holocaust, the Nazi’s genocidal campaign against the Jews).

United we stand

Johnson also argues that ‘ingroup favouritism’ (also known as the ‘ingroup-outgroup bias’) serves as a strategic instinct.

What is ingroup favouritism, and why does Johnson consider it to be so influential in the world of international politics? As part and parcel of our coalitional psychology, we humans have a powerful tendency to favour our own groups and its members, and disparage the ‘outgroup’. This bias is so strong and ubiquitous that ingroup favouritism is essentially the bread and butter of social psychology.

Needless to say, such prejudices can have horrific consequences. Johnson argues that throughout human history, the ingroup bias has contributed to the oppression of minority groups, inflamed ethnic conflict, and has been implicated in genocide.

However, Johnson claims that in smaller doses and in appropriate settings, ingroup favouritism can be relatively benign and ‘highly adaptive’. To elaborate, Johnson argues that ingroup favouritism increases cohesion as well as coordinated action against rival groups, which together can increase group’s survival and overall effectiveness.

To evaluate these claims, Johnson parachutes us back to the Pacific War between the United States and Japan. Through his combing of the historical artifacts, Johnson argues that the United States was able to persist and ultimately prevail in the long and brutal Pacific campaign against the Japanese partially due to ingroup favouritism helping bolster the war effort (that is, by increasing cohesion among military personnel, boosting support for the war among Americans at home, and by sealing the commitment of America’s political leaders).

Conversely, Johnson argues that the Japanese took outgroup animosity to extreme levels, which sowed the seeds of their downfall. (The Japanese certainly did not have a monopoly on dehumanisation. However, Johnson argues that Japan’s demonisation of Americans severely distorted their thinking, compromising their estimations of risk and ultimately their military strategy).

American infantrymen secure an area on Bougainville, Solomon Islands, in March 1944, after Japanese forces infiltrated their lines during the night. Image credit: AP Photo.

Overkill: The limits of strategic instincts

In Strategic Instincts, Johnson clearly acknowledges the dark side of these cognitive biases, especially when taken to excesses. That is, when overconfidence becomes hubris, when attribution errors manifests into paranoia, and when ingroup favouritism fuels discrimination and racism. As stated by Johnson; “the in-group/ out-group bias can obviously be a serious impediment to cooperation, peace, and equality between different groups, and we must strive to reduce or manage it wherever it has malicious effects.”

Johnson also points out the pitfalls of only psychologising instances where things go wrong. If we want a complete understanding of how cognitive biases impact our decision making, we must count both sides of the ledger. To this end, Johnson argues that an evolutionary perspective offers the crucial next step in incorporating psychological insights into the field of international politics.

One may question Johnson’s emphasis on competition and military conflict, rather than on international cooperation. Notwithstanding the oversight of international institutions including the United Nations, Johnson asserts that the world lacks a global ‘Leviathan’, and is therefore engulfed in competitive anarchy. Despite his Hobbesian worldview, Johnson stresses that global cooperation is possible, and he’s hopeful of humanity’s ability to overcome seemingly insurmountable challenges.

Johnson writes:

We need inspiration for solving the collective action problems at the global level more than ever. Here, the current challenges to the planet are especially daunting and difficult, ranging from expanding populations and dwindling resources to species extinction and climate change. Some inspirational confidence in the face of such challenges could make all the difference.

I think Johnson makes several compelling arguments in Strategic Instincts. That said, there are elements of the book that one could critique. What stood out the most for me is that the latest findings from the field of cultural evolution appear to be missing.

Exhibit A: Although overconfidence is a well-established finding from the field of psychology, cultural evolutionary theorist Michael Muthukrishna and his colleagues have detailed significant cultural differences in how overconfidence manifests.

Much of the literature cited by Johnson has been conducted with North Americans and Western Europeans. However, we now know that these people are really WEIRD. That is, they are Western, educated, industrialised, rich and democratic, which makes them psychological outliers among the world’s diverse inhabitants of humans. In other words, cognitive biases are not intrinsic human universals, but are prevalent to varying degrees, and manifest in different ways, across human populations.

These points aside, Johnson arguably makes a key contribution not only to the field of international relations, but to psychology itself. For various reasons, seeing cognitive biases as inherently detrimental has become the default assumption of many behavioural scientists. To challenge this prevailing view, Johnson eloquently illustrates how cognitive biases can confer advantages in politics— and what the implications of this are for everyday life.

Clash of the titans

What light can Strategic Instincts shed on global politics today? Johnson argues that the biggest question facing international relations may be rising tensions between the United States and China.

Whilst the United States retains its hegemony in many spheres, Johnson implies that America’s dominance is quickly diminishing. If this trajectory continues, the implications are enormous.

As stated by Johnson:

History tells a gloomy story about rising states. They have rarely risen peacefully, either because they begin a quest for expansion or because other states act to prevent from them doing so [sic], or from acquiring the ability to try. Normally, in such a context of rising tensions, overconfidence would be cited as an outright danger. The United States (or China) is likely to overestimate its own capabilities, exaggerate its own level of control over events, and maintain overoptimistic predictions about the future, all of which would seem to increase the probability of deterrence failure, crisis, and war.

Several intellectuals take comfort in the fact that war has been in steady decline since World War II (what Steven Pinker refers to as the ‘Long Peace’ in his book The Better Angels of Our Nature). However, Johnson clarifies that “while war may be in decline among states, competition is not”.

As the human population bulges and temperatures continue to rise worldwide, Johnson suggests environmental stressors may load the dice and increase the odds of territorial disputes.  

The modern world is infinitely complex, and experts are generally pretty terrible at predicting the future. That said, pundits point to an uncomfortably high chance of a confrontation between the United States and China over Taiwan in the medium-term.  

Beyond territorial expansion, Johnson clarifies that states are vying for strategic advantages in a myriad of ways. A good illustration of this is the new arms race sparked between the United States and China over artificial intelligence (AI).

Whilst evolutionary psychology excavates the remnants of our evolutionary past, AI researchers are taking insights from evolution to build the digital minds of tomorrow. Both countries are now ploughing large sums into artificial intelligence for military purposes, including the development and deployment of autonomous weapons. Whilst AI may prove to be a boon for humanity, experts warn that without proper oversight and regulation, humanity risks ‘losing control’ of AI.

Similarly, Johnson appears to be concerned about increasing technological and social complexity. As the scale and complexity of political interactions continues to increase, Johnson warns that mistakes and misunderstandings may become more difficult to avoid. In a bipolar world where two military superpowers are continuously on red alert, the risks of accidental escalation looms large (with the mass deployment of automated weaponry, one may worry not so much about ‘artificial intelligence’, but of ‘artificial stupidity’).

Despite his sobering analysis, Johnson seems confident (perhaps overconfident?) that the United State’s strategic instincts will save the day:

Even if the disadvantages are genuine and likely to cause mistakes, the advantages could outweigh them, avoiding mistakes in the other direction that would be even more costly. It would be easy for a state to shrink back in the face of a rising power, anxious to avoid conflict and hesitant or unwilling to commit to the bold actions necessary to assert and preserve its position. This was certainly Chamberlain’s problem in the 1930s, and Britain paid the price— losing its empire, bankrupting the nation, and nearly suffering an invasion of his homeland as well. As we have seen, overconfidence can serve to increase ambition, resolve, and perseverance, helping to exploit opportunities, deter enemies, attract allies, and provide a competitive edge in strategic interactions. While drawbacks of overconfidence certainly remain in the mix, all of these advantages could conceivably help the United States consolidate and preserve its position vis-a-vis China in the coming years.

Here’s the 30 trillion-dollar question: will overconfidence help avert a large-scale military conflict between the United States and China, or will it inevitably lead to disaster?

Written by Max Beilby for Darwinian Business.

Strategic Instincts: The Adaptive Advantages of Cognitive Biases in International Politics is published by Princeton University Press. Click here to buy a copy.

Article updated on the 27th July 2021.

Managing the Human Animal, with Nigel Nicholson

Here’s a podcast episode I recorded with Nigel Nicholson, for the Evolution Institute.

Nigel Nicholson and I discuss the application of evolutionary psychology to business and management. We cover Nigel Nicholson’s academic career, and his books Managing the Human AnimalFamily Wars and The “I” of Leadership. We also explore the impacts of the pandemic on the world of work. 

We recorded this episode on the 1st September, 2020.

Evolutionary Organisational Psychology, with The Dissenter

Here’s a podcast episode I recorded with Ricardo Lopes, for The Dissenter.

Ricardo and I explore the application of evolutionary psychology to the business world. We start by tackling the concept of evolutionary mismatch, and then go through some examples of how it applies to the modern workplace— such as Dunbar’s number, hierarchy and leadership, and work stress.

We recorded this episode on the January 29th, 2020.

Evolutionary Mismatch in the Workplace, with Mark van Vugt

Here’s a podcast episode I recorded with Mark van Vugt, for the This View of Life podcast.

Mark van Vugt and I discuss his book Mismatchcoauthored with Ronald Giphart. We then delve into the science of evolutionary mismatches, and how this knowledge can help us understand human behaviour in modern settings, such as the workplace.

We recorded this episode on December 23rd, 2019.

Competition can encourage prosocial behaviour to spread

A defining aspect of our species’ success is our unusually high levels of cooperation. In particular, our ability to cooperate with others who are not related to us.

The scale of cooperation among humans is rare in the animal kingdom, and is strongly at odds with our closest primate relatives. Presented with this puzzle, scientists are still debating the evolutionary origins of our extraordinary prosociality. 

Traditionally, evolutionary scientists have explained prosocial behaviour by modelling the evolutionary benefits to the individual (or more specifically, the individual’s genes). For example, prosociality can evolve among non-relatives based on reciprocation (‘you scratch my back, I’ll scratch yours’), or if altruists are deemed more attractive romantic partners (and therefore have more babies).

However, an emerging class of inter-disciplinary scientists are viewing our large-scale cooperation as a product of cultural group selection’. That is, traits favouring prosocial behaviour can evolve via culture, due to the competitive advantage they bestow to a group. This is a type of cultural evolution, and does not involve natural selection working on genes. 

Although the theory is well developed, empirical evidence documenting cultural group selection is only just accumulating

To shed some light on the matter, economists Patrick Francois and his colleagues Thomas Fujiwara and Tanguy van Ypersele recently published a paper in Science Advancesexploring cultural group selection in the workplace and the laboratory. 

Banking on trust

What is particularly interesting about this paper is that the researchers analysed industry data to test their hypotheses. As stated by the authors; “Perhaps the most ubiquitous avenue of group-level competition occurring in contemporary settings is likely to be competition across firms.”

Patrick and his colleagues hypothesised that companies subject to more intense external competition would be more likely to foster cooperation among their employees. In other words, increased external competition would encourage employees to suppress selfishness and increase cooperative behaviour, in the interest of the firm’s survival. 

The authors used ‘generalised trust’ as their measure of prosocial behaviour (that is, answers to the question; “Do you think that, on the whole, people can be trusted or that you can’t be too careful in dealing with people?”). Their reasoning was that survey-based questions of trust reflect the level of pro-social behaviour individuals perceive of others around them.

The authors used a range of data sources to test their hypothesis. 

Firstly, Patrick and his colleagues explored the relationship between the competitiveness of industries, and the level of trust employees report.

To do this, the authors used data from the United States’ General Social Survey, which includes measures of trust among employees. The competitiveness of an industry was calculated by the percentage of total sales in an industry not covered by the largest 50 firms. 

You can see the relationship below:   

Americans who work in more competitive industries are more likely to trust.

Although a strong relationship between competitiveness and trust was identified, the authors note that this is weak evidence of competition increasing trust. As this data is correlational, it cannot explain causality. Likewise, it may be others factors which are driving this relationship, which haven’t been acknowledged. 

To get round this conundrum, you’d need a naturalistic experiment where competition is increased within an industry, with levels of trust measured before and after this introduction. 

 It turns out such a natural experiment was provided by an episode of American banking deregulation.

Starting in the early 1980’s, several US states lifted restrictions which prohibited banks from operating in other states across the country. This deregulation increased the availability of credit, which in turn facilitated the creation of new firms- and therefore raised the amount of competition within these local markets. 

Of particular interest to the researchers was that different states undertook the deregulation at different times.

What they found is that in the years after the deregulation was introduced, there were significant increases in levels of reported trust. As expected by the authors, firm competition increased with the banking reforms (with more firms created and subsequent business closures).

These broader impacts apparently continued for 10 years after the deregulation was initially introduced. 

Banking deregulation in U.S. states raised firm competition and trust.

Survey data from German employees was also analysed as part of the study, as this allowed the researchers to observe how trust is impacted when workers move to more competitive industries. Similar to the data from the US, Francois and his colleagues found that German workers who moved to more competitive industries reported higher levels of trust.

Although these observational findings provide considerable insight, there are also limitations to this approach.

Fundamentally, using observational data means you can’t be sure of the effect you’ve found, or that you can confidently rule out alternative explanations. To get around this, the researchers also conducted laboratory experiments.

Back to the lab

These experiments were conducted in France, and tested whether changes in levels of competition across groups would impact trust and cooperation. 

A strategic economic game called the Public Goods Game was employed for the experiments.

Participants were placed into pairs, and were allocated to one of two versions of the game. The first was a standard version of the game, with no group competition. 

For each version of the experiment, 20 people were placed into groups of 2. Each player was given €10 per round. Participants were given the choice on how much they wanted to contribute to the ‘collective pot’, which would benefit both group members equally.

The game presents a dilemma. By the end of each round, the collective pool is increased by 1.5 times. Although good for the group overall, this means each individual’s contributions is actually a net cost (providing €0.75 for every €1 they contribute to the pot). 

If your objective is to maximise your own earnings, then the best strategy is therefore to contribute nothing. However, this undermines the greater success your group would have if both of you cooperated and contributed more money. 

Individuals were paired anonymously, and were told the outcome at the end of each round. They were then paired with a new partner, and played a total of 19 rounds. Participants were asked some questions after the experiment, with the main one being generalised trust.

The second condition of the experiment was the same, but with a twist.

The amount they received from the collective pool depended not only on their group’s contributions, but also on the size of their collective pot relative to other groups. Only if their collective pot matched or surpassed another equivalent group, did the group members receive their slice of the pie. 

So what happened?

As what almost always happens when playing the standard version of the Public Goods Game, the researchers observed declining contributions as the game progressed. Initial contributions were also low, with participants chipping in just over €2 for the first round on average.

However, there was a big difference in the second ‘competitive’ condition. As the graph below illustrates, group competition induced significantly higher contributions to the collective pot, which was sustained across all of the rounds. 

Contributions in the first round were also twice as high with group competition, and stayed higher throughout the game. 

Introducing competition in public good laboratory game increases contributions and propensity to trust.

The players may have increased their contributions for various reasons, such as feeling inclined to reciprocate. However, the authors point out that players also increased their contributions when they saw their competitors performing well. They also don’t see this as evidence of reciprocation, as each partner was drawn afresh for each round. 

Instead, Patrick and his colleagues argue these findings show cultural group selection at work; “mimicry of the actions or norms in successful groups leading to diffusion of those norms into the broader population.”

Cooperation from competition

The theory that evolution works at the level of the group, rather than the conventional level of the individual, is controversial. Likewise, there is no clear consensus among scientists regarding the importance of group selection (also known as multilevel selection) to evolution.

Although less contested than its genetic grandfather, cultural group selection also remains controversial, and not everyone is convinced. 

Exhibit A:

 

Oliver Curry made some valid points on Twitter, outlining potential limitations of the study’s design and the inferences made by the authors. 

Can the data presented be best explained by cultural group selection, over and above other well established theories of cooperation (such as mutualism)? As the connection to theory within the paper isn’t made clear, it’s difficult to answer this question.

What isn’t obvious to me is why external competition would increase trust per se, rather than cooperative behaviour by itself. Oliver Curry argues that cooperation and trust are not separate, and that trust is simply the expectation of cooperation. However, there is experimental evidence suggesting that they are indeed distinct concepts, and that is it useful to separate them.

In a subsequent Twitter exchange, Tim Waring also acknowledges the studies limitations, but argues the study does ultimately support the authors’ conclusions. 

 

Future research will hopefully address these points raised. 

Despite the critiques of this particular study, cultural group selection arguably offers a powerful explanation for the evolution of large-scale human cooperation. Although traditional evolutionary theories explain much of human cooperation, they don’t seem able to explain how a hominid species that evolved for life in small groups came to develop chiefdoms, nation states, and the modern corporation.

For the purpose of this blog, I assume the majority of business practitioners aren’t particularly bothered about the underlying evolutionary theory. Regardless of the best scientific explanations available, it’s evident that greater external competition increases prosocial behaviour within groups.

This knowledge could be used to increase trust among employees and to make groups more productive. This may be achieved by changing group structures, and rewarding teams as opposed to individual outputs. Similarly, businesses may want to foster an organisational culture where considerable attention is focused on the threats posed by external competition.

However, it’s easy to see how such knowledge can also be abused. Many leaders seem to intuitively grasp how external threats influence behaviour, with the potential for manipulation. As an extreme example, one can be cynical and think of dark triad world leaders who may be tempted to wage war as a means of boosting their political support (no need to mention names here). 


Written by Max Beilby for Darwinian Business

 

We don’t need to understand how technology works for it to evolve

We modern humans live in a world surrounded by ever evolving technology. Whether it’s the combustion engine or the modern computer, these technologies are ubiquitous and have radically altered the world we live in.

What’s no so obvious is how complex the technologies of traditional societies are too. Bow and arrows and clothing are just a couple of sophisticated technologies that pre-industrial humans created, and used to venture into new, challenging environments.

How is it that we humans have managed to produce such impressive technology, when our closest living primate relatives have produced nothing of the sort?

Many believe this comes down to our superior cognitive abilities.  That is, our intelligence and our ability to reason.

However, some scientists argue that the inherent complexity of certain technologies make them very hard to understand. Instead, they argue that complex technologies result from many small improvements made over generations which are culturally transmitted– without people understanding how these technologies actually work.

To help settle the debate, Maxime Derex and his colleagues Jean-François Bonnefon, Robert Boyd and Alex Mesoudi conducted a rather ingenious experiment, involving a technology which changed the face of our planet: the wheel.

Note that at the time of writing this post, the paper is a preprint and yet to be peer-reviewed, and is therefore subject to further to scrutiny. Despite the amendments that may be made to the paper, the significance of this study should become apparent.

Spinning wheels

The experiment boiled down to getting participants to increase the speed of a wheel down a meter long, inclined track. The wheel had 4 radial spokes, and a single weight could be moved along each spoke.

Participants were organised into ‘chains’ of 5 individuals. Each participant had 5 trials  to minimize the time it took for the wheel to reach the end of the track. All participants  were provided with the last two choices and  scores of the previous participant in their chain (except those who went first). 14 chains were run, with each containing different people.

In total, 140 people took part in the study (with two versions of the experiment conducted). Each person received money for participating in the experiments. The money they received ranged from €3 to €29, depending on their performance and that of their peers.

Derex and his colleagues provide sound reasons for choosing a wheel for their experiment on causal understanding.  First, existing studies suggest Westerners generally have poor understanding of how wheels work, which means most participants didn’t know what was required of them (this is not meant to be insulting). Secondly, the speed of the wheel depends solely on the laws of physics, and not on irrelevant factors which could compromise the validity of their findings. And thirdly, the wheel systems doesn’t involve many dimensions, which made it well suited for hypothesis testing.

So what were the researchers actually evaluating? They were essentially testing whether wheel speeds would increase after several generations of trails, and if people’s understanding of the underlying physics would do too.

The wheel’s speed depends on just two variables: its moment of inertia (how mass is distributed around the axis), and its initial potential energy (the distance between the wheel centre of mass and the ground).

If the weights are located closer to the centre of the wheel, and if one of the weights at the top or to the right of wheel are further away from the axis before its descent, then the wheel will cover the track faster. Note that there’s a trade-off here between the two forces, and some experimentation is required to work out the optimal configuration.

The simplicity of the system meant the researchers could measure participants’ understanding of the wheel after they completed their trials. The research team evaluated their understanding by presenting them with a few options, and asking them to predict which wheels would cover the track faster.

Causal understanding_image 2
Illustration of the experimental set up (Derex et al, preprint)

So what did Derex and his team find having conducted the experiment?

After the 5 generations, the average wheel speed increased significantly. However, participants’ actual understanding of the physics did not.

The average wheel speed produced by the first participants on their last trial was 123.6 meters per hour, and their average understanding score was 4.60. After 5 generations, the average wheel speed increased to 145.7 meters per hour, while participants’ understanding didn’t significantly change.

With a maximum possible speed of 154 m/h, the team found remarkable improvements in just a few generations.

Stifling exploration

The authors were particularly interested in whether or not the sharing of lay theories to one and another would increase people’s understanding.

To further explore how individuals gain their understanding, Derex and his colleagues ran another version of the experiment.

The set up was largely the same, with 5 trials per participant and 14 chains. However, the difference was that participants could now also write their own theory about the wheel, and share this with the next participant in their chain.

All participants were provided with the previous participant’s theory, except those who were starting.

What did they find? The average wheel speed increased at a similar rate to the first experiment, and the participants’ understanding also barely changed across the generations (see the graph below).

Counter-intuitively, the authors also found that the sharing of theories had a negative  effect on participant’s actual understanding of the underlying physics.

Causal understanding_Graph
Participants produced faster wheels across generations, but their understanding of the system did not (Derex et al, preprint)

Although little differences were observed between the experimental conditions overall,  further digging found “striking” differences in participant’s exploration and independent learning.

The researchers found that if a participant had received a theory about either inertia or potential energy, then their configurations would be constrained to one of these forces. In other words, inheriting an inertia theory increased their understanding of this dynamic, but reduced participant’s understanding of energy (and vice versa).

The main explanation presented is that receiving a theory mostly constrained participants’ focus, and blinded them to the dynamics beyond the theory they received.

Derex and his colleagues argue that these results support the theory that small improvements occur over generations via cultural transmission, in the absence of people’s actual understanding of the technology.

As stated by the authors:

These results indicate that highly optimized technologies do not necessarily result from evolved reasoning abilities but instead can emerge from the blind accumulation of many small improvements made across generations linked by cultural transmission, and demand a focus on the cultural dynamics underlying technological change as well as individual cognition.

Implications

With  the paper yet to be peer reviewed, it does seem a bit premature drawing lessons from the study at this stage. However, a wealth of research demonstrates the role of cultural evolution in driving technological advancement, which means we can have some confidence in the research findings.

The authors also note that these experiment were conducted on ‘WEIRD’ people. That is,  those who are Western, educated, industrialised, rich and democratic. Further experiments would need to be conducted cross-culturally to confirm whether or not this finding is universal.

These points aside, one key take away I took from these experiments are the roles groups and demographics play in fostering technological advancements, rather than the contributions of individuals.

In business and society more broadly, a widespread belief is that the most significant innovations come from geniuses and their novel ideas. However, such experimental findings from the field of cultural evolution reveal how overly simplistic these beliefs are; these beliefs ignore the wider environmental factors and culturally acquired knowledge that facilitate novel insights in the first place.

Another potential lesson concerns exploration and independent learning. If it is the case that receiving incomplete theories can compromise people’s understanding of technology, then this has implications for research and development professionals (or anyone fostering innovation for that matter). Working around this effect and encouraging independent learning may lead to insights which may have otherwise been missed.

Ultimately, such findings illustrate the importance of experimentation in driving technological advancements. Whether one is trying to improve a process or create new products, continuous small-scale experimentation may lead to new technologies being developed- although you may not understand how they actually work.

Written by Max Beilby for Darwinian Business

Note: Derex et al’s paper has since been published in the journal Nature Human Behaviour (1st April 2019)

Monkeying around with market research

Despite increasing public debate over the appropriateness of sex in advertising, sexual imagery and high status individuals continue to be used by marketers to sell products.

However, answering why sexual imagery has proven so influential in advertising receives conflicting answers. Social constructionists argue that these consumer preferences are primarily shaped by people’s experiences within particular social, economic and historic contexts. Conversely, evolutionary psychologists argue that such stimuli satisfies ancient biological drives that evolved to prioritise useful social information.

In the online journal PLOS One, Mehmet Yavuz Acikalin and his colleagues have recently published a unique experiment which helps provide an answer. To explore the origins of our consumer preferences, the researchers conducted a pseudo-advertising campaign on non-human primates.

Monkey Ads

Acikalin and his colleagues tested whether pairing common brand logos with either sexually provocative images or alpha males would lead monkeys to prefer these brand logos.

Rhesus macaque monkeys were used for the experiment, which are old world monkeys native to Central and South Asia. Rhesus macaques form into large mix-sex groups and strict dominance hierarchies. The researchers argue their highly complex social interactions make them ideal for understanding social cognition and behaviour in primates.

We humans diverged from old world monkeys on the evolutionary tree of life around 25 million years ago. If these monkeys show a preference for brand logos that have been paired with sex and social status cues, the authors claim this would support such consumer preferences being evolutionary ancient (rather than a mere social construction).

Using non-human primates allowed for a controlled experiment, where the researchers could rule out the effect of culture and previous engagements with such brands. Additionally, the experimental design allowed the researchers to conduct extensive testing that wouldn’t be feasible in laboratory experiments with humans.

Ten adult rhesus macaques were used for the study, five of each sex. The monkeys participated in the experiment by interacting with a touch-screen interface within their enclosures. The monkeys were shown an image of a real-world brand logo, alongside an image of a monkey which formed the monkey adverts.

Three types of images were used for the adverts: a dominant or subordinate male’s face, or a female monkey’s ‘hindquarters’. Other logos were paired with a scrambled image containing no social information as a control. The monkeys were trained to use the equipment beforehand, and were rewarded with fruit juice whenever the monkey chose a logo on the screen, regardless of their preference.

methodetimesprodwebbin68813bf8-18f8-11e8-a427-78e8af199a96
Stimuli used within the pseudo-advertising campaign on non-human primates (Acikalin et al, 2018)

Sex sells

The researchers found that following the pseudo-advertising campaign, the monkeys developed preferences for brand logos that had been paired with images of male faces and females’ behinds.

As predicted, the females showed no preference for the brands paired with the faces of low status males (to reference TLC, female macaques don’t want no scrubs).

Contrary to their expectations however, the male monkeys also formed a preference for brand logos paired with low dominance males. The researchers speculate that this may be due to males being attentive to low status males who may try to use aggression to climb the monkey hierarchy.

Yavuz Acikalin and his colleagues state the study shows preferences for brands advertised with sex and status cues can emerge independent of cultural learning and imitation found only in humans.

The authors note that although their results support an evolutionary perspective on why we sex is used in advertising, this does not mean that socialisation and culturally-defined gender roles do not influence our consumer behaviour. Rather, they argue that there’s likely strong evolutionary drives behind our consumer preferences, which can either be amplified or suppressed through socialisation.

Although several hundred trails were conducted, a key limitation of the study is that only 10 monkeys were involved in the experiments. I wouldn’t usually comment on a study with such a small sample size. However, there are other reasons why monkeys may also respond to the social drives which advertisers tap into.

Fundamentally, rhesus macaques and other monkey species share with humans similar neural mechanisms that have been linked to social decision making and evaluation. Also, a previous study of a similar nature found that rhesus macaques are willing to sacrifice rewards to see naughty monkey photos.

A mistake to avoid is extrapolating findings from other species to humans which do not apply. However, the rationale for the experiments and the inferences the authors make appear well justified.

A potential limitation of the study is that it assumes sex is an effective way to sell products to us homosapiens. However, I understand there’s considerable debate here, and that the reality may be more nuanced (especially in an age of shifting social norms and consumer preferences).

These points aside, we may be able to draw a lesson from this study.

Although our evolved psychological dispositions helped our great ancestors survive and thrive by attending to opportunities for sex and status enhancement, Yavuz Acikalin and his colleagues suggest that such motivations left unchecked can be detrimental to our mental health (and our bank balance). Being aware of this means we can step back and evaluate what we really want to achieve through our consumer purchases.

In summary, we’d all surely benefit from knowing how deep-seated evolutionary motives shape our consumer behaviour.

Written by Max Beilby for Darwinian Business

Darwin goes to Wall Street

Since the financial crash of 2008 the field of economics has been in a state crisis, where a paradox lies at the heart of the issue.

On the one hand markets are remarkably rational and efficient, displaying allocation and foresight that prediction scientists are only beginning to fully grasp. Efficient markets are powerful, practical tools for aggregating information, and they do it more quickly and cheaply than any known alternative.

However markets also prone to wild swings of irrationality, and can fail spectacularly. Indeed, soul searching in the wake of the financial crisis has led to calls for the field of economics to be revolutionised. Behavioural economics has since risen in prominence, challenging the orthodoxy of neoclassical economic theory by outlining how predictably irrational people can be.

What can we make of this apparent contradiction?

In Adaptive Markets, MIT finance professor Andrew Lo ambitiously calls for a paradigm shift in financial economics, and urges us to reconsider financial markets from an evolutionary perspective. Lo argues by understanding the evolutionary forces that have shaped human behaviour and spurred financial innovation we can reconcile these paradoxical findings, and successfully address the problems facing the financial world.

It Takes a Theory to Beat a Theory

One passage from the book that stuck with me is where Andrew tells the story of taking his son to the National Zoo in Washington DC, who was then a toddler. “As expected, my son was delighted with the Great Ape House, but for me, this visit was nothing less than transformational.”

Lo describes his family standing in front of a group of orangutans, where the alpha male of the group came surprisingly close to the iron-bar fencing separating the great apes from the visitors. In response, Andrew pulled his son away from the fence to keep him out of danger. This startled the alpha male’s companion, who instantly moved in front of the younger orangutan to repel Andrew’s advance- in essence mirroring each other’s behaviour.

The human brain works in mysterious ways. At that precise moment, I saw clearly how the Efficient Markets Hypothesis and its behavioural critique could be reconciled. In fact I understood two things that should have been obvious to me all along, but which I had never thought about until then.

The first insight Andrew had was just how instinctive our primate behaviour is and the the legacy of our shared ancestry, where 97% of our DNA is identical to that of chimpanzees. However Andrew notes the large gulf between our species, where one of these primates carried on their life as usual held in captivity, where the other would go on to write a book detailing the experience and resolving a longstanding academic controversy. Lo argues it is this 3% of the human genome that separates us from other primates, which enables cultural innovation and human ingenuity, and permits advanced economic activity and efficient trading.

The core argument presented in Adaptive Markets is that financial markets do not follow the laws of economic theory. Rather, financial markets are the product of human evolution, and follow the laws of biology instead.

Undoubtedly, behavioural economists have helped improve our understanding of economic decision-making. However, what behavioural economists neglected to answer is the ultimate question: why do people possess these psychological dispositions? Answering ultimate questions leads one to evolution, as the human brain has been honed by the forces of natural selection.

As stated by Lo:

Economic behavior is one aspect of human behavior, and human behavior is the product of biological evolution across eons of different environments. Competition, mutation, innovation, and especially natural selection are the building blocks of evolution. All individuals are vying for survival- even if the laws of the jungle are less vicious on the African Savannah than on Wall Street. It’s no surprise, then, that economic behavior is often best viewed through the lens of biology.

A key concept Lo uses to explain economic behaviour is an evolutionary mismatch:  traits selected for in our ancestral past which were once advantageous, which become maladaptive when the environment changes. For example, Lo argues evolution can help explain loss aversion and people’s inclination to ‘probability match’ in financial settings, which can result in sub-optimal investing.

Financial behavior that may seem irrational now is really behavior that hasn’t had sufficient time to adapt to modern contexts. An obvious example from nature is the great white shark, a near- perfect predator that moves through the water with fearsome grace and efficiency, thanks to 400 million years of adaptation. But take that shark out of the water and drop it onto a sandy beach, and its flailing undulations will look silly and irrational. It’s perfectly adapted to the depths of the ocean, not to dry land.

For the past 50 years, academic finance has been dominated by highly mathematical models and methods that derived from physics. These sophisticated quantitative techniques spawned a wave of financial innovation, and triggered an evolutionary change within the world of finance. However, Lo argues that despite the advantages these advanced quantitative techniques provided, this mass ‘mathematization’ of finance has significant flaws.

Finance isn’t physics, despite the similarities between the physics of heat conduction and the mathematics of derivative securities, for example. The difference is human behavior and the role of evolution in its development… The financial crisis showed us that investors, portfolio managers, and regulators do have feelings, even if those feelings were mostly disappointment and regret during the last few years. Financial economics is much harder than physics.

The Financial Crisis

Much of Adaptive Markets is dedicated to the 2008 financial crisis. Although there are numerous causes of the crisis, Lo argues that at the most fundamental level the primary cause of the crash was greed overpowering fear.

The Adaptive Markets Hypothesis tells us that, at the most basic level of the financial crisis, greed overwhelmed fear. Ignoring the changing environment, people at all levels of the system created a narrative that greed was good. The pushback against the warnings about the oncoming crisis was stronger than the warnings themselves- until it was too late. 

Rather soberingly, Lo details how economists such and Robert Shiller and Raghuram Rajan raised the alarm of the American housing market showing signs of a bubble, which could potentially lead to a catastrophic meltdown of the financial system. However, these concerns were largely ignored by the wider financial community. With the benefit of hindsight, such warnings were remarkably prescient.

Lo’s own research on the hedge fund industry also showed early warning signs of the financial crisis. Back in 2005, journalist Mark Gimein published an overview of Lo’s research in the New York Times. The last paragraph reads; “The nightmare script for Mr. Lo wold be a series of collapses of highly leveraged hedge funds that bring down major banks or brokerage firms that lend to them”.

Apparently Lo’s warning seemed ridiculous at the time, yet in hindsight various hedge funds collapsed at the start of the crisis “and the fact that Bear Stearns and Lehman Brothers both experienced their first wave of losses through their hedge funds, it wasn’t too far off the mark.”

Hedge funds are described by Lo as the ‘Galapagos Islands of finance’, being a novel species of finance that exploit market anomolies which are highly vulnerable to changing environments. According to Lo, increased complexity combined with tighter coupling and a new spawn of financial gigantism increased the odds of a catastrophic meltdown.

Lo also takes the opportunity to challenge the narratives we share to explain the financial crisis. For example, one common theme is that the financial crisis was the result of the unscrupulous practices of financial elites. Although there is much truth to this story, Lo argues many determinants of the crisis were systemic and were not caused by ethical lapses. However, this claim is contested by leaders in the field.

Finance Behaving Badly

Not only does Adaptive Markets cover the basics of evolutionary psychology, it also makes reference to the cultural evolution. Lo makes clear that culture, a domain which is frequently deemed beyond the realm of biology, is itself the product of evolution. That is, subject to the processes of variation, selection and replication. A core argument in Adaptive Markets is that an evolutionary perspective of culture can help us identity and prevent financial scandals.

Long before the days Gordon Gekko became a cultural icon, social psychologists have studied what leads ordinary people to behave like monsters. The infamous Milgram and Zimbardo Stanford prison experiments were conducted during the 1960s and 1970s respectively, and demonstrated in shocking and graphic detail how blind obedience to authority can lead ordinary people to commit atrocities.

Lo notes how little people were paid to participate in these experiments, and yet still were complicit in such unthinkable acts. Milgram paid his participants roughly today’s equivalent of $36, where Zimbardo paid his subjects roughly $90 in today’s money.

Imagine a situation in which you were instructed to engage in questionable financial practices- actions that aren’t nearly as gut-wrenching as delivering electrical shocks- by a managing director or vice president in a suit and tie, and you’re given tremendous financial incentives, like a multi-million dollar year-end bonus, to do so. In light of the Lucifer Effect, it’s not hard to understand how context and culture can lead to even caring and ethical individuals to do reprehensible things to unsuspecting clients. This is the Gekko Effect. 

One possible critique of Adaptive Markets is that it emphases the importance of the environment, yet it does not adequately address the environmental forces shaping financial institutions. However, Lo’s reflections on regulation and corporate fraud is a clear exception.

Although the data is confined to the United States and the time series is rather small (especially when considering evolutionary time-scales), Lo provides evidence that financial scandals and scams are cyclical. That is, historically financial scandals have increased as stock markets rose, and declined once market conditions deteriorated.

 

Lo Dyck, Morse and Zingale's (2013, figure 1) estimates of the percentage of large corporations starting and engaging in fraud
Estimates of the percentage of large corporations starting or engaging in fraud, from 1996-2004 (Dyck, Mores & Zingales, 2013)

Deason et al (2015) Frequency of SEC- prosecuted Ponzi schemes by calendar quarter from 1988 to 2012
Frequency of SEC prosecuted Ponzi schemes by calendar quarter from 1988 to 2012 (Deason, Rajgopal & Waymire, 2015)

These findings may seem counter-intuitive. However, the researchers investigating ponzi schemes make it clear that such large-scale fraud is harder to sustain during deteriorating market conditions, as was the case with Madoff. Lo also notes that regulatory budgets increase after financial bubbles burst.

Lo states the unravelling of Madoff also revealed the biases and blind spots of financial regulators. Although social scientists have much to learn about the behaviour of auditors and financial regulators in the lead up to such scandals, Lo argues loss aversion may help explain why regulators don’t react quicker to signs of disturbance. That is, being more concerned about being wrong and causing a public scandal than investigating cases of potential large-scale fraud.

Fixing Finance 

Lo argues that if we wish to change financial culture and tackle corporate malfeasance, we first have to understand the broader contextual and environmental forces that have shaped such cultures over time and across circumstances.

As a professional working in the field, I’ve observed increasing activity to monitor aspects of organisational culture within the banking industry. However, I believe we’re only beginning to grapple with this challenge, and that various issues need to be addressed. To elaborate, what do we mean exactly when we refer to ‘culture’, how do we measure it, and which aspects of culture can actually be changed and should be prioritised?

Lo provides some excellent advise here, and demonstrates the importance of framing.

The first step requires a subtle but important shift in our language. Instead of seeking to “change culture”, which seems naive and hopelessly ambitious, suppose our objective is to engage in “behavioural risk management” instead… Despite the fact we’re referring to essentially the same goal, the latter phrase is more concrete, feasible, and- this is important- unassailable from a corporate board’s perspective.

To conclude, a core theme of Adaptive Markets is that the financial system is more similar to an ecosystem of living organisms than a machine, and that we must manage the system accordingly. This is a very different perspective compared to traditional approaches of financial regulation, however Lo notes the list of prominent economists who have reached similar conclusions.

Despite certain reviews of the book arguing that the Adaptive Markets Hypothesis offers little practical value, this theoretical insight arguably has many practical implications.

For one, it shows investors how markets are not wholly efficient and can be beaten, and makes clear that specific investment strategies can either succeed or fail depending on the broader financial environment.

Lo shares some big ideas on how large-scale investment funds can be designed to address pressing social problems, such as the high cost of developing new cancer drugs.

For regulators, the adaptive toolkit provides ways of addressing the cultural roots of corporate maleficence, which could help prevent the next Bernie Madoff from succeeding.


Written by Max Beilby for Darwinian Business

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