Market Analysis

Evolved Markets

The science of evolution is changing the way economics and markets are understood.

An idea less than 200 years old, the theory of evolution, represents one of the most profound and cataclysmic shifts in the history of human thought. To be able to see it, you've got to fathom its wide implications. Most tend to think evolution is just for scientists. And until just a few decades ago, the topic was largely ignored by most fields outside biology.

Today, evolution is exploding well-established modes of thought in fields as far ranging as economics and anthropology. That's because evolution has important things to say about all things human: their perspectives, feelings, and connection to the world. Acquiring a solid understanding of evolution is well worth the time for any serious investor. Today's New York Times Science section features an excellent cluster of articles and perspectives on evolution. Find it here:

For many decades, teachers, psychologists, and neuroscientists regarded the human mind as a "Blank Slate." That is, the mind is born completely blank—society and culture play a dominant role in forming the personality. This is commonly referred to as the Standard Social Science Model, or SSSM.

But a rudimentary application of the principles of evolution to psychology shows this to be absurd. We aren't blank slates. Instead, we have a legacy of evolved content in our heads, called instincts, playing a major influential role in our behavior.

This has major implications for investing. First, it destroys the notion of the classical "rational man" in economics. For centuries, economists accepted that individuals act in their own best interest. That's a basic SSSM notion. But if we know that, at least in part, man is influenced by instinct, then many of our reactions and emotions may not be "rational" at all in the sense we commonly think of them.

Brains evolved in the wild and were built for survival against predators—they weren't made to do math or scale large sums of money properly. So, "rational" from an evolutionary standpoint is different than optimal economic behavior. That means folks can quite clearly be irrational from an economic point of view. In fact, mass misunderstanding of big market issues like deficits, inflation, trade, and so on can make for huge investing opportunities—but are easy to explain when we recognize the brain was evolved to function differently than economics wants. Blame it all on evolution!

For more on the debunking of the SSSM and the importance of instinct on human behavior, see Stephen Pinker's excellent study of neuroscience, evolution, and psychology:

The Blank Slate: The Modern Denial of Human Nature
by Steven Pinker

But it's not all psychological, and it's not all behavioral. In fact, the notion of survival of the fittest, the mode by which evolution marches forward, also acts as a compelling metaphor for understanding the development of capital markets and economics in general.

This may seem a strange notion at first. But consider: Evolutionary scientists consider it axiomatic that only those organisms best able (or fittest) to obtain and utilize resources will survive. Evolution is the way in which nature battles for scarce resources. It can be brutal at times, but it's unquestionably the most efficient mode of allocation. Through all this, an ecosystem, or "web of life" is created where organisms are in competition with each other, but many form symbiotic systems where they are dependent upon others for survival.

Now, think of capitalism. Capitalism puts individuals, given their own self interests and desires, into competition with one another—to both produce and consume. In this seemingly chaotic process, systems "evolve"—markets are created, production is innovated and becomes more efficient, and new capital markets instruments are developed. It's a "web of economic" life if you will. The system of capitalistic economics is perhaps the greatest impersonator of that greatest concept of how systems of life are created. Capitalism, in a sense, is evolution.

This is just the tip of the iceberg for evolution and economics. For even more, see our past MarketMinder column:

Economic Evolution
By Doug Regner

And if you're really excited about it . . .

Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics
by Eric D. Beinhocker

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.