The Mind of the Market: Book Review

The Mind of the Market: How Biology and Psychology Shape Our Economic Lives

As I was finishing The Mind of the Market by Michael Shermer (of which I have a signed copy), I was having a discussion with a fellow business major. This hard-headed, toddler-like buffoon was no stranger to less and critical thinking – but since he asked about the book I was reading, I told him. It covers how humans have developed our business morals and markets from our evolutionary past. Then he surprised me with the most arrogant thing he has ever said, “our world today has no bearing on our past”. Don’t be like this presumptuous fool! Let me rely on Mr. Shermer to prove otherwise.

                                                                   (here is my signed copy)

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The Mind of the Market uses plenty of enjoyable tales, studious studies, and interesting historical facts to show how we have developed our market since the infancy of our species. The tribal instinct used thousands of years ago have stayed with us and even guided how we created our market. Think of it like the “invisible hand” that Adam Smith suggested in The Wealth of Nations.

If you know Michael Shermer, you know he writes in an entertaining way that keeps you reading as well as learning. He is the founder of the Skeptic Society so there are numerous studies to clearly define where he is getting his information. But, since there are so many studies within the book (which I strongly recommend you getting) I will instead focus on his main points in the book.

There are many aspects of numbers and probability that we still have trouble understanding – all from our primitive upbringing. In Accounting, there is a term called “sunk costs” which are expenses put into a project or asset that cannot be returned. When approached with the problem of whether or not the project or asset should be kept even though it is unlikely to be successful, people are far more likely to stick with the project. It is like gambling. When facing losses, one is more likely to stay with it to try to recoup losses. But this is completely illogical and hard to get away from. I was even taught this in college.

We also base decisions about a whole population on small numbers of data. These mistakes are apparent in daily stock traders and even politicians. The example Shermer used was picking red and white marbles out of two bags. If the bags were split 1/3 and 1/3 of each color in each bag – pulling out 5 marbles would usually satisfy our curiosity. We would draw the conclusion of the marbles in each bag based on our findings. This again, is not always correct.

There is also the “framing effect” where we base decisions on how the offer is framed. Here is the example from the book:

  1. Phones-are-Us offers the new DgiMusicCam cell phone for $100; five blocks away FactoryPhones has the same model half off for $50. Do you make the trip to save $50?
  2. Laptops-are-Us offers the new carbon fiber computer for $1000; five blocks away CompuBlessings has the same model discounted to $950. Do you make the trip to save $50?

Most would make the trip for the first one, but very few would make the trip for the other one even though you are saving $5o each time. Shermer calls this “mental accounting” where we compute the reward versus the effort. This framing is used everywhere but especially in commercials or in sales pitches.

Other tribal-like characteristics like this include:

Best sellers – We trust best seller lists because others have deemed the product good so we value that. Just like if a tribe of humans are all eating something, we conclude that the food is good.

Trusting celebrities – Just like we used to trust tribal leaders, we trust celebrities today to show us quality products and because they use it too, we find the product worthy.

Trusting people like us – Because it was wise to only trust your kin and tribe, we have a deep sense of trust for people like ourselves. Some scientists think this may be where our racist tendencies comes from. Luckily, we are now smart enough to resist racism (well, the more intelligent of our species).

Moral fairness – We come from a long history of banding together and sharing our hard work. Even today, we desperately want people to work and put something into the system. We hate freeloaders! Similarly, we desire those who are more wealthy to share more with us – even though they earned it.

I think the most profound point in The Mind of the Market is the necessity of the freedom of trade. The freer the market, the freer the people. In every culture, the liberation of the markets have freed the people and even saved nations. The comparison is made, that just like evolution is bottom up design, the market is bottom up and determined by the people. In totalitarian societies, so much effort is to determining the market value of products. Free societies have no such problem. And unlike its totolitarian partner, free capitalist societies are controlled and upheld by the people. In doing this, the markets are free to grow and because it is built into its structure, the free market has incentives to grow.

Shermer uses a quote from one of my favorite Founding Fathers Thomas Jefferson to stress this point, “Freedom is the right to choose, the right to create for oneself the alternative choice. Without the possibility of choice, and the exercise of creation, a man is not a man, but a member, an instrument, a thing.”

And finally, the most important aspect of free trade – the global market. As mentioned above, we have a deep sense of tribe-like loyalty. We want to take care of ourselves, our familys, our countrymen first. Because it is a deep instinct of ours, it is understandable and in the worst financial downturns, countries always pull back. We turn away from the global market. This is not wise. Take for instance, the creation of the European Union (I may have lost my conservative reader here). Post World War II, the United States and the Soviet Union ruled all. It wasn’t untill the 1980’s and 90’s did the European countries begin to shine because they banded together. By combining their economies, the whole continent prospered to above even the United States. The people prospered and the region prospered. They are now one of the biggest economies – even with sich a small area and few resources (compared to the US).

If there is one lesson from this book, it is that we are a product of evolution – and our market is a product of evolusion. There must be freedom to choose, “we must choose freedom, then create the circumstances in which it can be realized, and then defend it.”

Get your copy here!
The Mind of the Market: How Biology and Psychology Shape Our Economic Lives

 

 

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