The results explain some intriguing findings in experimental economics and call for a new economic theory of “networked minds”.
Credit: © violetkaipa / Fotolia
Economics has a beautiful body of theory but does it describe real markets?
Doubts have come up not only in the wake of the financial crisis, since financial crashes should not occur according to the then established theories.
For some time economic theory has been based on concepts such as efficient markets and the “homo economicus”, i.e. the assumption of competitively optimising individuals and firms.
It was believed that any behaviour deviating from this would create disadvantages and, hence, be eliminated by natural selection.
But experimental evidence from behavioural economics show that, on average, people behave more altruistically ('fairness-oriented' and 'other-regarding') than expected. A new theory by scientists from ETH Zurich now explains why.
“We have simulated interactions of individuals facing social dilemma situations, where it would be favourable for everyone to cooperate, but non-cooperative behaviour is tempting,” explains Dr. Thomas Grund, one of the authors of the study.
“Hence, cooperation tends to erode, which is bad for everyone.” This may create tragedies of the commons such as over-fishing, environmental pollution, or tax evasion.
Evolution of “friendliness”Prof. Dirk Helbing of ETH Zurich, who coordinated the study, adds: “Compared to conventional models for the evolution of social cooperation, we have distinguished between the actual behaviour – cooperation or not – and an inherited character trait, describing the degree of 'other-regarding' preferences, which we call the friendliness.”
The actual behaviour considers not only the own advantage (“payoff”), but also gives a weight to the payoff of the interaction partners depending on the individual friendliness.
For the “homo economicus”, the weight is zero. The friendliness spreads from one generation to the next according to natural selection. This is merely based on the own payoff, but mutations happen.
For most parameter combinations, the model predicts the evolution of a payoff-maximizing “homo economicus” with selfish preferences, as assumed by a great share of the economic literature.
(Homo socialis is subjected to society, is a part of it.)
Very surprisingly, however, biological selection may create a “homo socialis” with 'other-regarding' preferences. In such a case, clusters of friendly people, who are “conditionally cooperative”, may evolve over time.
If an unconditionally cooperative individual is born by chance, it may be exploited by everyone and not leave any offspring.
However, if born in a favourable, conditionally cooperative environment, it may trigger cascade-like transitions to expand cooperative behaviour, such that 'other-regarding' behavior pays off. #
Networked minds create a cooperative human species
“This has fundamental implications for the way, economic theories should look like,” states Professor Helbing.
Most of today’s economic knowledge is for the “homo economicus”, but people wonder whether that theory really applies.
A comparable body of work for the “homo socialis” still needs to be written. While the “homo economicus” optimizes its utility independently, the “homo socialis” puts himself or herself into the shoes of others to consider their interests as well,” explains Grund
Helbing adds: “This establishes something like “networked minds”. Everyone’s decisions depend on the preferences of others.” This becomes even more important in our networked world.
A participatory kind of economy
How will this change our economy? Today, many customers doubt that they get the best service by people who are driven by their own profits and bonuses.
“Our theory predicts that the level of 'other-regarding' preferences is distributed broadly, from selfish to altruistic. Academic education in economics has largely promoted the selfish type.
Perhaps, our economic thinking needs to fundamentally change, and our economy should be run by different kinds of people,” suggests Grund.
“The true capitalist has 'other-regarding' preferences,” adds Helbing, “as the “homo socialis” earns much more payoff.”
This is, because the “homo socialis” manages to overcome the downwards spiral that tends to drive the “homo economicus” towards tragedies of the commons.
The breakdown of trust and cooperation in the financial markets in 2008would be seen as good example.
“Social media will promote a new kind of participatory economy, in which competition goes hand in hand with cooperation,” believes Helbing.
Indeed, the digital economy’s paradigm of the “prosumer” states that the Internet, social platforms, 3D printers and other developments will enable the co-producing consumer.
“It will be hard to tell who is consumer and who is producer”, says Christian Waloszek. “You might be both at the same time, and this creates a much more cooperative perspective.”
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