Tuesday, 19 March 2013

“Networked Minds” Require A Fundamentally New Kind of Economics

“True capitalists are other-regarding” – “Perhaps we have applied the wrong theory, and our economy should be run by different people”

The body of economic literature will have to change, implies a groundbreaking discovery. In their computer simulations of human evolution, scientists at ETH Zurich find the emergence of the “homo socialis” with “other-regarding” preferences. The results explain some intriguing findings in experimental economics and call for a new economic theory of “networked minds”.

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. Since ages, economic theory is based on concepts such as efficient markets and the “homo economicus”, i.e. the assumption of competitively optimizing individuals and firms. It was believed that any behavior deviating from this would create disadvantages and, hence, be eliminated by natural selection. But experimental evidence from behavioral economics show that, on average, people behave more 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 favorable for everyone to cooperate, but non-cooperative behavior 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. 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 behavior – cooperation or not – and an inherited character trait, describing the degree of other-regarding preferences, which we call the friendliness.” The actual behavior 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. Very surprisingly, however, biological selection may create a “homo socialis” with other-regarding preferences, namely if offsprings tend to stay close to their parents. In such a case, clusters of friendly people, who are “conditionally cooperative”, may evolve over time. That is, they prefer to be cooperative, but they do not cooperate, as long as the interaction partners in the neighborhood are non-cooperative. In this way, they can protect themselves from being exploited. “But if by chance an unconditionally cooperative individual is born in the neighborhood one day, someone like ‘Mother Theresa’, the conditional cooperators may turn to cooperative behavior”, explains Christian Waloszek, one of the coauthors of this study. As a consequence, cooperation may spread in a cascade-like way and earn higher paysoffs, such that many friendly offspring are born. The “homo socialis” is established and begins to outnumber the selfishly optimizing “homo economicus”.

Trespassing the “valley of tears”

“But it does not always go so well,” Christian Waloszek continues. “A superfriendly, unconditionally cooperative individual may be exploited by everyone, consequently getting a miserable payoff and no offspring. Hence, such people might die without an impact on the world.” That means, the evolution from the “homo economicus” to the “homo socialis” may go through a valley of tears. “Without random mutations it would never happen,” adds Helbing. However, if enough conditionally cooperative individuals are already around, the “homo socialis” spreads.

“This has fundamental implications for the way, economic theories should look like,” underlines 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. Our economic thinking may have been totally misled. It may apply to the “untamed selfish beast” that characterized Thomas Hobbes picture of humans, when he called for the ordering hand of a state in his book “Leviathan” back in 1651. But since then, much has changed.

Networked minds create a cooperative species

For example, Nobel Prize winner Elinor Ostrom has shown that people can manage their resources in a cooperative way, if following certain rules. This is found in Swiss communities as well as collaborative projects in the Web2.0. Wikipedia is probably the best-known example. “Now, we have laid the foundation of a new theory of human decision making,” says Helbing. “Thanks to its evolutionary foundation, we just have to make very few, widely accepted assumptions.” This sets the model apart from many alternative choice models. The long overdue unification of the behavioral sciences might be just around the corner.

“People in our model do not behave irrationally,” explains Grund, but 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.” 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 back in 2008 might 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.”

Further information:
Thomas Grund, Christian Waloszek, and Dirk Helbing (2013) How natural selection can create both, self- and other-regarding preferences, and networked minds. Scientific Reports 3, 1480; DOI:10.1038/srep01480.

Figure caption: Local reproduction is crucial for the transition from a “homo economicus” to a “homo socialis”. The rate v of local reproduction determines the probability of an offspring to occupy the closest empty site to the parent. With probability (1-v), the offspring moves to an empty site that is randomly selected. The circle size indicates average friendliness, while the circle color represents the share of cooperators. The parameter T characterizes the level of temptation to behave non-cooperatively in the social dilemma situations the people find themselves in.

Figure caption: Evolution of the distribution of friendliness in the course of time. It is clearly visible that a broad distribution of individual utility functions results, even though everybody starts off with a purely self-regarding behavior, for which the utility function agrees exactly with the payoff function.

To view the report, click the link below:
How Natural Selection Can Create Both Self- and Other-Regarding Preferences, and Networked Minds, Nature Scientific Reports 3: 1480.


  1. These results align with the massive body of evidence for human sociality that has come from every field that studies human behavior or our ancestral evolutionary history. I have written a summary article on this topic here.

    I recommend Christopher Boehm's book Moral Origins: The Evolution of Virtue, Altruism, and Shame as one helpful starting point that shows how human sociality arose in the context of hunter-gatherer societies (with a long history prior to this in early hominid and deeper mammalian history that also supports the evolution of our social behavior).

    The great irony is that human nature has been incorrectly framed for many decades. This is ironic in two ways:
    (1) The first time behavioral scientists conducted studies on economic behavior, they invalidated the core assumptions of rational action -- because the rational actor model was created by mathematicians, not behavioral scientists; and
    (2) Research on human semantics (that gives us insight into the psychological mechanisms that lead to framing effects) requires a different underlying philosophy than that of self-interest rationalism.

    It has been clear for decades now in various research fields ranging from psychology, physical anthropology, primate studies, neuroscience, linguistics, and more that tell us the "homo economicus" theory is bunk.

    In order to understand how dysfunctional theoretical models like this one have co-opted the governing dynamics of human communities, I recommend this blog article I wrote last year.

    If you are interested in discussing this topic further, I would be happy to arrange a call.


    Joe Brewer
    Director, Cognitive Policy Works

  2. One additional note that you will want to consider in future modeling studies is your initial conditions. Humans did not begin as autonomous individuals competing for resources. We began as socially bonded groups who clung together for protection -- as was the case for early hominids when they left the jungles and ventured out onto the savannahs of Africa.

    So you are not dealing with a "blank slate" system, but rather one that begins with sociality and then perpetuates it. The origins of sociality go back before the first hominids, to the emergence of placental birth and parent-offspring bonding. Your models will get closer to reflecting real economic behavior when they start out with the appropriate set of "social parameters" that characterize the kind of social animals that humans have been since we branched off from ancestral lines (that also exhibited complex social organization and parent-offspring bonding).

    An adequate characterization of the emergent dynamics for social organization will need to capture the boundary conditions and morphodynamic constraints that lead to the rise of complex societal structures. This requires careful selection of initial conditions.


    Joe Brewer
    Director, Cognitive Policy Works


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