Monday, April 20, 2009

Invisible Hand v Irrational Hand

This is better than Alien v Predator. In one corner we have Adam Smith's invisible hand. He says that when each of us pursue our self-interest, the aggregate will promote the general welfare. Although we are all selfish, by pulling in opposite directions we cancel each other out.

In the other corner we have Dan Ariely's (and many others) behavioral economics research that shows that we are all quite irrational in our decision making. This creates cascades that pull the aggregate way out of balance. The recent stock market bubbles and real estate bubble are pretty good evidence too.

Adam Smith's invisible hand is also challenged by the problem of asymmetric information. When some people have better information than others, they can exploit their advantage in the market.

If the Irrational Hand is stronger than the Invisible Hand, we need some kind of oversight (not necessarily government) to help out. The problem we have had over the years is that our regulations have been equally biased and irrational, so they don't help as much as they could and certainly don't SOLVE the problem. Maybe we need to elect fewer lawyers and former lobbyists and more behavioral economists.

Saturday, April 18, 2009

Religion makes you who you are, but maybe not how you think.

There is some fascinating neurological research being done by Andrew Newberg on the effects of religious thought on the wiring of the brain. What he has found is a great argument for the power of top down processing.

If you believe in a loving G-d, these thoughts build up the connections in your frontal lobes and anterior cingulate. This is where reason and empathy reside. So this belief can make you more rational and more empathic. But a belief in a vengeful G-d builds up connections in your limbic system where emotions like aggression and fear reside. So this belief can make you more aggressive and afraid. By building up connections in the brain, these effects can create positive reinforcement loops. Belief in a benevolent G-d makes you into the kind of person more likely to see good in things and people, strengthening these brain areas still further in a virtuous cycle. Belief in a vengeful G-d has the opposite effect in a vicious cycle.

These findings can easily be extrapolated beyond religion. People who have positive or negative beliefs about the external world in general probably experience similar neurological effects. In essence, it illustrates the power of positive or negative thinking in general. This is not some new age psychobabble. Our outlook on life can actually create the life that we want to some extent by wiring our brains to see it that way and guide our experiences to make it so.