Social finance as cultural evolution, transmission bias, and market dynamics.

The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, social finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment.

Moonshots, investment booms, and selection bias in the transmission of cultural traits.

Biased information about the payoffs received by others can drive innovation, risk taking, and investment booms. We study this cultural phenomenon using a model based on two premises. The first is a tendency for large successes, and the actions that lead to them, to be more salient to onlookers than small successes or failures. The second premise is selection neglect-the failure of observers to adjust for biased observation. In our model, each firm in sequence chooses to adopt or to reject a project that has two possible payoffs, one positive and one negative. The probability of success is higher in the high state of the world than in the low state. Each firm observes the payoffs received by past adopters before making its decision, but there is a chance that an adopter's outcome will be censored, especially if the payoff was negative. Failure to account for biased censorship causes firms to become overly optimistic, leading to irrational booms in adoption. Booms may eventually collapse, or may last forever. We describe these effects as a form of cultural evolution, with adoption or rejection viewed as traits transmitted between firms. Evolution here is driven not only by differential copying of successful traits, but also by cognitive reasoning about which traits are more likely to succeed-quantified using the Price Equation to decompose the effects of mutation pressure and evolutionary selection. This account provides an explanation for investment booms, merger and initial public offering waves, and waves of technological innovation.

Evolutionary dynamics of culturally transmitted, fertility-reducing traits.

Human populations in many countries have undergone a phase of demographic transition, characterized by a major reduction in fertility at a time of increased resource availability. A key stylized fact is that the reduction in fertility is preceded by a reduction in mortality and a consequent increase in population density. Various theories have been proposed to account for the demographic transition process, including maladaptation, increased parental investment in fewer offspring, and cultural evolution. None of these approaches, including formal cultural evolutionary models of the demographic transitions, have addressed a possible direct causal relationship between a reduction in mortality and the subsequent decline in fertility. We provide mathematical models in which low mortality favours the cultural selection of low-fertility traits. This occurs because reduced mortality slows turnover in the model, which allows the cultural transmission advantage of low-fertility traits to outrace their reproductive disadvantage. For mortality to be a crucial determinant of outcome, a cultural transmission bias is required where slow reproducers exert higher social influence. Computer simulations of our models that allow for exogenous variation in the death rate can reproduce the central features of the demographic transition process, including substantial reductions in fertility within only one to three generations. A model assuming continuous evolution of reproduction rates through imitation errors predicts fertility to fall below replacement levels if death rates are sufficiently low. This can potentially explain the very low preferred family sizes in Western Europe.

There is little evidence that the Industrial Revolution was caused by a preference shift.

The idea, based on Life History Theory, that the Industrial Revolution was a positive feedback process wherein prosperity induced prosperity-promoting preference shifts is just an intriguing speculation. The evidence does not distinguish this explanation from simple alternatives. For example, increased prosperity may have freed up time for individuals to engage in innovative activity and increased the benefits from doing so.

Social transmission bias and the cultural evolution of folk-economic beliefs.

Evolved dispositions influence, but do not determine, how people think about economic problems. The evolutionary cognitive approach offers important insights but underweights the social transmission of ideas as a level of explanation. The need for a social explanation for the evolution of economic attitudes is evidenced, for example, by immense variations in folk-economic beliefs over time and across individuals.