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Behavioral Changes in Large Groups

September 3, 2015

As I listened to this podcast I was struck by the link between the selfless behavior described and behavioral economics. They both seem mainly to describe behavior in small groups.

For example, the behaviorists describe many ways in which individuals are irrational in decision making (e.g. being more averse to losses that they would value like gains). Yet stock markets operate efficiently at least in the sense that no one can use these insights to consistently profit. The behavior is observed in individuals, but in not when they act with many others in a crowded market. Why? The structure of the market (*e.g. opportunities for arbitrage) bleeds the irrationality out of market prices.

Likewise, the selfless traits of individuals (and perhaps their innate sense of justice) also seem to get lost when they deal with others in large anonymous market– witness past political demands for mandatory minimum sentences, multi-level marketing schemes, people taking advantage of government programs who are not truly needy.

The simple conclusion is that crowded markets (and perhaps other spheres) produce more rational results– but that is not always a good thing.

I suspect there are deeper insights to be had about institutional design to incorporate this insight, but for now I leave that to others.

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From → Economics

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