The Economics of Fickleness

— The deadline is tomorrow for a proposal I promised to deliver but now don’t want to write.

I dutifully, if reluctantly, begin to work on the project when a niggling detail about some utterly irrelevant matter comes to mind. It may concern the etymology of a word, or the colleague whose paper bag ripped open at a departmental meeting revealing an embarrassing magazine inside, or why caller ID misidentified a friend’s telephone number. These in turn bring to mind the next in a train of associations and musings.

Such prosaic episodes strongly suggest to me that there will never be a precise science of economics. Shopping and buying, I suspect, sometimes partake of a similar whimsicality.

I was thus fascinated by a new book by Paul Ormerod, a British economic theorist and professor who has worked for The Economist magazine. Entitled Butterfly Economics, the book faults the discipline for not sufficiently taking into account the common-sense fact that people influence each other.

People do not, as orthodox economics maintains, have a set of fixed preferences that they coolly and rationally base their economic decisions on. The assumption that people are sensitive only to price simplifies the mathematical models, but it is not true to our experience of fads, fashions and everyday “monkey-see, monkey-doism.”

An Ant Acting Like a Stock Trader

An experiment involving not monkeys but ants provides a guiding metaphor for the book. Two identical piles of food are set up at equal distances from a large nest of ants. Each pile is automatically replenished and the ants have no reason to prefer one pile to another. Entomologists tell us that once an ant has found food, it usually returns to the same pile, and that upon coming back to the nest, it physically stimulates other ants to follow it to the same pile.

So where do the ants go? It might be speculated that either they would split into two roughly even groups or perhaps a large majority would arbitrarily settle on one or the other pile. The actual ant behavior is counterintuitive. The number of ants going to each pile fluctuates wildly and doesn’t ever settle down. Graphing these fluctuations results in something that looks suspiciously like the variations in the stock market.

And in a way, the ants are like stock traders. Upon leaving the nest, each ant must make a decision: Go to the pile visited last time, be influenced by a returning ant to switch piles, or switch piles of its own volition. This slight openness to the influence of other ants is enough to insure the complicated and volatile fluctuations in the number of ants visiting the two sites.

Ormerod takes off from here to discuss Christmas toy fads, surprise movie hits and misses, the triumph of inferior VHS machines over Betamaxes in the VCR market, crime and divorce rates, and, most extensively, economics — all phenomena that derive, in part, from each of us influencing and being influenced by others.

Small Cause, Big Effect

The book’s title refers to the notion that a butterfly flapping its wings in Venezuela, say, might spell the difference several months later between a hurricane and a balmy day along the eastern U.S. seaboard. The book’s thesis is that interactions among economic agents sometimes introduce nonlinear effects (small causes, disproportionately large consequences) that make long-range precise predictions all but impossible. This is most certainly not to say that rough, qualitative predictions are impossible.

Governments, says Ormerod, “should do very much less in terms of detailed, short-term intervention,” but rather should search for the broader patterns and not respond to ephemeral and short-lived shifts in supply and demand or human tastes and preferences.

Not only do most orthodox economists take too little notice of the influence we exert on each other, but many don’t sufficiently appreciate the unpredictable consequences of the interconnectedness of economic variables. Interest rates have an impact on unemployment rates, which in turn influence revenues; budget deficits affect trade deficits, which sway interest rates and exchange rates; an increase in some quantity or index positively (or negatively) feeds back on another, reinforcing (weakening) it and being in turn reinforced (weakened) by it.

Divergent Paths

I wrote about using nonlinear dynamical systems to model such interconnections in my 1995 book A Mathematician Reads the Newspaper. For illustration, I described a simple instance of one: Imagine approximately 30 round obstacles are securely fastened to the surface of a pool table in haphazard placement. Hire the best pool player you can find and ask him or her to place the ball on the table and take a shot toward one of the round obstacles. Then ask for the exact same shot from the exact same spot with another ball. Even if the angle on the second shot is off by the merest fraction of a degree, the trajectories of these two balls will very soon diverge considerably, magnified by each succeeding bounce. Soon, one of the trajectories will hit an obstacle that the other misses entirely, at which point all similarity between the two trajectories ends.

The sensitivity of the billiard balls’ paths to minuscule variations in their initial angles is not totally unlike, say, the dependence of one’s genetics on which a zig-zagging sperm cell reaches the egg.

Consider also the disproportionate effect of seemingly inconsequential events — the missed planes, serendipitous meetings and odd mistakes that shape and reshape our lives.

Human interactions and interconnected economic variables strongly suggest that the economy is less susceptible to precise, long-range forecast than many believe.

Professor of mathematics at Temple University, John Allen Paulos is the author of several books, including A Mathematician Reads the Newspaper and, most recently, Once Upon a Number. His Who’s Counting? column on ABCNEWS.com appears on the first day of every month.

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