In the 1922 poem The Waste Land, T. S. Eliot writes, cryptically: Who is the third who always walks beside you? / When I count, there are only you and I together / But when I look ahead up the white road / There is always another one walking beside you.

In his footnotes to this verse, Eliot explained that the lines “were stimulated by the account of one of the Antarctic expeditions [Ernest Shackleton’s] … that the party of explorers, at the extremity of their strength, had the constant delusion that there was one more member than could actually be counted.”

Third man, angel, alien or deity — all are sensed presences, so I call this the sensed-presence effect. In his gripping book, The Third Man Factor (Penguin, 2009), John Geiger documents the effect in mountain climbers, solo sailors and ultraendurance athletes. He lists conditions associated with it: monotony, darkness, barren landscapes, isolation, cold, injury, dehydration, hunger, fatigue and fear. I would add sleep deprivation; I have repeatedly experienced its effects and witnessed it in others during the 3,000-mile nonstop transcontinental bicycle Race Across America. Four-time winner Jure Robic, a Slovenian soldier, recounted to the New York Times that during one race he engaged in combat a gaggle of mailboxes he was convinced were enemy troops; another year he found himself being chased by a “howling band” of black-bearded horsemen: “Mujahedeen, shooting at me. So I ride faster.”

Sleep deprivation also accounts for Charles A. Lindbergh’s sensed presence during his transatlantic flight to Paris: “The fuselage behind me becomes filled with ghostly presences — vaguely outlined forms, transparent, moving, riding weightless with me in the plane … conversing and advising on my flight, discussing problems of my navigation, reassuring me, giving me messages of importance unattainable in ordinary life.”

Whatever the immediate cause of the sensed-presence effect, the deeper cause is to be found in the brain. I suggest four explanations:

1. The hallucination may be an extension of the normal sensed presence we experience of real people around us, perhaps triggered by isolation.
2. During oxygen deprivation, sleep deprivation or exhaustion, the rational cortical control over emotions shuts down, as in the fight-or-flight response, enabling inner voices and imaginary companions to arise.
3. The body schema, or our physical sense of self — believed to be located primarily in the temporal lobe of the left hemisphere — is the image of the body that the brain has constructed. If for any reason your brain is tricked into thinking that there is another you, it constructs a plausible explanation that this other you is actually another person — a sensed presence — nearby.
4. The mind schema, or our psychological sense of self, coordinates the many independent neural networks that simultaneously work away at problems in daily living so that we feel like a single mind.

Neuroscientist Michael S. Gazzaniga of the University of California, Santa Barbara, calls this the left-hemisphere interpreter — the brain’s storyteller that pulls together countless inputs into a meaningful narrative story. In an experiment with a “split-brain” patient (whose brain hemispheres were surgically disconnected), Gazzaniga presented the word “walk” only to the right hemisphere. The patient got up and began walking. When he was asked why, his left-hemisphere interpreter made up a story to explain this behavior: “I wanted to go get a Coke.”

My brother-in-law Fred Ziel, who has twice climbed Mount Everest, tells me that both times he experienced a sensed presence: first when he was frostbitten and without oxygen at the limit of physical effort above the Hillary Step, and second on Everest’s north ridge after he collapsed from dehydration and hypoxia at 26,000 feet. Both times he was alone and feeling desirous of company. Tellingly, when I asked his opinion as a medical doctor on possible hemispheric differences to account for such phenomena, Fred noted, “Both times the sense was on my right side, perhaps related to my being left-handed.” The sensed presence may be the left-hemisphere interpreter’s explanation for right-hemisphere anomalies.

Whatever its cause, the fact that it happens under so many different conditions tells us that the presence is inside the head and not outside the body.

Since 99 percent our evolutionary history was spent as hunter-gatherers living in small bands of a few dozen to a few hundred people, we evolved a psychology not always well equipped to reason our way around the modern world. What may seem like irrational behavior today may have actually been rational a hundred thousand years ago. Without an evolutionary perspective, the assumptions of Homo economicus — that “Economic Man” is rational, self-maximizing, and efficient in making choices — make no sense. Take economic profit versus psychological fairness as an example.

Behavioral economists employ an experimental procedure called the Ultimatum Game. It goes something like this. You are given $100 to split between yourself and your game partner. Whatever division of the money you propose, if your partner accepts it, you are both richer by that amount. How much should you offer? Why not suggest a $90-$10 split? If your game partner is a rational self-interested money-maximizer he isn’t going to turn down a free ten bucks, is he? He is. Research shows that proposals that deviate much beyond a $70–$30 split are usually rejected.

Why? Because they aren’t fair. Says who? Says the moral emotion of “reciprocal altruism,” which evolved over the Paleolithic eons to demand fairness on the part of our potential exchange partners. “I’ll scratch your back if you’ll scratch mine” only works if I know you will respond with something approaching parity. The moral sense of fairness is hardwired into our brains and is an emotion shared by most people and primates tested for it. Thousands of experimental trials with subjects from Western countries have consistently revealed a sense of injustice at low-ball offers. Further, we now have a sizable body of data from peoples in non-Western cultures around the world, including those living close to how our Paleolithic ancestors lived, and although their responses vary more than modern peoples living in market economies do, they still show a strong aversion to unfairness.

The deeper evolution of this can be seen in the behavior of our primate cousins. In studies with both chimpanzees and capuchin monkeys, the Emory University primatologists Frans deWaal and Sarah Brosnan found that when two individuals work together on a task for which only one is rewarded with a desired food, if the reward recipient does not share that food with his task partner, the partner will refuse to participate in future tasks and expresses emotions that are clearly meant to convey displeasure at the injustice. In another experiment in which two capuchin monkeys were trained to exchange a granite stone for a cucumber slice, they made the trade 95 percent of the time. But if one monkey received a grape instead — a delicacy capuchins greatly prefer over cucumbers — the other monkey cooperated only 60 percent of the time, sometimes even refusing the cucumber slice altogether. In a third condition in which one monkey received a grape without even having to swap a granite stone for it, the other monkey cooperated only 20 percent of the time, and in several instances became so outraged at the inequity of the outcome that they heaved the cucumber slice back at the human experimenters!

Such results suggest that all primates, including us, evolved a sense of justice, a moral emotion that signals to the individual that an exchange was fair or unfair. Fairness evolved as a stable strategy for maintaining social harmony in our ancestors’ small bands, where cooperation was reinforced and became the rule while freeloading was punished and became the exception. Apparently irrational economic choices today — such as turning down a free $10 with a sense of righteous injustice — were at one time rational when seen through the lens of evolution.

Just as it is a myth that evolution is driven solely by “selfish genes” and that organisms are exclusively greedy, selfish, and competitive, it is a myth that the economy is driven by people who are exclusively greedy, selfish, and competitive. The fact is, we are both selfish and selfless, cooperative and competitive. There exists in both life and economies mutual struggle and mutual aid. In the main, however, the balance in our nature is heavily on the side of good over evil. Markets are moral and modern economies are founded on our virtuous nature. The Gordon Gekko “Greed is Good” model of business is the exception and the Google Guys “Don’t Be Evil” model of business is the rule. If this were not the case market capitalism would have imploded long ago.

A review of Pope Brock’s Charlatan. America’s Most Dangerous Huckster, the Man Who Pursued Him, and the Age of Flimflam.

Human cognition has a problem — anecdotal thinking comes naturally whereas scientific thinking does not. The recent medical controversy over whether vaccinations cause autism illustrates this barrier. On the one side are scientists who have been unable to find any causal link between the symptoms of autism and the vaccine’s ingredients. On the other are parents who noticed that shortly after having their children vaccinated autistic symptoms appeared. Anecdotal associations are so powerful that they cause people to ignore contrary evidence. In the vaccination case the imagined culprit for autism’s cause is the preservative thimerosal, yet it breaks down into ethylmercury that is expelled from the body too quickly to have a damaging effect (plus autism continues to be diagnosed in children born after thimerosal was removed from vaccines). The story holds power despite the contrary facts.

The reason for our cognitive disconnect is that the brain evolved to be cautious. We favor anecdotes because false positives (believing there is a connection between A and B when there is not) are usually harmless, whereas false negatives (believing there is no connection between A and B when there is) may take you out of the gene pool. Our brains are `belief engines’ that seek connections.

Even in the age of modern science, our faith in anecdotes can make us easy to exploit. Any medical huckster promising that A will cure B has only to advertise a handful of successful testimonials. Enter John R. Brinkley, one of the most notorious medical quacks of the first half of the twentieth century, and his nemesis Morris Fishbein, the quackbusting editor of the Journal of the American Medical Association. Their long struggle throughout the 1920s and 1930s, wonderfully retold in a gripping narrative by Pope Brock, brings to life this tension between folk and scientific medicine.

As Brock ably demonstrates, Brinkley came of age on the tail end of the freewheeling patent remedy era in which con-men hawked their wares out of the side of wagons:

They usually performed at night. A platform was unfolded and torches placed at each corner as the audience gathered, drawn by handbills and word of mouth. First a fiddler or a dancer got the crowd warmed up. A short morality play followed, in which a noble head-of-house or ringleted female died pathetically for lack of a miracle tonic, identified by name. Finally the physician himself (Brinkley) shot onstage in a dinner-plate hat, cutaway coat, and pious pants that buttoned up the sides, theeing and thousing, singing and selling, waving a bottle of Ayer’s Cathartic Pills. Or maybe Burdock Blood Bitters or Aunt Fanny’s Worm Candy. One thing was for sure, whatever it was cured whatever you had.

What many men had, Brinkley discovered as he honed his scam, was a lack of sexual vitality, and he developed a surgical technique that offered the type of firm results that his male clientele so desperately sought: goat testis sewn right into the patient’s scrotum, which he likened to “embedding a marble in an apple.” Come one, come all. And they did, to the tune of $750 per surgery, advertised widely in newspapers (a study revealed that over half of all newspaper advertising at the time was for patent medicines) and the new fangled technology, radio, which Brinkley took to like an evangelist to television. It made him a rich man, but as his business grew he got careless, performing operations both before and after happy hour, and fobbing off work to assistants whose medical credentials were even shadier than his own (Brinkley graduated from the unaccredited and improbably named Eclectic Medical University of Kansas City). “As a result dozens of patients died over the years, either in the operating room or shortly after their return home,” Brock explains. “Many others were permanently maimed.”

This attracted the attention of the ambitious Morris Fishbein, whose career coincided with the rise of the American Medical Association’s attempt to reign in flimflamery through accrediting medical colleges and licensing practitioners. Fishbein made his public mark in 1923 when the Chicago Daily News sent him to investigate the “Hot Girl of Escanaba” (Michigan), a woman who suffered from a temperature of 115 degrees for two weeks. Fishbein exposed her as a “hysterical malingerer” when he discovered that a flesh colored hot water bottle was employed to elevate rectal thermometer readings. “Along with making him famous as a fraud buster extraordinaire,” Brock notes, “the case fixed him in a role he would revel in for years to come: the face, the popularizer, the lord high priest of the AMA.” For the next two decades Fishbein pursued the country’s “most daring and dangerous” swindler, as he called Brinkley, until he finally brought him down in a decisive courtroom confrontation that reads like a Hollywood film script.

Stripped of his license to practice medicine and embroiled in lawsuits, Brinkley eventually moved to Mexico where he dispensed pseudo-medical twaddle over the airways through a “border blasting” radio station that could be heard all the way to Canada. When the Mexican government shut him down in 1941 — in part because of his public sympathies for the Nazis — he was a broken man. “My health is gone. I am ready for the bed and out…” he wrote his wife three days before a heart attack terminated his tenure of 56 years.

Fishbein’s promotion of science-based medicine was heroic in his day, but medical flapdoodle flourishes today on the internet so every medical association and journal needs a quackbusting Fishbein on its staff, for without such eternal vigilance, folk medicine will trump scientific medicine in the minds of patients.

(New York, 2008, ISBN 978-0307339881)
This review was originally published in Nature.

How did we evolve from ancient hunter-gatherers to modern consumer-traders? Why are people so irrational when it comes to money and business? Dr. Michael Shermer argues that evolution provides an answer to both of these questions through the new science of evolutionary economics. Drawing on research from neuroeconomics, Shermer explores what brain scans reveal about bargaining, snap purchases, and how trust is established in business. Utilizing experiments in behavioral economics, Shermer shows why people hang on to losing stocks and failing companies, why business negotiations often disintegrate into emotional tit-for-tat disputes, and why money does not make us happy. Employing research from complexity theory, Shermer shows how evolution and economics are both examples of a larger phenomenon of complex adaptive systems. Along the way, Shermer answers such provocative questions as: Do our tribal roots mean that we will always be a sucker for brands? How is the biochemical joy of sex similar to the rewards of business cooperation? How can nations increase trust within and between their borders? Finally, Shermer considers the consequences of globalization and what will happen if nations allow free trade across their borders.

This event took place January 29, 2008 at Google Headquarters in Mountain View, CA.

The 19th-century French economist Frederic Bastiat expressed a principle applicable in the 21st century: “Where goods do not cross frontiers, armies will.”

In my new book, The Mind of the Market, I describe in detail how in the modern world of nation states, economic sanctions are among the first steps taken by one nation against another when political diplomacy fails, as when the United States enforced them on Japan after its invasion of China in the 1930s, and these became a prelude (among other factors) to Japan’s retaliatory bombing of Pearl Harbor in 1941 and our involvement in the greatest war in history. More recently, economic sanctions were imposed by the U.S. and Japan on India following its 1998 nuclear tests, and more recently by the U.S. on Cuba, Iran, and North Korea.

Economic sanctions send this message: if you do not change your behavior we will no longer trade with you. And by Bastiat’s Principle, where our goods do not cross your frontiers, our armies will. Not inevitably, of course, but often enough in history that the principle retains its veracity. Economic sanctions are not a necessary or sufficient cause of war, but they are almost always a prelude to war, whether you are a consumer-trader or a hunter-gatherer. Consider the Yanomamö people of the Amazon, sometimes called the “fierce” people. There is good reason for the moniker because warfare has long been a part of Yanomamö life. As the anthropologist Napoleon Chagnon discovered, however, the Yanomamö are also sophisticated traders, and the more they trade the less they fight. The reason is that trade creates alliances. One village cannot go to another village and announce that they are worried about being conquered by a third, more powerful village, since this would reveal weakness. Instead, they mask the real motives for alliance through trade and feasting, and as a result not only gain military protection but insure inter-village peace. Most interestingly, even though each Yanomamö group could produce its own goods for survival, in fact they don’t; they set up a division of labor and system of trade. They do this not because they are nascent capitalists, but because they want to form political alliances with other groups, and trade is an effective means of so doing. The end result is that when goods cross Yanomamö frontiers, Yanomamö armies do not.

The cooperation that goes into making trade successful accentuates amity and attenuates enmity between strangers and can even be seen at work in brain scans. Scientists at Emory University had 36 subjects play an exchange game while undergoing a functional magnetic resonance imaging (fMRI) brain scan. They found that the areas of the brains of cooperators that lit up were the same areas activated in response to such stimuli as desserts, money, cocaine, attractive faces, and other basic pleasures. Specifically, there were two broad areas dense in neurons that responded, both rich in dopamine (a neurochemical related to addictive behaviors): the anteroventral striatum in the middle of the brain (the so-called “pleasure center”), and the orbitofrontal cortex just above the eyes, related to impulse control and the processing of rewards. Tellingly, the cooperative subjects reported increased feelings of trust toward and camaraderie with their game partners.

How does trust translate to trade? At the Center for Neuroeconomics Studies at Claremont Graduate University, Paul Zak has demonstrated the relationship between trust, trade, and economic prosperity. He shows, for example, how trust is directly related to neurological chemicals such as oxytocin, a hormone synthesized in the hypothalamus and secreted into the blood by the pituitary. In women, oxytocin stimulates birth contractions, lactation, and maternal bonding with a nursing infant. In both women and men, it increases during sex and surges at orgasm, playing a role in pair bonding, an evolutionary adaptation for the long-term care of helpless infants. In exchange games, the more subjects are behaving in trusting ways, the more money they exchange and the higher the levels of oxytocin that are released by the brain. To find out if cooperating and trust lead to the release of oxytocin or if increased levels of oxytocin lead to more cooperation and trust, Zak infused oxytocin into subjects’ brains through a nose spray that is quickly absorbed by the body and discovered that it causes them to act more cooperatively.

Although there may be legitimate political reasons for imposing trade embargoes on nations behaving badly, there are economic consequences that lead directly to a breakdown of trust. By contrast, free trade makes people more trusting and trustworthy, which makes them more inclined to trade, which increases trust … creating a self-enforcing cycle of trust, trade, freedom, and prosperity.

With the stock market off to its worst first week of the year in history, investors are scrambling to decide whether or not to get out of the market. In my new book, The Mind of the Market, I describe the problem this way: our decisions about buying or selling things we value are heavily weighted by three psychological phenomena: the endowment effect, the sunk cost fallacy, and loss aversion. Understanding these will help you decide what to do with your investments.

Consider the following thought experiment. If you owned a coffee mug valued at $6 what is the lowest price you would accept to sell it? By contrast, if you were a potential buyer of a coffee mug of the same value, how much would you be willing to pay for it? In an experiment in which subjects were given this choice, the average price owners of the mug were willing to sell it for was $5.25, whereas the average price potential buyers were will to pay was only $2.75. Why the striking difference of nearly double the perceived value? Because of a psychological phenomenon called the endowment effect, in which ownership endows value by its own virtue, and nature designed us to hold dear what is ours.

This is one of countless studies in the new sciences of behavioral economics and evolutionary economics that has revealed how irrational and emotional we can be when it comes to money, investments, and especially stocks. Once we invest in stocks, especially in companies whose products we may value in personal use, we exaggerate the value of the stock simply by virtue of owning it. In our evolutionary past this makes perfect sense. Before humans domesticated other species, they had to forage and hunt, sometimes in conditions of severe scarcity, or the threat of it, in order to survive. Those who survived most likely exhibited a strong predilection for hoarding as well. Nature endowed us with the desire to value, and dearly hold on to, what is ours. Of course, by putting so much value on what we already have, we can also overvalue it — to the point that the cost sunk into it blinds us to the value of future losses that we will sustain if we do not switch to something that we do not already have.

This is another peculiar psychological effect known as the sunk cost fallacy and it can be a serious impediment toward our thinking clearly about whether to hold or sell stocks. For example, imagine that your child’s private school tuition bill of $20,000 is due and the only source you have for paying it is selling some of your stock holdings. Fortunately, you invested in Apple before the iPod boom, purchasing 200 shares at $50 each, for a total investment of $20,000. The stock is now at $200 a share. Should you realize your net gain by selling half of your Apple stock and paying off your bill? Or, should you sell off that loser Ford stock you purchased ages ago for $40,000, at its current value of $20,000?

Most of us would sell the Apple stock and hang on to the Ford stock in hopes of recovering our losses. Financially, this would be the wrong strategy. Why would we sell shares in a company whose stock is on the rise and hang on to shares in a company whose stock is in the dumpster? Because of another psychological effect called loss aversion, in which our brains are wired to pay more attention to losses than to gains. In fact, it turns out that losses hurt twice as much as gains feel good.

For example, imagine that I gave you $100 and a choice between (A) a guaranteed gain of $50 and (B) a coin flip in which heads gets you another $100 and tails gets you nothing. Do you want A or B? Now imagine that I gave you $200 and a choice between (A) a guaranteed loss of $50 and (B) a coin flip in which heads guarantees you lose $100 and tails you lose nothing. Do you want A or B? The final outcome for both options A and B in both scenarios is the same, so rationally it does not matter which option you choose, so people should choose both equally. According to “Rational Choice Theory,” which forms the foundation of a species of human known as Homo economicus, we maximize our utility when we make decisions. That is, when faced with a choice, we consider the value of the outcome and make a rational decision about the most efficient course to take to get to that end.

But loss aversion leads most people to choose A in the first scenario (a sure gain of $50) and B in the second scenario (an even chance to lose $100 or nothing). Even though there is no difference between having $100 and a sure or potential gain of $50 and having $200 and a sure or potential loss of $50, emotionally there is a difference, a big difference, between the two choices.

Research in these new sciences demonstrates precisely how risk averse we are — on average most people will reject the prospect of a 50/50 probability of gaining or losing money, unless the amount to be gained is at least double the amount to be lost. That is, most of us will accept a 50/50 chance to gain $100 if the risk of losing money does not exceed $50. When the potential payoff is more than double the potential loss, most of us will take the gamble.

So the next time you are thinking about holding or selling some of your stocks, remind yourself of the endowment effect, the sunk cost fallacy, and loss aversion before making your decision, because none of us are nearly as rational in our choices as we like to think we are.

National Capital Area Skeptics, Arlington, VA (January 12th, 2008)

LISTEN to part 1 (audio podcast)
LISTEN to part 2 (audio podcast)

Tattered Cover, Denver, CO (January 17th, 2008)