Saturday, December 29, 2007

Book Review: The Origin of Wealth by Eric D. Beinhocker

Quote on front cover “A brilliant piece of intellectual history” from the Washington Post. Sure, if you consider a survey paper ‘a brilliant piece of intellectual history’. Beinhocker annoys reader with supposed insights that are really just obvious statements about business dynamics. Book is divided into 4 sections. The first and second related to defining traditional economics as the neoclassical approach, what we were taught in school about economics was wrong, and that the economy really acts as a complex adaptive system. Gee, that’s freakin’ brilliant! At least he doesn’t take credit for that observation and points to the folks at SFI for arming him with the data to repeat this now well understood notion. I don’t mean to be bitter here, but he doesn’t say anything really new. He does summarize how complexity theory and economics have had an affair for the past couple decades and references work by Mandelbrot, Holland, etc. to give credibility to his point(s).

He also summarizes his points about economics and its ‘truth’ as a complex adaptive system by summarizing results of the Sugarscape experiments which also demonstrated the notion of punctuated equilibrium in economics. He summarizes the work Mandelbrot did disproving the random walk hyptothesis, and summarizes a bunch of obvious business implications of complexity theory in section 3. Section 4 gets a bit more philosophical and discusses the implications of sections 1 and 2 for civilization overall with epiphanies like “companies don’t innovate, markets do”. Blech. “if a company’s total resources are fully committed to executing legacy business plans, it will be incapable of evolving any new ones (page 346)”.
If you haven’t read anything on complexity theory and its application to the stock market chapter 2 would be okay but reading mandelbrot’s recent text (reviewed previously in my blog) is much better.

Here’s what annoys me: It doesn’t tell me anything new, the book is called the origin of wealth and I guess I got my answer: its born from complex interactions of agents whose optimal path is dependent on where they are located in the current fitness landscape….thanks man. You should pay attention to these issues when thinking strategically about where to take your business.

Another reviewer mentions that he is ‘a storyteller of first rank’. I’d have to agree with that. Author does actually tell a good story, its just a story I’ve already heard. Author is also extremely well read and has an extensive list of citations and references at the end of the book. He does a great job summarizing things like the Sugarscape experiments and makes complex economic arguments easy to understand. I could see some parts of this book being a reasonable text for a tour for undergraduates or high school students.

I will give it a 3 out of 5. Its an average read, but I’ve reviewed other books that are better elsewhere in my previous blog posts. By better, I mean they have more meat on their bones, are more efficient, and don’t seem to wander all over the place. I feel like I’m reading his first draft. Part III could be dropped out altogether and would have strengthened the book.


aron said...

You though it was that obvious, huh? I'm surprised. It's been a while since I read this, but I thought he did a good job showing big flaws in the 'rational actor' model of people. I guess the use of simulations is not that surprising to us, though. What stuck with me: the fact that a 3% drop in a stock could be an expected side effect of the limit orders in place.

adam lake said...

perhaps i miscommunicated in my post: he summarized the work showing that the rational actor model was flawed, but i think my point was that mandelbrot's book did a BETTER job, not that this book did a bad job. perhaps i failed to get that across as well as i meant to. i just don't recommend this book over other books i've read on the subject at hand, and i don't think have any deeper understanding on the origin of wealth than i did before.

aron said...

Now I get it. I sort of thought you were referring to Mandelbrot's giant mathematical tome, not the shorter one on finance. Since I read this book first, I found more of the material interesting. I came back to look again because I'm going to do the book forum at Marginal Revolution about "The Logic of Life" by Tim Harford. Interested?