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The Banker’s Paradox

by Michael Shermer, Mar 31 2009

An evolutionary tale for today

Imagine that you are a banker with a limited amount of money to lend. If you advance loans to people who are the poorest credit risks, you are taking a great gamble that they will default on their loans and you will go out of business. This sets up a paradox: the people who most need the money are also the worst credit risks and thus cannot get a loan, whereas the people who least need the money are also the best credit risks and thus it is that the rich get richer.

The evolutionary psychologists John Tooby and Leda Cosmides call this the Banker’s Paradox, and they apply it to a deeper evolutionary problem: to whom should we extend our friendship? The Banker’s Paradox, they suggest, “is analogous to a serious adaptive problem faced by our hominid ancestors: exactly when an ancestral hunter-gatherer is in most dire need of assistance, she becomes a bad ‘credit risk’ and, for this reason, is less attractive as a potential recipient of assistance.”

If we think of life as an economy, and if we count resources as anything we have that could help others — including and especially friendship — by the logic of the Banker’s Paradox we have to make difficult choices in assessing the credit risk of people we encounter. In evolutionary theory the larger problem to be solved here is altruism: why should I sacrifice my genes for someone else’s genes? Or, more technically, an altruistic act is one that lowers my reproductive success while simultaneously raising the reproductive success of someone else.

Standard theory suggests two evolutionary pathways to altruism: kin selection (“blood is thicker than water”) and reciprocal altruism (“I’ll scratch your back if you’ll scratch mine”). By helping my kin relations, and by extending a helping hand to those who will reciprocate my altruism, I am helping myself. Thus, there will be a selection for those who are inclined to be altruistic … to a point. With limited resources we can’t help everyone and so we must assess credit risks, and some people are better risks than others. Here again is the Banker’s Paradox: those most in need of assistance are the least likely to be given help, and so yet again the rich get richer.

But not always, because fair weather friends may be faking their signs of altruistic tendencies and later fail to come to our aid when the weather turns decidedly stormy. By contrast, true friends are those who are deeply committed to our welfare regardless of the potential for reciprocity. “It is this kind of friend that the fair weather friend is the counterfeit of,” Tooby and Cosmides continue. “If you are a hunter-gatherer with few or no individuals who are deeply engaged in your welfare, then you are extremely vulnerable to the volatility of events — a hostage to fortune.” The worse the environment the more important it is that we have true friends, and the environment of our evolutionary past was no picnic.

Evolution, it is suggested, would have selected for adaptations to work around the Banker’s Paradox dilemmas, including selecting us to:

  1. seek recognition from our fellow group members for our trustworthiness and reliability,
  2. cultivate those attributes most desired by others in our group,
  3. participate in social activities that recognize and reinforce such pro-social attributes,
  4. avoid social activities that lead to untrustworthy actions and therefore a negative reputation,
  5. notice similar attributes of trustworthiness in others, and
  6. develop the ability to discriminate between true and fair weather friends.

Thus, Tooby and Cosmides conclude, the Banker’s Paradox leads us to an evolved psychology where “if you are unusually or uniquely valuable to someone else — for whatever reason — then that person has an uncommonly strong interest in your survival during times of difficulty. The interest they have in your survival makes them, therefore, highly valuable to you. The fact that they have a stake in you means … that you have a stake in them. Moreover, to the extent they recognize this, the initial stake they have in you may be augmented.” Through such augmentation can the poor become rich through the evolved foundation of friendship.

If this sounds like I have reduced human relationships to nothing more than credit calculations and reciprocal relations, in my book The Science of Good and Evil, I demonstrate how kin selection and reciprocal altruism led to the evolution of deep and real moral emotions that include love, friendship, and trust, because it is not enough to fake being a good and faithful spouse, friend, or partner; you actually have to believe it yourself, and actions follow beliefs. Thus it is that morality is real and transcendent, and human relations genuine and deeply ingrained in our nature.

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29 Responses to “The Banker’s Paradox”

  1. Max says:

    You can adjust the loan amount to keep the risk constant. The risk is high only if you lend much more than the borrower can pay back.

  2. Mike Prigge says:

    Nice explanation. See you at UCSD.

  3. Sceric says:

    hmmpff, no I’m in trouble again with my wife and friend, as I need to buy another book (yours in that case)…I hope our friendship will withstand the issue of space for books as compared to space for living (especially the little-Sceric tends to insist on roaming space)

  4. Michael Smith says:

    I was wondering about the evolution of the Mortgage Backed Security into the Credit Default Swap. I wonder if you just helped explain how the governing bodies could decided that you could take the riskiest loans out of an MBS and move them over to a CDO and call them AAA rated securities. On paper and through statistics, it eliminates the Banker’s Paradox. Of course now we know that logic still holds sway and bad loans are still bad loans.

  5. tmac57 says:

    Now that our social contract with the banking/financial system has been broken, what would an evolutionary psychologist predict will be the long term consequences for society?

  6. Phil says:

    This ad was missing the link to where one buys the book/product.

  7. Phil says:

    Ooh, hypertext!

  8. TaoMacGuy says:

    I think Muhammad Yunus might have a few words to add to the discussion on this so-called “Banker’s Paradox.” Via the Grameen Bank he has lent to millions of mostly very poor women in India. No credit checks required. They have (according to him) a 2% default rate.

    Maybe what needs rethinking is our banking model?

    I would love to think (and surely I hope) we can “evolve” (intellectually) to the next level where the purpose of business is primarily for the betterment of humankind and not the seeking of monetary profit.

  9. Hasn’t the success of microcredit proved that this is a false paradox based on flawed logic and fear? The 2006 Nobel of economy recognized this.

  10. tmac57 says:

    Ditto comments #1 #4 #8 #9,
    There used to be more rational and appropriate lending requirements 20 years ago, but the lending powers that be apparently forgot the rules.

  11. nergvol says:

    The way bankers and Wallstreet handling our money, think some irate and justified people eliminate them from gene pool. Do we want their values or lack of them passed on? Wondering on the Wynoochee

  12. Stoic Tom says:

    Seems far too simplistic to me. The need, real or imagined, for say sex puts an entirely new factor into play. I help her for no better reason than I want sexual favors. Modern humans are rapidly distancing themselves, I believe, from the influence of genes and “hardwired” neural circuits. The Bankers Paradox is quite artificial, in my view, and of limited value. Seems to me humans very rarely use this kind of balance sheet calculations, people usually cannot trace their decision making with any accuracy at all. They invent reasons for what they do, completely out of touch with the subconscious processing that actually makes the choice.

    Fractional banking and interest is an invention of clever people who want something for nothing – greed based, not altruistic in any way. A parasitic device that sometimes has symbiotic results.

  13. Miguel Piedras says:

    #8 and #9 point to evidence that this “paradox” probably is self fulfilled wishful “thinking” that is being used to “explain” an evolutive result… but what is the objective result?

    our race HAS both conducts in the face of disaster, that is,
    the one we subjectively call “good” ie: helping the hunter that fell into the gully…
    and the subjectively named “bad” ie: taking the fallen hunter’s weapons, tools, food, etc and leaving him to die or even killing him.

    Since BOTH conducts are there in us, it is very likely that both have survival value (this is a fact, not wishful thinking) whether or not we like one or not.

    with this in mind,going back to the article ‘the deeper evolutionary problem: to whom should we extend our friendship?’ seems a bit silly:
    is it a problem really? evolution already solved it long ago.

    You extend your friendhip either because you see an advantage in it (“bad” behaviour) or because you like or feel empathy (“good” behaviour) – I am oversimplifying but hoping you see the point – but either one works in an evolutive point of view.

    Now what do I prefer? real honest friends and “good” behaviour of course…

    But I cannot deny that politicians, drug dealers and felons do have descendants, even if I disagree with their morals

  14. Don says:

    One could certainly see recipricol altruism in the Red River valley of North Dakota/Minnesota this week during the flood crisis. Many people helped perfect strangers because they truly believed the debt would be repaid if roles were reversed. There is a strong sense of “community” (kin relations) in this region in the broad sense, and that undoubtedly helped save Fargo and other communities from devastation.

  15. Peter Hogan says:

    I find it paradoxical that our economic system depends on people who have more money than they need make even more money by lending to people who don’t have enough money.

  16. DogBreath says:

    “I find it paradoxical that our economic system depends on people who have more money than they need make even more money by lending to people who don’t have enough money.”

    Spoken like a true elitist liberal/socialist itching to divine other peoples needs. Hopefully, you are not an American.

  17. Scott says:

    There are 6 known causes for human behavior:
    1. Genetic Endowment
    2. Pre-natal chemical environment
    3. Post-natal chemical environment
    4. Pavlovian Conditioning-stimulus-stimulus-response
    5. Skinnerian Conditiong-stimulus-response-consequence
    6. Traumatic factors
    B.F. Skinner explained human behavior in the book The Behavior Of Organisms. Behaviorism has been rejected because it drew conclusions that went against cultural presuppositions, but the science and its effectiveness speak for themselves. If anybody wants a complete scientific explanation of altruism with an evolutionary perspective AND an environmental perspective I recommend B.F. Skinner’s books.

  18. Beelzebud says:

    Still praying at the altar of the free market, I see.

  19. ian Lynch says:

    Why a paradox?I thought it common sense to lend money to somebody most likely to pay back the debt which is,in most cases,a borrower with sufficient future income to repay the debt.We can see what has happened when bankers have advanced “sub=prime” loans to borrowers supposedly in most need of money……

  20. Beelzebud says:

    “Spoken like a true elitist liberal/socialist itching to divine other peoples needs. Hopefully, you are not an American.”

    Spoken like a right-wing libertarian with no sense of history.

    America was founded by liberals, and America is about being diverse…

  21. J.F.Soti says:

    I see Beelzebud is still suckling at the teat of big government. Calling the founders liberals is truly disingenuous. America was founded on the principles of the enlightenment, of freedom. Much of today’s liberalism is founded on the principle of envy and the perpetuation of ignorance.

  22. tim giles says:

    Big government, republicans hate the the hell out of big goverment, ronald reagon spent 37 percent more money than the democrat before him,the two bushes spent 40 something percent over the democrats before them, its a a good thing republicans hate big government, they mostly hate working men and seniors having something to spend, which is a paradox because corporations make their money from the same people they try to keep poor. Feed the international corporatons who spend our money across the oceans, because they seem to hate the thought of americans getting collage educations the educated are more likely not to vote for them, they also hate us americans eating well,look at the size of us,unnutrital fattening food is lot cheaper than eating healthy protein foods, except for eggs some of wouldnt have nutritional proteins,your stomach is not big enough to stay helthy eating beans,and speaking of eggs, republicans must be trying to kill off the unrich with heart attacks. when they get rid of us who else they gonna hate or make money off of .

  23. tim giles says:

    PS I am smart enough to spell unnutritional and healthy, that should take away the heart of your rebuttals.

  24. tim giles says:

    Actully I came to this web site to tell yall about louisiana fast balloons,they can fly across half way the sky and be gone in seconds.Do you skeptics have fast balloons in your neck of the woods?

  25. Absolutely, Tim. I’m an amateur balloon drag racer. My balloon runs the quarter mile in under eleven seconds. I took state in my class last year (North Carolina).

  26. mossyfiber says:

    Tim, your spelling capability is no doubt the result of your excellent “collage educations”

  27. J.F.Soti says:

    I hope some day tim giles will realize he just proved my point, envy and ignorance. Nobody keeps you poor in this country, at least not yet anyway.

  28. Peter Rossi says:

    It’s an intellectual, liberal explination of human behavior and mutual aid (which I too believe is the essence of what makes us human). But really abit too soft for my taste. Wish there were something harder to bite into. I think this formulation leaves out passion, and our capacity to love another human being and the overlooked fascination in truly knowing another person – their uniqueness, their passions, their view of the world, feelings, emotions, priorities, creative energy, unique abilities, their hurts and joys. The things that make us who we are are endlessly fascinating and I think that’s why we reach out to each other whether we are aware of it or not.

  29. intricatenick says:

    Thus the problem when banks make the notion of credit and debt anonymous and with little trace of its source. We didn’t evolve like that.