If Electrons Had Feelings...
Why Economies, Markets and Life Defy Our Predictions
A few days back, I searched “Jokes on Economists” on the internet. Here are some good ones I got.
An economist is someone who can tell you tomorrow, why, what they predicted yesterday, didn’t happen today.
Why did God create economists? To make weather forecasters look good.
Economics is the only field where two people can share a Nobel Prize for saying exactly opposite things.
Economists don’t answer questions. They explain why the answer will be different next time.
Economists are a soft target for jokes about failed predictions, but the reality is a bit more complicated.
Economic ideas may look perfect on paper, until they hit the most unpredictable force in the system:
We, the People!
The same human factor that makes financial markets so jittery and our own lives so full of surprises.
To try and make sense of it all, traditional economics often portrays humans as perfectly logical and rational decision-makers. It is the base assumption of almost every classical model.
What is interesting is to see the outcome when these well-structured ideas meet our messy human ways of thinking and choosing.
To get a better feel for why forecasts miss the mark and why markets can seem to have a mind of its own, we need to peek into a different toolbox.
Psychology.
The Ultimatum Game
Imagine you are offered ₹ 500. Free money. No strings attached. You would take it, right? It just makes sense.
Now, let’s increase the complexity a bit. You are paired with a stranger. Your partner is given ₹ 10,000 to split between you both. But there is a catch. Your partner has the sole right to decide how to split it. They can offer you a small amount or if they are generous, they can share half the amount with you.
Your power is to accept their offer or reject it. If you reject, neither of you gets anything, the entire ₹ 10,000 is gone.
So, assume this scenario. Your partner offers you a small sum of ₹ 500, planning to pocket the other ₹ 9,500. What will be your move? Think about it. What does your gut feeling say?
Pure, cold, economic rationality will tell you to grab that 500 rupee note. It is free cash, better than zero. Simple.
But if you are like many people, another feeling might surface, perhaps more strongly. A sense of unfairness.
“Is that a reasonable split?” you might ask yourself. “Keeping 95% for themselves?”
Suddenly, the decision becomes about fairness and feeling taken advantage of rather than pocketing an easy gain of ₹500. Driven by these feelings, you may want to teach a lesson to your partner for their unfairness. You might very well reject the offer, even if it means both of you walk away empty-handed.
That ₹500 offer, in pure cash terms, is the same freebie as before. Yet your reaction can flip 180 degrees.
Because we are not just logical algorithms. We are wired for emotion, fairness, and a whole lot more.
Feeling Electrons
Plain old economics often expects us to act in a cold rational way.
Real life is full of people with a mix of emotions - greed, fear, optimism, envy, trust, grit, revenge, self-esteem, irrational competitiveness and many more.
This simple ultimatum game is a perfect snapshot of why well defined theories can get so wrong in the real world. Life, business and markets are all packed with these complex human moments, driven by ‘emotional variables’ that models cannot factor.
The great physicist Richard Feynman captured this beautifully. He once said,
“Imagine how much harder physics would be if electrons had feelings.”
In economics, the ‘electrons’, that is, all of us, are absolutely bursting with feelings and emotions all the time.
This ‘feeling electrons’ dynamic is at play every day and almost everywhere - in business dealings, politics, fluctuations of financial markets and throughout the unpredictable journey of our lives.
The ‘And’ Problem
People being emotional is only one part of the problem. The real issue arises when we collectively interact.
There is an old Sufi teaching story narrated by Donella Meadows in her book “Thinking in Systems”, that perfectly captures this:
“You think that because you understand ‘one’ that you must therefore understand ‘two’ because one and one make two. But you forget that you must also understand ‘and’.”
We can study a single individual, a single investor, a single consumer, or a single company. But the moment we add “and”, the moment they connect, interact, influence, and copy each other, all of our simple, “one-plus-one-equals-two” math breaks down.
The whole is not the sum of its parts. The essence of the system lies not in its individual components but in the relationships between them.
Complex Adaptive Systems
The whole behaves in ways that cannot be predicted from the behaviour of the individual parts.
This is the world of Complex Adaptive Systems (CAS).
This is the way of thinking about any dynamic environment where individual participants interact, learn and adapt, resulting in unpredictable, self-organising behaviour. Global financial markets, national economies, online communities, political coalitions, business ecosystems - all behave this way.
No one is in charge; the complexity emerges from all their individual, interconnected actions.
Because the participants are ‘adaptive’, they constantly learn and change their behaviour based on what is happening around them. They react to each other, to new information, and to new rules, which makes the system’s future path impossible to map.
We have seen this multiple times. We can’t understand a traffic jam by interviewing one driver. The jam is something that emerges only from the interactions of all the drivers.
Adam Smith’s concept of the invisible hand is a great starting point for understanding how human driven Complex Adaptive Systems create order. The second step is seeing how chaos emerges.
The Invisible Hand
The result of our interactions is actually the central theme of how a market-driven society works. Adam Smith, in his classic “The Wealth of Nations” explored this through his fundamental concept of the “Invisible Hand“.
Smith famously argued: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
When millions of us act in our own self-interest (buying what we want, selling what we are good at), an emergent property appears: a functioning, innovative market that (mostly) gets goods to where they are needed. No central planner has to tell the baker how many loaves of bread to bake; the system of price signals and individual incentives does it automatically.
This factor of self-interest and responding to incentives is the invisible hand that drives most of the interactions in the human-driven Complex Adaptive Systems.
When these forces create a stable system, we see “balancing loops”, mechanisms that keep things in check, like a thermostat cooling a room when it gets too hot. In an economy, the classic balancing loop is the law of supply and demand. If the price of a good shoots up, consumers buy less and producers make more, naturally pushing the price down to a stable equilibrium.
While balancing loops keep healthy systems stable, they are also the reason bad habits, toxic corporate cultures and stagnant bureaucracies are so very hard to change. The system actively fights to pull itself back to the status quo.
The Unintended Consequences
The invisible hand has unintended negative consequences as well.
The same interconnectedness that allows the market to efficiently deliver goods also allows panic to spread instantly. Markets don’t always behave rationally. They often fall prey to “reinforcing loops”, where an action creates a result that encourages more of the same action.
A stock or a sector attracts buyers simply because the price is rising, pushing the price even higher until a bubble forms that is completely detached from reality.
Sometimes, what is rational at the individual level is disastrous collectively or for the system as a whole, if everyone follows the same rational behaviour.
Consider these paradoxes:
Saving is a prudent habit for an individual. But if everyone saves and spends only the bare minimum, demand collapses and the economy comes to a grinding halt.
If there is a rumour about a bank’s health, it is prudent for an individual to withdraw their money. But if everyone does that simultaneously, the bank collapses, creating a self-fulfilling prophecy.
If demand for a commodity increases substantially, prices go up. It is rational for a producer to increase capacity to capture that profit. But if every producer increases capacity, they soon create an oversupply, driving prices down and causing heavy losses for everyone.
Economies, financial markets, and even our own lives are driven by these complex, adaptive feedback loops.
Classical economic models over-rely on balancing loops to maintain a stable equilibrium. In reality, the invisible hand is constantly pushed and pulled by unpredictable reinforcing loops.
Moreover, people respond to incentives in wildly unpredictable ways. While policymakers or business leaders might design an incentive to drive a specific behaviour, people are incredibly adept at finding hidden incentives where none were intended, or shifting their behaviour to exploit a loophole.
In a complex system, one and one may not equal two. The “and” is very important.
Conclusion
We are not the rational, detached observers of models. We are the “feeling electrons” themselves - emotional, unpredictable and deeply interconnected.
Our collective actions create traffic jams, shortages, excesses, bubbles, panics and much more. Individually, we do not cause them but as a collective, we do. In any case, we are forced to face the consequences.
We cannot predict these events. But by knowing the nature of the complex world in which we operate, we can prepare for them by building a margin of safety.
A margin of safety is an acknowledgment that the future will not unfold in a neat, predictable way. It builds room for error, for shocks and for outcomes that do not resemble the past.
Building this room requires understanding an important rule of complex systems: efficiency and fragility are two sides of the same coin. If you optimise for 100% efficiency, you strip away the shock absorbers. To survive turbulence, we need redundancy.
Therefore, a margin of safety comes at a cost: planned inefficiency. It costs in the form of spare un-utilised capacity. It means holding a buffer when others are operating at full capacity. It means looking inefficient when others look optimal. It means holding back when others are accelerating.
It is the cost of staying in the game. At times, it also serves as firepower to strike when it matters most.
The higher the margin of safety, the larger the shock absorber. But it also means foregoing the possibility of maximum gains and the inner urge to show people that “we have arrived.”
Most of all, it requires living well below the means, exercising prudence, and maintaining emotional discipline to survive shockwaves we could never foresee.
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The adaptive ‘human factor’ is just one part of the story. There is another powerful element that makes these systems so unpredictable: “pure randomness”. That, however, is a topic for another day.
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