Why our definition of “normalcy” can be costly for everyone else.

You are not normal. If you are reading these pages, you probably belong to the minority of the world’s population that has a steady job, adequate access to social security, and enjoys substantial political freedoms. Moreover, you live on more than $2 a day, and, unlike 860 million others, you can read. The percentage of humanity that combines all of these attributes is minuscule.

According to the World Bank, about half of humanity lives on less than $2 a day, while the International Labour Organization reckons that a third of the available labor force is unemployed or underemployed, and half of the world’s population has no access to any kind of social security. Freedom House, an organization that studies countries’ political systems, categorizes 103 of the world’s 192 nations as either “not free” or “partially free,” meaning that the civil liberties and basic political rights of their citizens are limited or severely curtailed. More than 3.6 billion people, or 56 percent of the world, live in such countries.

Statistically, a “normal” human being in today’s world is poor, lives in oppressive physical, social, and political conditions, and is ruled by unresponsive and corrupt government. But normalcy is not only defined by statistics. Normal implies something that is “usual, typical, or expected.” Therefore, normal is not only what is statistically most frequent but also what others assume it to be. In this sense, the expectations of a tiny minority trump the realities of the vast majority. There is an enormous gap between what average citizens in advanced Western democracies—and the richer elites everywhere—assume is or should be normal, and the daily realities faced by the overwhelming majority of people. Information about the dire conditions common in poor countries is plentiful and widely discussed. Curiously, however, expectations about what it means to be normal in today’s world continue to reflect the abnormal reality of a few rich countries rather than the global norm.

At Google, we're constantly trying to find new ways to organize the world's information, including information relevant to our business. Building on the ideas of Friedrich Hayek and the Iowa Electronic Markets, a few Googlers (Doug Banks, Patri Friedman, Ilya Kirnos, Piaw Na and me, with some help from Hal Varian), set up a predictive market system inside the company.

The markets were designed to forecast product launch dates, new office openings, and many other things of strategic importance to Google. So far, more than a thousand Googlers have bid on 146 events in 43 different subject areas (no payment is required to play).

We designed the market so that the price of an event should, in theory, reflect a consensus probability that the event will occur. To determine accuracy of the market, we looked at the connection between prices of events and the frequency with which they actually occurred. If prices are correct, events priced at 10 cents should occur about 10 percent of the time.

In the graph below, the X-axis indicates the price ranges for the group. The orange line represents the average price, which is how often outcomes in that group should actually happen according to market prices. The purple line is how often they did happen. Ideally these would be equal, and as you can see they're pretty close. So our prices really do represent probabilities - very exciting!

I don't share Matthew Simmons's angst, but I admire his style. He is that rare doomsayer who puts his money where his doom is.

After reading his prediction, quoted Sunday in the cover story of The New York Times Magazine, that oil prices will soar into the triple digits, I called to ask if he'd back his prophecy with cash. Without a second's hesitation, he agreed to bet me $5,000.

His only concern seemed to be that he was fleecing me. Mr. Simmons, the head of a Houston investment bank specializing in the energy industry, patiently explained to me why Saudi Arabia's oil production would falter much sooner than expected. That's the thesis of his new book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy."

I didn't try to argue with him about Saudi Arabia, because I know next to nothing about oil production there or anywhere else. I'm just following the advice of a mentor and friend, the economist Julian Simon: if you find anyone willing to bet that natural resource prices are going up, take him for all you can.

I don't share Matthew Simmons's angst, but I admire his style. He is that rare doomsayer who puts his money where his doom is.

After reading his prediction, quoted Sunday in the cover story of The New York Times Magazine, that oil prices will soar into the triple digits, I called to ask if he'd back his prophecy with cash. Without a second's hesitation, he agreed to bet me $5,000.

His only concern seemed to be that he was fleecing me. Mr. Simmons, the head of a Houston investment bank specializing in the energy industry, patiently explained to me why Saudi Arabia's oil production would falter much sooner than expected. That's the thesis of his new book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy."

I didn't try to argue with him about Saudi Arabia, because I know next to nothing about oil production there or anywhere else. I'm just following the advice of a mentor and friend, the economist Julian Simon: if you find anyone willing to bet that natural resource prices are going up, take him for all you can.

The parable of the broken window was created by Frederic Bastiat in his 1850 essay That Which is Seen and That Which is Not Seen to illuminate the notion of hidden costs (a.k.a. opportunity costs).

Parable story

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefitting the baker, who will then buy shoes, benefitting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

There's real money to be made selling unreal stuff, such as digital weapons and land, to online gamers. It's a controversial market.

Robert Kiblinger's online shop does brisk business in items fantastic.

For $179.88, there's the Blade of the Righteous, a sword forged specifically to slay demons. The $69.88 Shadow Dancer Leggings allow their wearer to sneak about undetected. And then there's Titan's Hammer, which wreaks $129.88 worth of unmitigated havoc.

All command real money, but none are real.

Like a rapidly growing number of online merchants, Kiblinger traffics in virtual goods that exist only in the realm of Internet-based games such as "Ultima Online," "EverQuest" and "Second Life."

I.B.M. is renowned for its rich storehouse of patented inventions. It once again led the research sweepstakes in America last year, collecting 3,248 patents, more than any other company. And it earned more than $1 billion last year from licensing and selling its ideas.

So why has I.B.M. shifted course recently, giving away some of the fruits of its research instead of charging others to use it? The answer is self-interest.

Diverging from conventional wisdom, the company has calculated that sharing technology can sometimes be more profitable than jealously guarding its property rights on patents, copyrights and trade secrets. The moves by I.B.M., the world's largest supplier of information technology services and computers, are being closely watched throughout the business world.

These ideas fed into our work on indirect reciprocity, a concept that was first introduced by Robert Trivers in a famous paper in the 1970s. I recall that he mentioned this idea obliquely when he wrote about something he called "general altruism". Here you give something back not to the person to whom you owe something, but to somebody else in society. He pointed out that this also works with regard to cooperation at a high level. Trivers didn't go into details, because at the time it was not really at the center of his thinking. He was mostly interested in animal behavior, and so far indirect reciprocity has not been proven to exist in animal behavior. It might exist in some cases, but ethologists are still debating the pros and cons.

In human societies, however, indirect reciprocity has a very striking effect. There is a famous anecdote about the American baseball player Yogi Berra, who said something to the effect of, "I make a point of going to other people's funerals because otherwise they won't come to mine." This is not as nonsensical as it seems. If a colleague of the university, for instance, goes faithfully to every faculty member's funeral, then the faculty will turn out strongly at his. Others reciprocate. It works. We think instinctively in terms of direct reciprocation — when I do something for you, you do something for me — but the same principle can apply in situations of indirect reciprocity. I do something for you and somebody else helps me in return.

Co-operation has brought the human race a long way in a staggeringly short time

“Our everyday life is much stranger than we imagine, and rests on fragile foundations.” This is the intriguing first sentence of a very unusual new book about economics, and much else besides: “The Company of Strangers”, by Paul Seabright, a professor of economics at the University of Toulouse. (The book is published by Princeton University Press.) Why is everyday life so strange? Because, explains Mr Seabright, it is so much at odds with what would have seemed, as recently as 10,000 years ago, our evolutionary destiny. It was only then that “one of the most aggressive and elusive bandit species in the entire animal kingdom” decided to settle down. In no more than the blink of an eye, in evolutionary time, these suspicious and untrusting creatures, these “shy, murderous apes”, developed co-operative networks of staggering scope and complexity—networks that rely on trust among strangers. When you come to think about it, it was an extraordinarily improbable outcome.

The tech guru sees a "new economic system" in the unconscious cooperation embodied by Google links and Amazon lists.

Howard Rheingold is on the hunt again. With his last book, Smart Mobs: The Next Social Revolution, in 2001, the longtime observer of technology trends made a persuasive case that pervasive mobile communications, combined with always-on Internet connections, will produce new kinds of ad-hoc social groups. Now, he's starting to take the leap beyond smart mobs, trying to weave some threads out of such seemingly disparate developments as Web logs, open-source software development, and Google.

At the same time, Rheingold is worried that established companies could quash such nascent innovations as file-sharing -- and potentially put the U.S. at risk of falling behind the rest of the world. He recently spoke with Robert D. Hof, BusinessWeek's Silicon Valley bureau chief. Here are excerpts from their conversation:

Q: Where do you see the social revolution you've been talking about going next?

A: It's too early to say. The question is: What does it point toward? Some kind of collective action...in which the individuals aren't consciously cooperating. A market is a great example as a mechanism for determining price based on demand. People aren't saying, "I'm contributing to the market," they say they're just selling something. But it adds up.

Contemporary world population patterns are shaped by the "demographic transition" concept introduced to the field by the great demographer Frank Notestein several generations ago. That schema offers a stylized description of the great shifts in modern population patterns. Death and birth rates start out high, but more or less in equilibrium. Then, advances in knowledge and improvements in income result in broad declines in mortality, precipitating rapid population increase. Finally, socioeconomic development brings about sustained fertility reductions via voluntary, deliberate changes in childbearing patterns, at which point births and deaths once more come into balance.

While Notestein's schematic may still describe the human condition in broad stroke, today we can observe some important and surprising exceptions to these generalizations. Four of these unanticipated trends are (1) the rapid spread of sub-replacement fertility, (2) the emergence of unnatural gender imbalances among the very young, (3) sustained increases in death rates, and (4) American "demographic exceptionalism."

The evolution of specialization in a multi-agent system is studied both by computer simulation and Markov process model. Many individual agents search for and exploit resources to get global optimization in an environment without complete information. With the selection acting on agent specialization at the level of system and under the condition of increasing returns, the division of labor emerges as the results of long-term optimizing evolution. Mathematical analysis gives the optimum division of agents and a Markov chain model is proposed to describe the evolutionary dynamics. The results are in good agreement with that of simulation model.

Key Words: division of labor, evolutionary dynamics, multi-agent system, emergence.
Zengru Di, Jiawei Chen, Yougui Wang, and Zhangang Han
Department of Systems Science, Beijing Normal University, Beijing, 100875, China

There are substantial differences between nations in reported subjective well-being (SWB). Although surveys of subjective well-being face methodological challenges, the existing data suggest that the measures have a degree of validity and that the between-nation differences are substantive. People in wealthy nations tend to report greater SWB than people in poor nations. The causal factors relating wealth to well-being, however, are not yet understood. The wealth of nations strongly correlates with human rights, equality between people, the fulfillment of basic biological needs, and individualism. Because of the high intercorrelations between these predictor variables and wealth, their separate effects on SWB have not yet been isolated. Another variable that correlates with higher SWB in nations is political stability and a related variable, interpersonal trust.

Individualism is a cultural variable that correlates across nations with both higher reported SWB and also with higher suicide rates. Possible reasons that individualism leads to these divergent outcomes are discussed. Individualists believe that happiness is more important than do collectivists, who emphasize other values such as "harmony" and "respect." Furthermore, reports of SWB are highest in those nations where it is thought to be important. Interestingly, when making life satisfaction judgments, individualists are more likely to weight their moods and emotions, and are less likely than collectivists to consult norms about how appropriate it is to be satisfied. Furthermore, people in Latin cultures prize pleasant affect and denigrate unpleasant affect, whereas people in Confucian cultures in the Pacific Rim appear to place less emphasis on pleasant affect and are more accepting of unpleasant emotions.

The major approaches to the psychological understanding of the differences in SWB between societies are the innate needs approach, the theory of goal striving, models of emotion socialization, and genetic explanations. Policy implications of the national differences in SWB are discussed briefly.

Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations

In the summer of 2003, analysts at the Department of Defense had an unusual idea. To predict important events in the world, including terrorist attacks, they would create a kind of market in which ordinary people could actually place bets. The proposed Policy Analysis Market would allow each of us to invest in our predictions about such matters as the growth of the Egyptian economy, the death of Yasir Arafat, and the likelihood of terrorist attacks in the United States. Investors would win or lose money on the basis of the accuracy of their predictions. Predictably, the Policy Analysis Market produced a storm of criticism. Ridiculed as "offensive" and "useless," the proposal was abandoned.

Amid the war on terrorism, why was the Defense Department so interested in the Policy Analysis Market? The answer is simple: it wanted to have some help in predicting geopolitical events, including those that would endanger American interests, and it believed that a market would provide that help. It speculated that if a large number of people could be given an incentive to aggregate their private information, in the way that the Policy Analysis Market would do, government officials would learn a great deal.

Does this idea seem ludicrous? Since 1988, the University of Iowa has run the Iowa Electronic Markets, which allow people to bet on the outcome of presidential elections. As a predictor, the Iowa Electronic Markets have produced extraordinarily accurate judgments, often doing better than professional polling organizations. In the week before each of the last four elections, the predictions in the Iowa market have shown an average absolute error of just 1.5 percentage points, a significant improvement over the 2.1 percentage point error in the final Gallup Polls. Or consider the Hollywood Stock Exchange, in which people predict Oscar nominees and winners, as well as opening weekend box-office successes. Here, too, the level of accuracy has been exceptionally impressive, with (for example) correct predictions of thirty-five out of forty Oscar nominees in 2002.

In fact, prediction markets are springing up all over the Internet, allowing people to make bets on the likely outcomes of sports, entertainment, finance, and political events. On tradesports.com, people have been betting on whether Donald Rumsfeld will resign soon (extremely unlikely), whether Osama bin Laden will be captured by June 2004 (extremely unlikely), whether John Edwards will be selected as John Kerry's running mate (a good chance, but probably not), and whether George W. Bush will be re-elected (more likely than not). One can imagine prediction markets on any number of questions: Will gas prices reach $3 per gallon? Will cellular life be found on Mars? Will smallpox return to the United States? Will there be a sequel to Master and Commander? Will the Federal Communications Commission be abolished? (I didn't make these up; they are actual or proposed questions on existing markets.)

James Surowiecki is fascinated by prediction markets. In his opinion, they demonstrate that crowds are often wise. He rejects the widespread view that groups of ordinary people are usually wrong--and that we do better to ignore them and follow experts instead. Even when individuals blunder, he believes, groups can excel: "Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them." This is so even when "most of the people within the group are not especially well-informed or rational." What is wonderful, and surprising, is that "when our imperfect judgments are aggregated in the right way, our collective intelligence is often excellent." Instead of chasing experts, we should consult that collective intelligence.