ECONOMIC PAST. A DEAD LOCK OR A PROLOGUE? Roberta Patalano Parthenope University (Naples) and Luiss (Rome) Glasgow, 7-9

1. ECONOMIC PAST. A DEAD LOCK OR A PROLOGUE?Roberta Patalano Parthenope University (Naples) and Luiss (Rome)Glasgow, 7-9/1/2009

2. The talk will address two topics:1. The relationship between path dependence and memory. This part will be based onR. Patalano (2007), Mind Dependence. The Past in the Grip of the Present, Journal of Bioeconomics, 9,2, 85-107.2. The relationship between future, expectations and memory.This part will summarize briefly what I’m working on at the moment.

3. Path dependence develops the insight that ‘history matters’.Later decisions rely on, and are constrained by, earlier decisions. In very general terms, path-dependence must involve:(1) An irreversible process, that is a process which develops through history; and(2) The existence of multiple equilibria that are attainable under different initialconditions. Equilibria take the form of asymptotic states which the systemmight attain in its evolutionary trajectory. In a path dependent dynamic the outcome is determined by the whole sequence of events that unfold through time.‘Small events’ are never forgotten and can lock-in the system into a suboptimal equilibrium.

4. At an individual level, path-dependence emerges when history irreversibly influencesthe choice set and the behavioral algorithms of agents. At a system level, irreversibility is mainly caused by dynamic increasingreturns which, in turn, may be due to economies of scale, sunk costs and asymmetricalinformation. ‘More generally, they are likely to be a common property oflearning and accumulation of technological capabilities with their typical featuresof locality and cumulativeness’ (Bassanini & Dosi 1999, p. 19). Sources of path dependenceare also likely to exsist on the demand side of the market. Amongthem, network externalities (Katz & Shapiro 1994) and endogenous evolution ofpreferences (Dosi & Metcalfe 1991; Brock & Durlauf 1999) have been receivingincreasing attention.

5. At a macro level, conventions and shared norms, such as those which influenceand shape institutions are also an important ‘carrier of history’ (David 1994). Theygive rise to a cumulative and self-enforcing process of development because, bystructuring the social context, they also shape the cognitive and behavioral patternswhich support their existence (Coriat & Dosi 1998; North 2000; Patalano 2007).Recent developments in economic literature have pointed out that path dependencealso has a neuro-cognitive dimension. This approach has important roots in the history of economic thought and, in particular, in the work by Nobel Laureate Friedrich A. von Hayek. In The Sensory Order (1952) Hayek deals with the psychology of perception and compares the mind to a classifying structure which does not receive sensorial stimuli passively but directs and interprets them according to the connections among neurons. The latter continuously take form throughout the history of the individual and are influenced by both his/her genetic heritage and his/her personal living.

6. Recent neurobiological research confirms Hayek’s major ideas (David 1994; Fuster 1997;Paller 2001). The development of the mind and, specifically, its ability to create meanings on the basis of perceived information depends on the presence of neural connections which have existed since the individual’s birth. They are inelastic (but not rigid) and change according to new experiences. Changes include functional evolution of neural groups, learning how to performnew tasks when the individual faces unexplored situations and the recombiningof synaptic connections into a configuration that is more suitable for current situations.Perception of the external environment is based upon personal experience. All that is perceived is then compared with already recorded data and interpreted in the light of previous subjective classifications. The past perceptual experience orients the present one.

7. On these grounds, microfoundations of path dependence can be traced in the neuropsychological dimension of cognition (Rizzello 2003). The human brain and mind evolve by following a path that strongly depends on innate pre-existing structures but can also evolve in novel and unpredictable ways. In spite of the increasing attention paid by cognitive economists to the path dependenceof mind and brain activities, the role played by memory inshaping individual attitude toward the past has not yet been consideredin the literature.

8. An aspect that may be of particular interest for economist is the dynamicdimension of remembering.The construction of memories is commonly made up of three steps: the acquisitionof new information (encoding), the process by which this new informationis stocked (storage), and the process through which it is recalled (retrieval).Initially, information is encoded as patterns of neural activity which are still weak andnot yet persistent. Only later, is it stored in more persistent molecular or structuralformats by undergoing a series of neurophysiological processes (e.g., glutamaterelease, protein synthesis, neural growth and rearrangement) that render thememory representations progressively more stable. It is these processes that aregenerally referred to as ‘consolidation’. Once consolidation has taken place, the memoryis assumed to be ‘fixed’.

9. Recently, however, the idea has been gaining support that recalling or‘reactivating’ a previously consolidated memory renders it fragile and susceptibleto interference once again, therefore requiring periods of re-consolidation(Miller & Matzel 2000; Walker et al. 2003).This adds new support to the idea that memorydoes not simply consist of a replay of the past but involves a genuine reorganizationof data into new representations (Neisser 1967; Edelman 1992; Schacter1996). Retrieval is in fact a dynamic process during which new information modifiesthe existing representation. According to the hypothesis of re-consolidation,memories never reach a fixed state as they are subject to change every time theyare activated (also without conscious awareness).

10. To summarize, memory dynamic includes:• The initial encoding process, when new information is perceived and heldprecariously;• The later encoding processes, when new connections between nerve cells grow toguarantee a more permanent storage of information;• The consolidation process through which a memory becomes increasingly resistantto time;• The retrieval processes, when old information is reactivated and combined withnew information into a new memory;• The re-consolidation process, which shapes re-construction of memories overtime.

11. IMPLICATIONS FOR ECONOMICSAs suggested by the literature, path-dependence allows social scientists to interpret ‘the present in the grip of the past’. It seems, however, that this quotation can also be reversed, once the cognitive roots of path-dependence have been made explicit. Due to the reconstructive nature of memory processes and to the relevance of memories in defining personal identity (Schacter 1996), it’s also the past which appears to be in the grip of the present.Different from biological organisms, economic agents do not passively inherittraits of past evolution. Instead, they are tied to their memories by one-to-onefeedback which dynamically develops through time.

12. On the one hand, the past acts on the individualby shaping his neurocognitive structures and the mental models through whichhe makes sense of his environment and adapts to it. On the other hand, the currentexperience of the individual can selectively retrieve memories from the past whichthen overcome a process of re-consolidation. This latter process consists of merging presentinformation with that previously stored and brings new images of the past intoemergence. As a result, the memory of past experiences is modified and enrichedby present experiences.The human mind plays an active role inorientating the individual’s subjective attitude towards the past.Let us consider some implications for lock in.

13. As argued by Arthur (1989, p. 128), ‘increasing returns can cause the economygradually to lock itself into an outcome not necessarily superior to alternatives, noteasily altered, and not entirely predictable in advance.’ In biological systems the only possibility to escape lock in is a favourable gene mutation. Random mutations allow for new species to develop and unlock evolution from its current stage. They represent, thus, the driving-forces of change. In a socio-economic environment, evolution differs in important respects from the biological model, as it depends on the active behavior of individuals (Frenken et al. 1999). Lock orde-lock may be interpreted as a result of individual and collective wills and strategies(Bassanini & Dosi 1999; David 1987; Perez & Soete 1988).The functioning of memory may help in defining a differentconcept of lock-in and new ways out of it.

14. Certainly there exists a past whose events cannot be changed, due to the irreversibilityof time. Nevertheless, the image of the past that stems from individualand shared memories is not a fixed and unchangeable entity. It growscontinuously and modifies itself under the influence of the one-to-one feedbackbetween the present and the past.Any act of remembering involves a change. By acting on the present it is possibleto influence the image of the past, thus eventually increasing our freedomfrom the grip of past events. Our main claim concerns the existence of endogenous forces which,together with external factors, may drive the process of change.A key resources for endogenous change may be found in theconstructive processes which underlie remembering

15. In the working of memory, the present seems to act on the past through differentmechanisms: • By way of the retrieval clue which guides the search for memories selectively.Human beings do not remember all their past at any one time. Recall requiresa searching process that allows only part of stored information to reach consciousawareness. • After retrieval has occurred, the process of remembering takes place. Itinvolves the costruction of memories from the available retrieved informationplus information that is extracted from the present life of the individualand does not consist of a verbatim reproduction of a fixed content. QuotingBartlett (1932, p. 213), ‘remembering is not the re-excitation of innumerablefixed, lifeless and fragmentary traces. It is an imaginative reconstruction, orconstruction.’

16. From this perspective, the memory of the past does not appear to be exogenousand not even defined once and for all. Certainly, time is not reversible. Nevertheless, the individual and collectiveimage of ‘what has happened’ continuously evolves under the drive of theone-to-one feedback which connects present with past. The process of rememberinghas a mainly reorganizing nature, it involves recombination of memory traceswith present information and leads to the emergence of a new representation ofpast events.As a single image of history does not exist, neither can a unique and stablemodality of dependence from history be defined.Path dependence and lock-in appear to have a relative meaning that has to be defined case by case for it pertains to a specific, and to some extent modifiable, reconstruction of past events.

17. Second Part.MEMORY & FUTURE

18. MEMORY ERRORS Neuropsychological research has shown that memory is fallible, for it is prone to various kinds of errors, illusions and distorsions. Most importantly, it has shown that memory fails sistematically. Schacter (1999) has classified memory’s most common mistakes into 7 basic “sins”: TRANSIENCE; ABSENT-MINDEDNESS; BLOCKING; MISATTRIBUTION; SUGGESTIBILITY; BIAS; PERSISTENCE.

19. The first 3 sins reflect different types of forgetting.TRANSIENCE reflects the decreasing accessibility of memories over time. Gradual forgetting has been attributed both to retrieval failure –a difficulty to access information that is stored- and to the actual loss of information from storage. The latter is likely to occurr when a memory is not “used”and not recalled for a long time.ABSENT-MINDEDNESS occurs when insufficient attention is paid to a stimulus during encoding and/or retrieval. Absent-mindedness during encoding is the source of common everyday memory failures as when, for example, one does not remember a recent action (e.g. where I placed the mobile phone when I arrived at home). Furthermore, absent-mindedness is related to automaticity because it is likely to occurr when attention is not focused on the action that is undertaken and the latter is guided by habits.

20. BLOCKING occurs when the subject is unable to retrieve an information that he has and is aware of such difficulty. The most common example is the tip-of-the-tongue state. Retrieval blocks increase their frequency with aging.The next three sins involve distorsions and inaccuracy.MISATTRIBUTION occurs when a memory is attributed to the wrong source. Schacter (1999) identifies three main types of misattribution:1) in the first case, people correctly remember an episode of their past but attribute it to an incorrect source. For example, they may remember that they perceived an event that was only imagined, or that they met a person in a context instead of another;2) in the second case, people are unable to perceive a memory as part of their experience. For example, they think to have imagined a fact without remembering that they experienced it;3) in the third case, individuals falsely recall facts that never happened.

21. SUGGESTIBILITY refers to the tendency to incorporate in the memory of an event information that was provided by others after the event. A typical example is the suggestion on eyewitness testimony that derives from having seen Tv programs on the crime, or having read newspapers article.Another example are the false confessions that are based on the illusion to rember when such illusion is induced by suggestive interrogations frome police. BIAS refers to the distorting influence of present beliefs and information on the recollection of past events. It has been observed, for example, that individuals tend to homogeneize past and present beliefs/feelings as if nothing had changed in their way of thinking and perceiving.

22. PERSISTENCE involves the intrusive remembering of episodes that we wish to forget. Typical example are traumatic experiences such as war traumas and rumination over negative episodes. In the case of persistence, one wishes to decrease the accessibility of his/her memories without success.WHY DOES MEMORY FAILS SYSTEMATICALLY?“As tempting as such views may be, I suggest that it is a mistake to view the seven sins as flaws in system design that ought to have been corrected during the course of evolution. Instead, building on the analyses of J. R. Anderson and Bjork and their colleagues, the seven sins can be usefully viewed as by-products of otherwise adaptive features of memory” (Schacter 1999, p. 196).

23. “SAVING HYPOTHESIS”: if memory was not prone to forgetting, it would be overwhelmed by useless information. The costs of retaining the myriad of contextual details that define our daily experiences would be an impairement of its healthy functioning and, in particular, of its ability to support higher cognitive functions.Let us consider, for example, false recall and recognition. “False recall and recognition often occur when people remember the semantic or perceptual gist of an experience but do not recall specific details. However, memory for gist may also be fundamental to such abilities as categorization and comprehension and may facilitate the development of transfer and generalization accross tasks”(Schacter 1999, p. 197).This argument is very similar to that of “saving” cognitive effort through the creation of an incomplete, and necessarely biased, representation of the problem.

24. Another hypothesis has been gaining support that extends this result and provides further insights:SIMULATION HYPOTHESIS: the main function of episodic memory is not reminescensce but future thinking.The use of past experiences to build up future scenarious requires a flexible system that can easily gain access to the gist of events. To preserve such flexibility details are gradually eliminated. “Although the function of the episodic system is typically conceived of as a retrieval of past events, as demonstrated by the abundance of research on episodic memory, it is possible that the primary role of this system is not reminescence, but rather, future thinking (…). According to the constructive episodic simulation hypothesis, some of the vulnerabilities of episodic memory, such as memory distortions and illusions, may be attributable to the role of the episodic system in allowing us to mentally simulate our personal futures by flexibly drawing on elements of the past” (Addis, Wong & Schacter 2006, p.1374-1375).

25. Why does memory work reconstructively rather than reproductively?One possible answer addresses the role that memory plays in imagining future episodes, happenings and scenarios.“Since the future is not an exact repetition of the past, simulation of future episodes may require a system that can draw on the past in a manner that flexibility extracts and recombines elements of previous experiences –a constructive rather than reproductive system. If this idea has nerit, then there should be considerable overlap in the psychological and neural processes involved in remembering the past and imagining the future” (Schacter & Addis 2007, p. 774).

26. In the last decade, research in cognitive neuroscience has been contributed to the study of memory by using neuroimagining tecniques.Coherently with the simulation hypothesis results have shown that (Addis et al. 2007, p. 1364):- past and future events engage common neural regions;- amnesic patients have great difficulties imagining their personal futures; - “in healthy individuals, manipulations that reduced the specificity of past events (e. g., instructions or cues which induce a general retrieval style) also reduced the specificity of subsequently generated future events”.

27. What are the implications for economics?How is the approach of economists to time modified by these results?Can the functioning of memory inform the economic approach to expectations?

28. MAIN REFERENCESAddis D. R., Wong A. T. & Schacter D. L. (2006), Remembering  the  past  and   imagining the future: Common and distinct neural substrates during  event   construction and elaboration, Neuropsychologia, 45, 1363-1377.Patalano R. (2007), Mind-Dependence. The Past in the Grip  of  the  Present,   Journal of Bioeconomics, 9, 2, 85-107.Patalano R. (2009), Imagination and economics at  the  crossroad.  Materials   for a dialogue, History of Economic Ideas, forthcoming.Rizzello S. (2004). Knowledge as a path-dependence process. Journal of   Bioeconomics, 6, 255â?"274.Schacter D.  L.  &  Addis  D.  R.  (2007),  The  cognitive  neuroscience  of   constructive memory: remembering  the  past  and  imagining  the  future,   Philosophical Transactions of the Royal Society B, 362, 773-786.