The Fallacy of Composition: Why What’s Good for One Person Isn’t Always Good for Everyone

The “fallacy of composition” is a concept originated by Samuelson, an American economist and Nobel laureate. It refers to the idea that aggregating rational individual choices can lead to irrational outcomes for the group.

To illustrate, Samuelson provides a vivid example. In an open-air theatre, spectators initially sit on the ground. Those in back cannot see well, so they stand up. Seeing them stand, others follow suit. Soon everyone is standing, yet no one’s view has improved. Some spectators then stand on tiptoes, prompting others to do the same. The result is declining comfort for all, and rising individual costs, exemplifying the “fallacy of composition.”

In life, similar dynamics emerge frequently. A student undertakes extra lessons and excels, prompting others to follow suit. Collectively grades rise, along with admissions cutoffs. A farmer pioneers a novel crop, reaping substantial profits. Other farmers mimic him until the market is saturated, leaving all worse off. Or a reasoned critique sparks excessive vilification, as individually reasonable acts aggregate into a firestorm. In essence: behaviors beneficial for one may harm the collective when generalized.

This illustrates that rational micro-behaviors do not guarantee rational macro-outcomes. Local optimization does not equal global optimization. Noble individual goals can catalyze perverse group dynamics. We must consider systemic interactions, not just isolated causes.

The investor psychology classic “Fooled by Randomness” observes: “If there is one thing people can learn from finance, it is that the prevalent consensus is often wrong.” The “fallacy of composition” ignores interdependence, falsely projecting individual truths onto groups. Like herding, rational acts by one can ignite irrational cascades. Self-interest can myopically undermine collective welfare. We must analyze and address the risks that individually rational decisions compound into irrational results.

Some propose “context-appropriate” goal-setting. Rather than follow the herd, pick objectives suited to one’s situation and abilities. Avoiding the “fallacy of composition” requires grasping the broader context. A leaf masks the forest. Don’t let fragments obscure the whole. Short-term self-interest should not compromise collective well-being. Avoid rash emulation. Like floodwaters, blind trend-following leads to ruin. Independent, considered judgment is key.

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