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Mindset Economics

How to incorporate fixed and growth mindsets into economic theory

Source: Growth Mindset Poster

Standford psychologist Carol Dweck popularized a theory she calls the “growth mindset” that she argues accounts for many, if not most, people’s success. In short, believing you are capable of growing as a person or improving in your skills becomes a self-fulfilling prophecy of sorts.

My goal here is connect her theories with economics. As this is a new area of study, I will primarily present open avenues for research, as opposed to providing definitive answers or conclusive theories. First, I will provide an overview of fixed vs. growth mindsets, then I will discuss how these different mindsets can be incorporated into economic theory.

While much could be said of how to incorporate mindsets into economic theory, I focus here on belief formation, changing preferences, subconscious vs. conscious decision making, the evolutionary basis for mindsets, the self fulfilling nature of beliefs, the relation between entrepreneurship and mindsets, and finally, how to measure/model mindsets using game theory.

Many of these questions appear to be the domain of psychology and not economics. I dispute this, as I believe the economic theory of everything will need to be largely psychological/neurobiological. Nevertheless, if one prefers a distinction, it can be made as follows: psychology concerns the individual (how they can change their mindset to be a better person) while economics concerns the community (how can the ratio of fixed vs. growth mindsets in a population change over time).

Growth vs. Fixed Mindsets

Rather than reinvent the wheel, I will simply quote from an excellent article by Maria Popova on the differences between growth and fixed mindsets:

One of the most basic beliefs we carry about ourselves, Dweck found in her research, has to do with how we view and inhabit what we consider to be our personality.

A “fixed mindset” assumes that our character, intelligence, and creative ability are static givens which we can’t change in any meaningful way, and success is the affirmation of that inherent intelligence, an assessment of how those givens measure up against an equally fixed standard; striving for success and avoiding failure at all costs become a way of maintaining the sense of being smart or skilled.

A “growth mindset,” on the other hand, thrives on challenge and sees failure not as evidence of unintelligence but as a heartening springboard for growth and for stretching our existing abilities. Out of these two mindsets, which we manifest from a very early age, springs a great deal of our behavior, our relationship with success and failure in both professional and personal contexts, and ultimately our capacity for happiness.

While this may seem abstract, it can be understood with a simple example. Let’s suppose that you failed a test. There are two ways you can look at this. Wow, I’m stupid and that will never change, or that’s okay, I can study harder and do better next time.

Now, this might appear overly simplistic. Maybe you wonder, who would possibly think the former, rather than the latter? But actually, in my experience, most people have a default “fixed” mindset, even if they aren’t consciously aware of it.

A growth mindset isn’t necessarily natural, and it certainly takes effort. No one is purely fixed or growth minded; instead, we all have elements of both.

Nevertheless, you might find yourself surprised that anyone would think “I’m stupid and that will never change”. Or you might equally find yourself surprised that some people are capable of brushing off a failure and just viewing it as a part of growing as a person.

The important point is that we should all be aware that both types of people exist, and that fixed vs. growth mindsets are a spectrum.

The Economics of Mindset
There are many ways of approaching incorporating mindset into economics. When an economist says “the economics of blank”, we typically think about the incentives/constraints, supply/demand, rationality/irrationality, predictability/randomness, etc.

However, when we are talking about the economics of the mind itself, we face certain challenges. For starters, economists typically assume that everyone is rational, their preferences are stable and consistent, and they are only interested in economic outcomes.

In other words, we take the mind as a black box that simply outputs decisions based on never changing preferences/inputs.

We obviously know this to be false, which is why behavioral economics and neuroeconomics were invented. So, isn’t mindset economics just behavioral economics? I would claim that it is either a subfield of behavioral economics/neuroeconomics, or else an independent field.

I focus here on belief formation, changing preferences, subconscious vs. conscious decision making, the evolutionary basis for mindsets, the self fulfilling nature of beliefs, the relation between entrepreneurship and mindset, and finally, how to measure/model mindsets using game theory.

Each section will be brief and will conclude with open research opportunities.

Belief Formation
Dweck’s work on mindsets shows that they are developed early in childhood. Our beliefs about the world are formed through complex interactions with environments, parenting, genetics, schooling, culture, social and governmental institutions, etc.

The fascinating aspect of Dweck’s work is how much regarding success and happiness can be boiled down to simply fixed vs. growth mindset. As economists, we don’t need to model religious beliefs, political beliefs, social/culture beliefs, etc.

We can narrow down our focus to how fixed vs. growth mindsets are formed over time, as well as how easy or difficult it can be to change from one mindset. Open avenues for research include the following:

  • How are mindsets formed in childhood? What major factors influence the development of these mindsets?
  • Are mindsets domain specific? For example, can a professional athlete be growth minded regarding athletics, but fixed minded in other respects?
  • From a neurological perspective, what parts of the brain activate given different mindsets? What parts of the brain affect the development of mindsets?

Changing Preferences
Economists have notoriously avoided the problem of changing preferences. In fact, Gary Becker famously assumed that fixed preferences are a necessary assumption for economics to work! Fortunately, modern approaches are being developed. For example, gauge theory offers an opportunity to model changing preferences.

Nevertheless, changing mindsets seems to be quite the open problem. It is unclear how effective people are at changing mindsets. As such, here are some open questions surrounding changing mindsets:

  • How easy or difficult is it to change mindsets?
  • What percentage of the world is fixed minded vs. growth minded? Are these dependent on specific domains?
  • What is the “supply” of fixed vs. growth mindsets? Can we model a demand function for these mindsets? For example, do corporations demand certain mindsets? Do schools produce/supply certain mindsets?
  • How sustainable is a change in mindset? Does it revert back over time?
  • Do people more commonly switch from fixed mindsets to growth mindsets or the opposite? How does age play a role here?
  • How can we as economists model changing mindsets over time?

Subconscious vs. Conscious Decision Making
There has been a plethora of research on subconscious vs. conscious decision making. In general, it has been found that the mind has 2 modes of operation: a primitive fast computational reaction and a slower, more “modern” rational mode.

Thinking fast and slow, as it has been popularized. System 1 and system 2 thinking. Etc.

Nevertheless, there is much research needed on how this affects mindsets. Some open questions include:

  • Are we subconsciously biased towards a particular mindset?
  • Can we change this bias consciously? Subconsciously?
  • What conscious and subconscious tools can we use to affect our mindsets?

The Evolutionary Basis for Mindsets
Evolution is obviously integral to the way our mind works, yet economics as a field has struggled to incorporate evolution as a framework into theory. As such, this problem is compounded for a new field.

Nevertheless, it should interest us all the way that evolution has biased us to have particular mindsets. If my theory that most people are fixed minded is true, then perhaps there are evolutionary reasons why fixed mindsets are most prevalent.

For example, the common dove/hawk game theory application is relevant here. In short, define a dove as one who doesn’t defend property, and a hawk as one who steals other’s property. If we were all doves, a single hawk could steal everyone’s property. If we were all hawks, we would constantly be at war.

As such, we evolved to be doves towards other people’s stuff, and hawks towards our own. This is the stable equilibrium.

I wonder if a similar kind of thinking could be applied to fixed vs. growth mindsets. If we were all fixed minded, then no one would ever come up with new ideas. If we were all growth minded, then we would likely take too many risks as a civilization. Perhaps the stable equilibrium is for most people to be fixed minded regarding most things, while a smaller percentage of people can be growth minded for some things.

If you think about it, the modern world has more opportunities to be growth minded than our evolutionary past. In the past, two growth minded individuals might convince each other to try something way too risky, like petting a lion because it looks cute. “We can do anything!”

However, fortunately, in the modern world, there are more opportunities to be growth minded, with less downsides. Unfortunately, we did not evolve for the modern world.

As such, many open questions remain.

  • Is there a stable equilibrium between the ratio of fixed minded and growth minded individuals in a society?
  • Can this equilibrium change over time due to technological developments?
  • How does the development and evolution of capitalism affect the opportunities and constraints of mindsets?

The Self Fulfilling Nature of Beliefs
In the stock market, it is impossible to model prices without factoring George Soros’ idea of reflexivity, or the fact that expectations of how beliefs will change can itself change those beliefs.

Not all beliefs are self-fulfilling, obviously. However, when it comes to fixed vs. growth mindsets, they largely are. If you believe that you can grow, change, and improve as a person, you are much more likely to actually try to do that, which is a major component for you to succeed in doing that.

It is certainly possible that you can grow in skills even if you don’t believe you will. But it is more likely that you will improve your skills if you actually believe you can.

This self-fulfilling nature of mindsets has a sort of feedback loop that amplifies over time. As such, many questions remain:

  • Can we measure the effects of growth vs fixed mindsets from a network perspective? In other words, how does one’s mindset affect another’s?
  • Can we model mindsets in the same way that stock prices can be modeled using reflexivity?
  • How can we measure the amplitude of mindset feedback loops?

Entrepreneurship and Mindset
Entrepreneurs are notoriously risk takers. As such, many may be inclined to assume that entrepreneurs are more likely to be growth minded than the average population.

Nevertheless, this is an assertion, not evidence:

  • Are entrepreneurs more likely to be growth minded than the average population?
  • Are growth minded entrepreneurs actually more successful than fixed minded ones?
  • Do mindsets change with the success, failure, and growth of businesses?
  • Do corporations promote fixed mindsets? Do entrepreneurs encourage growth mindsets?

Measurement, Modeling, Game Theory
Finally, perhaps the most important area of research for mindset economics is how to accurately measure mindsets in the first place. While psychologists, no doubt, have ways of doing so, they are likely primarily based on surveys. i.e. people’s own purported views on their personality.

Economists are notorious for hating surveys. It would be better if we could use the theory of revealed preferences for measuring mindsets. Essentially, the theory of revealed preferences comes down to the assumption that people put their money where their preferences truly are.

Behavioral economists criticize the theory of revealed preferences by pointing out the numerous ways in which people actually don’t know what they want. Nevertheless, it would be profoundly impactful research to find a way of measuring mindsets in markets, without needing to take people at their word.

In summary, economists need a better way of measuring mindsets at scale in order to do economic research. Furthermore, we need a way to actually model mindsets. Psychologists may be happy to put their theories in words, but economists need math.

As such, a likely fruitful area of research would be incorporating fixed and growth mindsets into game theory. We could model fixed vs. growth mindsets in much the same way that rational/irrational traders are modeled in the stock market.

I certainly do not claim that this will be easy; there’s a reason this is a suggestion for future research. Here are some open questions:

  • How can economists better measure mindsets? Can we use large scale surveys? Can we use the theory of revealed preferences to measure mindsets?
  • How can we model mindsets? Is neurobiology necessary?
  • How can we use game theory to model mindsets?

In conclusion, this is admittedly a coarse outline for how to incorporate mindsets into economic theory. I have left many more questions than answers. This should not be surprising given that behavioral and neuroeconomics are still in their infancy.

Nevertheless, economics has much to say on mindsets, and vice versa. I am inspired by the expression all true narratives must reconcile. (I attribute this to Bret Weinstein).

Economics is a partially incomplete, but largely true narrative. Likewise, I also view Dweck’s theory of mindsets to be largely true. How to reconcile the two is the duty of any great economist.

Who knows? Maybe one day, future economists will specialize in mindsets.




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