Status: I thought this was a common economics term, but when I google it I get either unrelated or references using it the way I expect but not defining it. It’s a really useful term, so I’m going to attempt to make it a thing.

“Tallest Pygmy Effect” is when you benefit not from absolute skill or value at a thing, but by being better at it than anyone else.  For example, the US dollar is not that great a currency and the US economy is not that great an economy. However, the dollar is more stable than other currencies, so it becomes the currency of choice when you want stability. This high volume makes USD more stable and is in general good for the US economy (because e.g. US companies don’t have to take on currency risk when they borrow money).

Tallest pygmy effects are fragile, especially when they are reliant on self-fulfilling prophecies or network effects. If everyone suddenly thought the Euro was the most stable currency, the resulting switch would destabilize the dollar and hurt both its value and the US economy as a whole.

New Comment
7 comments, sorted by Click to highlight new comments since: Today at 11:34 AM

+1 for being short and to the point.

It's not clear to me whether you intend this term to include cases where not all contenders are bad. For instance, if you think the US dollar is actually a pretty good currency, is it still the "tallest pygmy"? If so, then the name is misleading because of the connotations of "pygmy". If not, then you're unnecessarily separating cases where some contenders are "good" from cases where none are, even though the same mechanism (the best one is chosen) applies in all cases, and even though the line defining "good" is usually arbitrary.

Because of this, I don't think the term as it stands is particular useful, and would not use it.

Does it seem useful to you if it refers to cases where the benefit comes from being the tallest, rather than absolute value level? That can be true regardless of absolute level, but is most likely to be true when absolute level is low.

No, because people who aren't specifically told what the term means will have the same confusion I did. Perhaps this could be solved by using another phrase. However, I'm not sure that the concept itself breaks reality down at the joints, for two reasons.

a) The idea that an "absolute value" can be objectively low or high is a tempting trap, but epistemologically incorrect. Let's say your absolute value is currency quality, and the US dollar is the best currency. I could say "man, there are so many ways the US dollar could be improved, it's a terrible currency but the best of a bad lot". Or I could say "actually, there are a lot of currencies that are much worse than the US dollar, the fact that it avoids those pitfalls makes it a great currency". Thinking that one of these views is more true than the other is basically the same mistake as the one described in What an algorithm feels like from the inside. The temptation to add an extra variable, "good or bad", in addition to all observable quantities, is one I've found very difficult to snap out of in the past, and so I think that framings which make the assumption that this variable exists are probably harmful.

b) There's no clear line between "benefits from absolute level" and "benefits from relative level". In the US currency example, a major benefit of a higher absolute level of stability is that it makes your currency more attractive to investors. But of course, when investing, the relative stability of your currency is also crucial. But then again it's not a zero-sum game because if all currencies become more stable, money will move into them from other asset classes.

The most useful way of understanding this phenomenon is probably something like: "Ceteris parabus, changes in x cause changes in y, and the extent of those changes is greater when x is one of the highest in its reference class." If I needed to make that pithy, "winner takes more" would probably work well enough.

Quick note that my comments may have come off as confrontational, in which case I apologise; I support people suggesting new terminology in general, and am glad to have had this one brought to my attention.

  1. So is the effect what happens when the least-worst option becomes a Schelling Point? It seems like the nuance of the phrase relies on everyone choosing the same least-worst option, rather than anything in particular about the option itself.
  2. How do we distinguish between Tallest Pygmy Effect from one where people have settled on a not-the-best option which is still a Nash equilibrium?

Moved to frontpage.

So basically it's just saying something is "not great but everything else is even worse" in a somewhat ethnically incorrect way? Don't think I'm sold on becoming a frequent user of the phrase; I predict your mileage will vary with "trigger-happy" crowds, scorning the inherent political incorrectness of the term. Also it's not exactly a super complex thought you are trying to compress here, you are saving like five words at the cost of raised eyebrows and bewilderment. IMO not worth it.