Willful

by Richard Robb

  Why should I have cared whether DKB canceled a deal? Why am I still talking about it twenty years later? An economist might argue that I was concerned that a failure would cause my future earnings prospects to drop, either within the bank or if I looked for a new job. But that wasn’t it. The grown-ups were going to take away our ball in the middle of the game. It was no more than that.

  It was getting harder and harder for me to cling to the view of work as a sacrifice of leisure to get money for consumption. I could not have bought my experiences at DKB—they were not for sale, and even if they were, it would have made no sense to pay for them. Nor could I determine a price at which I’d be indifferent to trading them for other things. It gnawed at me that I could not squeeze the attributes of my job into the framework of rational choice. Another sort of analysis was needed.

  The game truly did end in 2000 when DKB merged with Fuji Bank and Industrial Bank of Japan. There was no role in the new bank for me. My boss told me, in a masterpiece of Japanese tact, “Frankly speaking, you are free to work anywhere you like.” I gestured to our trading room. He looked down and mumbled, “Anywhere but here.” I decided to enjoy some leisure time, which after ten years with the bank, I could afford. But it was not at all what I expected.

  Each morning in my early retirement, I read the New York Times, helped make breakfast for my nine-year-old daughter and fourteen-year-old son, sent them off to school, and jogged around the reservoir in Central Park. At that point, it was 9:00 a.m. I discovered that the day is long. Weekends blended in with weekdays. Sure, I was free from the annoyances that had cropped up at my job, but I didn’t like it at all.

  My dissatisfaction didn’t arise from low income, as rational choice theory would suggest. My time at DKB had left me with ample savings, and I spent a few hours each week trading for myself. (More on that later.) Shuffling around the apartment in my slippers was a comfortable way to make enough money to cover my family’s expenses.

  I puzzled over this uneasiness until, one day during my abundant leisure time, I took my daughter to the Bronx Zoo. We watched the zookeeper feed the tigers a lunch of fish encased in blocks of ice. The tigers had to strip away the ice before they could eat; they seemed to relish the struggle. Suddenly, it became clear: I was like the tiger, except the zookeeper was feeding me all the ice-free fish I wanted, whenever I wanted. I knew my situation was fortunate and, to many, enviable, yet I craved a challenge. Eventually, I found two.

  First, I started a hedge fund with partners in New York and London. Our fund aimed to raise money to invest in European structured credit—debt securities that package the risk of loans to individuals or companies. I could try to rationalize this undertaking in terms of wealth maximization, but in reality, starting a business put my nest egg in jeopardy. A nail-biting adventure was the way to conquer the doldrums.

  I had invested in two entrepreneurial ventures before this fund, and both were disasters. They dragged on and on, sucking up more money than anyone had intended because we always believed that a change in our fortunes was just around the corner. I hoped that things would be different this time, even though the past is supposed to be the best predictor of the future and all that.

  Our fund got off to a rocky start. Although we were able to swiftly raise $11 million, that’s not enough for a viable hedge fund. We met with around a hundred potential investors and kept hearing the same message: “You’ll be a safer investment at $50 million than at $11 million. You’ll be more diversified and have better access to financing. Come back when you’re bigger.” We needed to reach a critical mass quickly. If no one invested, no one else would invest. If many invested, many more would join in. We were stuck in the bad equilibrium. Because we had chosen to register with the Securities and Exchange Commission, the law required us to raise $25 million in the first ninety days. We fell short of the mark and faced the embarrassing prospect of having to deregister. Our original investors began to make noises about getting their money back.

  All at once, our luck turned. The SEC inexplicably gave us a one-month extension, and then a new investor swooped in with $40 million. Other investors fell into place, and within five years we had $2 billion.

  My miserable spell of unemployment and sense of rejuvenation prompted by starting the fund led me right back to the same old dilemma. I could no longer accept the traditional economic model that saw a trade-off between work and leisure and emphasized the importance of consumption. Yet I wasn’t ready to turn my back on the orthodoxy altogether. In a way, my experience trading bonds in Chicago, working at DKB, and starting a hedge fund actually reinforced my faith in rational choice theory. Practically every day, useful insight came from assuming that people optimized and markets were in equilibrium. Economic theory often felt like my secret weapon.

  The second challenge I took on was teaching microeconomics at Columbia’s School of International and Public Affairs, first as an adjunct and then in a full-time position. In 2002, a year after I started teaching, I had the great fortune of meeting Edmund Phelps. With his project at Columbia’s Center on Capitalism and Society, he intended to reformulate economics for the modern world. The center sought a theory to describe “real human beings who are not only acquisitive and risk averse but also inquisitive and adventurous and who sometimes feel the need to take a plunge, to leap into the unknown.” This was new. I especially liked the phrase “not only.” There had to be room for both.

  The realization that a second realm sits alongside purposeful choice was the turning point for me. Why should one grand system explain it all? People not only seek to gratify desires, but also choose obstacles to overcome. If they succeed, or tire of their project and abandon it, new challenges will arise. It’s natural that this is hard to see, since action can feel more intentional than it really is. We often act first, then invent a cause for that action, which we usually describe in terms of seeking pleasure or avoiding pain.5

  “This Tricky Profit”

  Of course, I didn’t discover this realm. Fyodor Dostoevsky describes acts that cannot fit into lists of preferences (in economic lingo, inputs into utility functions). He asks: “how does it happen that all these statisticians, sages, and lovers of mankind, in calculating human profits, constantly omit one profit? … It’s no great trouble just to take it, this profit, and include it in the list. But that’s the whole bane of it, that this tricky profit doesn’t fall into any classification, doesn’t fit into any list.”6

  This “tricky profit” that eludes all systems and models is the exercise of will. Dostoevsky continues, “Man, whoever he might be, has always and everywhere liked to act as he wants, and not at all as reason and profit dictate; and one can want even against one’s own profit, and one sometimes even positively must…. [A]ll this is that same most profitable profit, the omitted one, which does not fit into any classification, and because of which all systems and theories are constantly blown to the devil.”7

  Dostoevsky’s “most profitable profit” cannot fit into a list alongside all other desires in the rational choice framework. In that model, an individual is controlled by her preferences. If the exercise of will were one of those preferences, then the resulting actions would be predictable and automatic, and therefore no longer “willed.” So acts that result from the exercise of will rather than the pursuit of preferences must belong to a different realm: what I call “for-itself.”

  Each for-itself action stands for itself without regard to whether it is better than some alternative. It is undertaken “just because.” It can be a flow or a process, a self-justifying game, or a struggle to overcome a challenge that is not important in any objective way. For-itself behavior includes acting confidently based on beliefs we hold and that matter to us (whether or not those beliefs are accurate) because that’s who we are. Our beliefs constitute our identity and so are not up for sale; “I yam what’s I yam,” declares Popeye the Sailor Man in a kind of for-itself anthem. The apparent opposite of entrenching ourselves in
our beliefs—an impromptu leap out of character—is for-itself, too.

  Above all, the for-itself realm emphasizes agency—an individual acting on the world. It considers time as a flow rather than as a single moment, which is all purposeful choice can truly accommodate. The purposeful model cannot explain (or be adjusted to explain) how we decide to consume now or later, to retire or continue working. Nor can it explain why we procrastinate, are inattentive to personal finances, start quixotic businesses, and persevere with projects for long stretches without evaluating whether to quit. In contrast, the more fluid for-itself model captures behavior as it unfolds over time in response to the challenges we encounter. This behavior includes spontaneous altruistic acts that no one could have predicted and heroism of the one-thought-too-many variety (e.g., the woman rescuing her husband) that transcends any rational calculus.

  Just as rational choice, and perhaps behavioral economics, has shed light on the sphere of purposeful choice, a methodical approach can be developed to analyze for-itself action, although not with the same degree of rigor. My intent is to understand real-world phenomena that matter to individuals and firms and impact public policy. My method involves drawing the boundary between these two modes of action—the purposeful and the for-itself—and then explaining for-itself conduct with as much precision as I can. Most of my examples are drawn from business and investing because that’s my area of expertise, but a similar analysis might be fruitful in fields like politics, education, and history.

  Although my thinking has evolved out of personal experience, I believe my thesis is nearly universal. For most of us, who try to see our behavior as rational, embracing one realm to the exclusion of the other leaves us with a picture of the world that is incomplete. We strain to fit for-itself conduct into a realm where it doesn’t belong and, despite all the ingenuity we may deploy, end up with unsatisfying results. Of course, I recognize that some people, when choosing how to live their lives, discount purposeful action and instead cultivate spontaneity. These people will be unmoved by my claim that there’s more to life than rational choice. But these happy few may have an opposite quandary: how to reconcile the rational side of their actions with their natural grace. They, too, may wish to explore the boundary between the for-itself—their home base—and the purposeful.

  On the one hand, I don’t want to claim too much for my thesis. My approach will not lead to a completely unified theory of human action because such a theory is impossible. Nor do I want to deny the supremacy of the purposeful approach to behavior. While my early exhilaration with rational choice economics has faded, my conviction in its power remains. On the other hand, I am equally convinced that the purposeful choice model has serious limitations. Only by venturing beyond purposeful choice—with or without behavioral biases—can we improve our theories of many practical matters. Important aspects of our behavior (even in financial markets) are best understood not by neoclassical economics or mathematics or adding to the catalog of behavioral biases, but by reassessing basic motives, along with assumptions about how those motives relate to action. Some of our actions arise from for-itself impulses rather than the purposeful intent to satisfy desires. Recognizing the twofold nature of our behavior will generate a truer understanding of ourselves—one that is more at ease with our experience. As Nietzsche observed: “Honey, says Heraclitus, is at the same time bitter and sweet; the world itself is a mixed drink which must constantly be stirred.”8

  2

  Two Realms of Human Behavior

  Before diving into the details, let’s take a closer look at the categories of purposeful and for-itself behavior, define our terms, and introduce the key themes that will emerge in our investigation of this second realm.

  The diagram summarizes my schema for human action.

  Purposeful Choice

  While much of this book will focus on the bottom fork of the diagram, for-itself action, we’ll start with a quick tour of the top fork: purposeful choice. But first, let’s clarify some terms. I’ll use “purposeful” as an umbrella term when contrasted to “for-itself” or when I want to allow for the possibility of behavioral bias. I’ll use “rational choice” to refer to economists’ traditional neoclassical models or to emphasize that I’m considering choice that is free of behavioral bias. “Cognitive bias” and “behavioral bias” will be treated as synonyms. “Preferences” will refer to desires in the purposeful realm—we know whether we would prefer to satisfy one desire over another and can rank them. The terms “wants,” “needs,” and “desires” will emphasize purposefulness. But, at some high level of abstraction, for-itself conduct also concerns desire and its synonyms: someone who doesn’t desire an action wouldn’t undertake it. The key difference is that purposeful choice deals with desires that can be compared to and traded for each other.

  When we understand and evaluate the strength of our desires, we enter the purposeful sphere. Purposeful choice assumes people mostly know what they want, and when they talk about desires that they don’t intend to act on, they are merely confused. As the old joke goes, two economists are walking down the street. The first one says, “I’d like to buy a car like that.” The second one answers, “No, you wouldn’t.” That’s the whole joke. The first economist doesn’t want the car enough to make the required sacrifices or else he would already have bought it. He reveals his true preferences through his conduct.

  Behavioral economics assumes that people understand their preferences, but that defects in their mental apparatus impair decision-making. At least one hundred and fifty behavioral biases have been identified, mostly through laboratory experiments, from the “ambiguity effect” (ruling out options when we can’t assign probabilities to possible outcomes) to the “zero risk bias” (spending unwarranted amounts to reduce small risks to zero while ignoring bigger ones). Presumably, once people are made aware of their biases, they will try to correct them, choose more wisely, and become better off. Until then, the field seeks to build more accurate models of behavior.

  Both rational choice and behavioral economics are effective in explaining our actions to the extent that we are indeed seeking to gratify our desires and can foresee what the consequences of our actions will be. This does not mean that we can predict what will happen with absolute certainty, but that we at least know enough about the structure of the world to assess the possible outcomes and the probability that each will occur. In practice, we’re often only vaguely aware of what might happen. Rather than facing crisp, easily modeled decisions—if we take action x, then y will happen with probability p and so forth—we may feel awash in a sea of ambiguity. This reality doesn’t imply that we need to toss out the apparatus of purposeful choice altogether, but does suggest that under such conditions, economists should be modest in their claims. In purposeful choice, people do their best with the information they have and spend resources to gather more information when that’s the optimal course.

  Nor does purposeful choice require that we have perfect knowledge of ourselves. We might get exactly what we want and then feel disappointed. We can learn through experience and, in recent decades, through positive psychology. Also called happiness research, this second branch of purposeful choice can be regarded as an aid to learning about our nature and preferences, helping us make more satisfying decisions.

  Assuming that at least some people know whether or not they are happy, discovery of the cause of that happiness should be an empirical task: ask a lot of people how happy they are, find out about their lives, and analyze the data. Do happy people have high incomes? High income relative to others around them? Rising income? Or does happiness correlate with some other factor? If people are similar, we can learn about ourselves via the systematic study of others. Here, self-realization becomes a group project: having conducted surveys or brain studies and assumed people are homogeneous, positive psychologists advise us to spend more time with friends, find shorter commutes to work, and worry less about making money after reaching the upper m
iddle class. Done in this way, happiness research effectively generates a collection of self-help tips. It may also be used as a guide for public policy—if we can objectively measure happiness, then governments can try to promote it.

  Whether or not we have an accurate understanding of our desires, the steps for applying purposeful choice are the same: determine, as best we can, what those desires are; rank them, consciously or unconsciously; and choose how to satisfy them, given our resources.

  For-Itself

  Let’s now turn to the south fork of the diagram: for-itself.

  The first branch, beliefs, explores how we come to our beliefs and how they shape our actions. Much of the time, we stick with our beliefs regardless of the evidence. Does this make us irrationally stubborn? I don’t think so. We hold onto our beliefs because they’re part of our identity. Stick-to-it-ness belongs to the for-itself realm, as does an occasional leap out of character. This is neither rational nor irrational; it’s just the sort of creature we are.

  A for-itself commitment to our beliefs can explain rigidities in companies and markets and why we sometimes fail to make profitable investments. An entrepreneur, for instance, may be lit up with conviction for her project, and who knows? She may turn out to be right. But the venture capitalist whom the entrepreneur approaches simply can’t share her enthusiasm. The venture capitalist may be fully incentivized to unearth promising startups; she may think clearly and be open-minded, courageous, honest, and intelligent. Yet she rejects the pitch. Nothing the entrepreneur says can bridge the gap in their beliefs.