Willful
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Other previously published material quoted with permission: Martin Buber, Tales of the Hasidim, copyright © 1947, 1948, copyright renewed 1975 by Penguin Random House LLC, used by permission of Schocken Books, an imprint of the Knopf Doubleday Publishing Group, a division of Penguin Random House LLC, all rights reserved; F. H. Knight, “The Role of Principles in Economics and Politics,” American Economic Review 41, no. 1 (1951): 1–29, copyright American Economic Association; reproduced with permission of the American Economic Review; Richard Robb, “An Epistemology of the Financial Crisis,” Critical Review 25, no. 2 (2013): 131–161; and Barbara Herrnstein Smith, Contingencies of Value: Alternative Perspectives for Critical Theory, Cambridge, Mass.: Harvard University Press, Copyright © 1988 by the President and Fellows of Harvard College.
My wife, Ianthe Jeanne Dugan, to whom this book is dedicated, has helped me over many years with both ideas and words. She somehow managed to encourage me while delivering the message: it’s still not good enough. I would jump in the river to save her any day.
Index
Abraham (biblical figure), 117–118
abstraction, 12, 140–143, 196–197, 206–207
acting in character, 49–66, 94–95, 203
acting out of character, 19, 26, 68–69, 72–74, 97, 114, 122
activist investors, 66
actuarial tables, 163
Akerlof, George A., 210–211n2
Alexander the Great, 140, 180–181
alienation, 205, 207
alpha, 75
altruism, 4
apparently irrational, 28–29, 206
care altruism, 38, 104, 108–114, 115, 120, 135, 201
effective, 110–112, 126, 130, 135–136
in for-itself model, 19, 104, 123, 129
love altruism, 104, 116, 123–125, 203
manners and ethics in, 104, 106–108, 135
observed care altruism, 108–112
purposeful choice compatible with, 104, 113–114, 115–116
selfish, 104, 105–106, 109, 123, 125, 135
types of, 104, 123, 130
utility maximized by, 5–6
vaccination as, 59. See also mercy
ambiguity effect, 24
American Work-Sports (Zarnowski), 191
Anaximander, 190
anchoring, 168
angel investors, 212–213n1
“animal spirits,” 169
Antipater of Tarsus, 134–135, 137
“anxious vigilance,” 73, 82
arbitrage, 70, 78
Aristotle, 200, 220n24
Asian financial crisis (1997–1998), 13
asset-backed securities, 93–95
asset classes, 75
astrology, 67
asymmetric information, 96, 210n2
authenticity, 32–37, 114
of challenges, 176–179
autism, 58, 59
auto safety, 139
Bank of New York Mellon, 61
Battle of Waterloo, 71, 205
Bear Stearns, 85
Becker, Gary, 33, 108–109
behavioral economics, 4, 10, 198–199
assumptions underlying, 24
insights of, 24–25
rational choice complemented by, 6
Belgium, 191
beliefs: attachment to, 51
defined, 50
evidence inconsistent with, 54, 57–58
formation of, 53, 92
persistence of, 26–28, 54
transmissibility of, 92–93, 95–96
Bentham, Jeremy, 127, 197–198
“black swans,” 62–64
blame aversion, 57, 72
brain hemispheres, 161
Brexit, 181–185
“bull markets,” 78
capital asset pricing model, 64
care altruism, 38, 104, 108–114, 115, 120, 135, 201
Casablanca (film), 120, 125
The Cask of Amontillado (Poe), 126–127
challenges, 202–203
authenticity of, 176–179
staying in the game linked to, 179–181
changes of mind, 147–164
charity, 40, 45–46, 119, 128
choice: abundance of, 172–174
intertemporal, 149–158, 166
purposeful vs. rational, 22–23
Christofferson, Johan, 83, 86, 87, 88
Cicero, 133–134
Clark, John Bates, 167
cognitive bias, 6, 23, 51, 147–148, 167, 198–199
confirmation bias, 200
experimental evidence of, 10–11, 24
for-itself behavior disguised as, 200–201
gain-loss asymmetry, 10–11
hostile attribution bias, 59
hyperbolic discounting as, 158
lawn-mowing paradox and, 33–34
obstinacy linked to, 57
omission bias, 200
rational choice disguised as, 10–11, 33–34, 199–200
salience and, 29, 147
survivor bias, 180
zero risk bias, 24
Colbert, Claudette, 7
Columbia University, 17
commitment devices, 149–151
commodities, 80, 86, 89
commuting, 26, 38–39
competitiveness, 11, 31, 41, 149, 189
complementary skills, 71–72
compound interest, 79
confirmation bias, 57, 200
conspicuous consumption, 31
consumption planning, 151–159
contrarian strategy, 78
cooperation, 104, 105
coordination, 216n15
corner solutions, 214n8
cost-benefit analysis: disregard of, in military campaigns, 117
of human life, 138–143
credit risk, 11
crime, 208
Dai-Ichi Kangyo Bank (DKB), 12–14, 15, 17, 87, 192–193
Darwin, Charles, 62–63
depression, psychological, 62
de Waal, Frans, 118
Diogenes of Seleucia, 134–135, 137
discounting of the future, 10, 162–164
hyperbolic, 158, 201
disjunction effect, 174–176
diversification, 64–65
divestment, 65–66
Dostoevsky, Fyodor, 18
drowning husband problem, 6–7, 110, 116, 123–125
effective altruism, 110–112, 126, 130, 135–136
efficient market hypothesis, 69–74, 81–82, 96
Empire State Building, 211–212n12
endowment effect, 4
endowments, of universities, 74
entrepreneurism, 27, 90, 91–92
Eratosthenes, 190
ethics, 6, 104, 106–108, 116, 125
European Union, 181–182
experiential knowledge, 59–61
expert opinion, 27–28, 53, 54, 56–57
extreme unexpected events, 61–64
fairness, 108, 179
family offices, 94
Fear and Trembling (Kierkegaard), 53–54
“felicific calculus,” 197–198
financial crisis of 2007–2009, 61, 76, 85, 93–94, 95
firemen’s muster, 191
flow, and well-being, 201–202
Foot, Philippa, 133–134, 135
for-itself behavior, 6–7, 19, 21, 27, 36, 116, 133–134, 204–205, 207–208
acting in character as, 51–53, 55–56, 94–95, 203
acting out of character as, 69, 72
analyzing, 20
authenticity and, 33–35
charity as, 39–40, 45–46
comparison and ranking lacking from, 19, 24, 181
consequences of, 55–64
constituents of, 26–31
defined, 23–24
difficulty of modeling, 204
expert opinion and, 57
extreme unexpected events and, 63–64
flow of time and, 30
free ch
oice linked to, 169–172
in groups, 91–100
incommensurability of, 140–143
in individual investing, 77–78
in institutional investing, 76
intertemporal choice and, 168, 175, 176
job satisfaction as, 189
mercy as, 114
misclassification of, 42, 44, 200–201
out-of-character trading as, 68–69
purposeful choice commingled with, 40–43, 129, 171
rationalizations for, 194–195
in trolley problem, 137
unemployment and, 186
France, 191
Fuji Bank, 14
futures, 80–81
gain-loss asymmetry, 10–11
Galperti, Simone, 217n1
gambler’s fallacy, 199
gamifying, 177
Garber, Peter, 212n1
Germany, 191
global equity, 75
Good Samaritan (biblical figure), 103, 129–130, 206
governance, of institutional investors, 74
Great Britain, 191
Great Depression, 94
Greek antiquity, 190
guilt, 127
habituation, 201
happiness research (positive psychology), 25–26, 201–202
Hayek, Friedrich, 61, 70
hedge funds, 15–17, 65, 75, 78–79, 93, 95
herd mentality, 96
heroism, 6–7, 19–20
hindsight effect, 199
holding, of investments, 79–80
home country bias, 64–65
Homer, 149
Homo ludens, 167–168
hostile attribution bias, 59
housing market, 94
Huizinga, Johan, 167–168
human life, valuation of, 138–143
Hume, David, 62, 209n5
hyperbolic discounting, 158, 201
illiquid markets, 74, 94
index funds, 75
individual investing, 76–82
Industrial Bank of Japan, 14
information asymmetry, 96, 210n2
innovation, 190
institutional investing, 74–76, 82, 93–95, 205
intergenerational transfers, 217n1, 218n4
interlocking utility, 108
intertemporal choice, 149–159, 166
investing: personal beliefs and, 52–53
in start-ups, 27
Joseph (biblical figure), 97–99
Kahneman, Daniel, 168
Kantianism, 135–136
Keynes, John Maynard, 12, 58, 167, 169, 188–189
Kierkegaard, Søren, 30, 53, 65, 88
Knight, Frank, 145, 187
Kranton, Rachel E., 210–211n2
labor supply, 185–189
Lake Wobegon effect, 4
lawn-mowing paradox, 33–34, 206
Lehman Brothers, 61, 86, 89, 184
leisure, 14, 17, 41, 154, 187
Libet, Benjamin, 161
life, valuation of, 138–143
Life of Alexander (Plutarch), 180–181
Locher, Roger, 117, 124
long-term vs. short-term planning, 148–149
loss aversion, 70, 199
lottery: as rational choice, 199–200
Winner’s Curse, 34–36
love altruism, 104, 116, 123–125, 126, 203
lying, vs. omitting, 134
Macbeth (Shakespeare), 63
MacFarquhar, Larissa, 214n6
Madoff, Bernard, 170
malevolence, 125–127
Malthus, Thomas, 212n2
manners, in social interactions, 104, 106, 107, 116, 125
market equilibrium, 33
Markowitz, Harry, 65
Marshall, Alfred, 41, 167
Mass Flourishing (Phelps), 189–191
materialism, 5
merchant’s choice, 133–134, 137–138
mercy, 104, 114–116, 203
examples of, 116–120
inexplicable, 45–46, 120–122
uniqueness of, 119, 129
mergers and acquisitions, 192
“money pump,” 159
monks’ parable, 114, 124
Montaigne, Michel de, 114, 118
mortgage-backed securities, 93
Nagel, Thomas, 161
Napoleon I, emperor of the French, 71
neoclassical economics, 8, 10, 11, 22, 33
Nietzsche, Friedrich, 21, 43, 209n5
norms, 104, 106–108, 123
Norway, 66
Nozick, Robert, 162
observed care altruism, 108–112
Odyssey (Homer), 149–150
omission bias, 200
On the Fourfold Root of the Principle of Sufficient Reason (Schopenhauer), 209n5
“on the spot” knowledge, 61, 70, 80, 94, 205
Orico, 13
overconfidence, 57, 200
“overearning,” 44–45
The Palm Beach Story (film), 7
The Paradox of Choice (Schwartz), 172
parenting, 108, 141, 170–171
Pareto efficiency, 132–133, 136, 139–140
Peirce, Charles Sanders, 53–54, 67, 94
pension funds, 66, 74–75, 93, 95
permanent income hypothesis, 179
Pharaoh (biblical figure), 97–99
Phelps, Edmund, 17, 189–191
Philip II, king of Macedonia, 181
planning, 149–151
for consumption, 154–157
long-term vs. short-term, 148–149
rational choice applied to, 152–158, 162
play, 44–45, 167, 202
pleasure-pain principle, 18
Plutarch, 180–181
Poe, Edgar Allan, 126
pollution, 132–133
Popeye the Sailor Man, 19
portfolio theory, 64–65
positive psychology (happiness research), 25–26, 201–202
preferences, 18–19, 198
aggregating, 38–39, 132, 164
altruism and, 28, 38, 45, 104, 110, 111, 116
in behavioral economics, 24, 168
beliefs’ feedback into, 51, 55
defined, 23
intransitive, 158–159
in purposeful behavior, 25, 36
risk aversion and, 51
stability of, 33, 115, 147, 207, 208
“time-inconsistent,” 158, 159, 166, 203
present value, 7, 139
principal-agent problem, 72
Principles of Economics (Marshall), 41
prisoner’s dilemma, 105
private equity, 75
procrastination, 3, 4, 19, 177–178
prospect theory, 168
protectionism, 185–187
Prussia, 191
public equities, 75
punishment, 109
purposeful choice, 22–26, 27, 34, 36, 56, 133–134, 204–205
altruism compatible with, 104, 113–114, 115–116
commensurability and, 153–154
as default rule, 43–46
expert opinion and, 57
extreme unexpected events and, 62–63
flow of time and, 30
for-itself behavior commingled with, 40–43, 129, 171
mechanistic quality of, 68
in merchant’s choice, 135, 137–138
Pareto efficiency linked to, 132
rational choice distinguished from, 22–23
regret linked to, 128
social relations linked to, 28
stable preferences linked to, 33
in trolley problem, 135–136
vaccination and, 58–59
wage increases and, 187. See also rational choice
quests, 30–31
Rapaczynski, Andrzej, 220n24
Raskob, John Jakob, 211–212n12
rational choice: behavioral economics reconciled with, 6, 10
changes of mind consistent with, 147, 149–151
comparison inherent in, 37–39, 196
defined, 22–23
individual preferences accommodated by, 198
insights of, 5, 10, 21, 24–25, 138–139
perils and shortcomings of, 7–8, 12, 14, 21, 52, 55
purposeful choice distinguished from, 22–23
social relations unexplained by, 12
stable preferences linked to, 115. See also purposeful choice
rationalization, 15, 43–44, 55, 159–162, 178, 194–195
readiness potential, 161
real estate, 80
redistribution, 109
reference points, 168
regret, 127–128, 129
religious faith, 49–50, 116
remorse, 128–129
repeat dealing, 105
repentance, 128
reputation, 105–106, 134, 183
retirement, 19, 41, 185, 206
Ricardo, David: personal investments, 71, 205
theory of comparative advantage, 185
risk: above-market returns linked to, 70
aversion to, 17, 51, 96, 168, 199
diversification and, 64
in efficient market hypothesis, 69, 70
in human-life valuation, 139
low asset prices linked to, 96
modeling of, 69, 76
rivalry, 201
Rockefeller, John D., 211–212n12
Rotten Kid Theorem, 108–110, 125
Russell, Bertrand, 62
salience, 29
Sartre, Jean-Paul, 128–129
satisficing, 42–43
Saul of Tarsus, 63
Schopenhauer, Arthur, 5, 161, 209n5
Schwartz, Barry, 172
scientific knowledge, 61
scientific method, 49–50, 53
search costs, 9
Searle, John, 141–142
Securities and Exchange Commission (SEC), 16
selfish altruism, 104, 105–106, 109, 123, 125, 135
Seligman, Martin, 202
Sen, Amartya, 169
Shafir, Eldar, 174
Shane (film), 169
Sharpe, William, 65
short-term trading, 78
Siddhartha Gautama, 63