Why people believe weird things about money(latimes.com)
latimes.com
Why people believe weird things about money
http://www.latimes.com/news/opinion/la-op-schermer13jan13,0,1195880.story?coll=la-opinion-rightrail
19 comments
popularity, social power, and possibly getting laid
As you suggest, these things are gotten from relative and not absolute wealth. If I make 50,000 dollars in an area where everyone makes 25,000, I am extremely wealthy, and can name my price for the important things in life. I wonder how the "researchers" missed that point.
As you suggest, these things are gotten from relative and not absolute wealth. If I make 50,000 dollars in an area where everyone makes 25,000, I am extremely wealthy, and can name my price for the important things in life. I wonder how the "researchers" missed that point.
There's an argument that in the strict sense, everyone is rational because they are all maximising some utility - it just isn't clear what that utility is, eg. money, sex, power, the satisfaction of having a well ironed shirt, it could be anything really.
Which is why this definition of rationality isn't very practical. In the traditional economic sense, rationality means maximimising money. With this narrow definition (and big assumption), the economic equations become tractable and can actually be analysed. Of course this doesn't represent reality. Going back to Kahneman and Tversky with their study on decision-making under risk (probably even further back than them since this is pretty obvious), psychologists have shown that humans aren't very rational.
But economists still tend to rely on this assumption so that the game theory equations work. Having said that though, I'm not sure whether or not this assumption holds (at least reasonably well) in the macro sense.
Which is why this definition of rationality isn't very practical. In the traditional economic sense, rationality means maximimising money. With this narrow definition (and big assumption), the economic equations become tractable and can actually be analysed. Of course this doesn't represent reality. Going back to Kahneman and Tversky with their study on decision-making under risk (probably even further back than them since this is pretty obvious), psychologists have shown that humans aren't very rational.
But economists still tend to rely on this assumption so that the game theory equations work. Having said that though, I'm not sure whether or not this assumption holds (at least reasonably well) in the macro sense.
seriously.
Putting it into a more emotionally charged version for us all - you can do a startup on your own and sell it for $1 million. Or you can be partners with someone who will do no work and take all the credit, but then the company will sell for $110 million, of which you will get 1% or $1.1 million.
It's the VC value proposition ;-)
I'd much rather have the last option - being an employee is less stressful and feels like a smaller responsibility than being a founder. And to top it off, I would get paid more.
Loss aversion is a large reason why many of my high school and college friends end up not doing start ups.
Loss aversion is about the only reason people don't do startups! :)
I know this is supposed to be a startup echo chamber, but come on...
I feel silly even contemplating spelling out the many reasons (beyond loss aversion) why not everyone starts their own company.
I feel silly even contemplating spelling out the many reasons (beyond loss aversion) why not everyone starts their own company.
News flash: it's not very enlightening to say that someone isn't rational because they aren't efficient at reaching goals you would prefer they have. You may think it's silly to want what they want, but that just means you don't want what they want. Big deal. Goals cannot be chosen rationally unless they're subordinate to some other goal.
There is a huge body of literature on cognitive biases. Under the right conditions, people will reliably make stupid bets. For example:
"Consider a regular six-sided die with four green faces and two red faces. The die will be rolled 20 times and the sequence of greens (G) and reds (R) will be recorded. You are asked to select one sequence, from a set of three, and you will win $25 if the sequence you chose appears on successive rolls of the die. Please check the sequence of greens and reds on which you prefer to bet.
1. RGRRR
2. GRGRRR
3. GRRRRR"
65% of the subjects chose 2, even though 1 provides the greatest chance of winning money. (From "Extensional versus intuitive reasoning: The conjunction fallacy in probability judgment," by Tversky and Kahneman.)
Maybe all those subjects had the unconventional goal of avoiding free money. But it seems more likely that they weren't thinking well.
"Consider a regular six-sided die with four green faces and two red faces. The die will be rolled 20 times and the sequence of greens (G) and reds (R) will be recorded. You are asked to select one sequence, from a set of three, and you will win $25 if the sequence you chose appears on successive rolls of the die. Please check the sequence of greens and reds on which you prefer to bet.
1. RGRRR
2. GRGRRR
3. GRRRRR"
65% of the subjects chose 2, even though 1 provides the greatest chance of winning money. (From "Extensional versus intuitive reasoning: The conjunction fallacy in probability judgment," by Tversky and Kahneman.)
Maybe all those subjects had the unconventional goal of avoiding free money. But it seems more likely that they weren't thinking well.
Sure, and I've no problem with that. The article in question, though, was suggesting that people are choosing wrong when they knowingly choose to be poorer but happier. There was no failure to understand the problem implied -- it's just that they didn't choose the way the article author wanted them to, and he conveyed this by calling them irrational.
It's pretty well established in the psychology literature that the effects of money on happiness are relative. You're happy (for some short time) if you make more than you expected, and you're (often) happy if you make more than your peers. Absolute quantity of money doesn't really do much for us humans, and I think the "irrational" test subjects were aware of that.
Ask a stupid question, get a stupid answer.
I've observed that inheritors are more risk averse than those who have earned their money. This may be rational. The earners know that they can earn it again. The inheritors know that they probably will not inherit again.
Evolutionary psychology crap. Ugh.
I agree with the sentiment. A lot of this stuff seems to be retrofitted to the observation. You can explain a lot of things through evolution, but to explain all behaviour in terms of it leads to a lot quackery and pseudoscience.
There doesn't seem to be a lot of rigor in these types of papers; a lot of hand waving.
There doesn't seem to be a lot of rigor in these types of papers; a lot of hand waving.
Assuming that your popularity, social power, and possibly getting laid a whole lot less are worth nothing to you? The question fails to capture total value, it seems.
Still a very interesting topic. People reason about money in strange ass ways.