by Richard Robb
A last-ditch defense of the theory that all behavior is purposeful might be: “So what? It’s only a model; it was never supposed to be a perfect description of the world.” But I don’t find that persuasive. As we’ve seen, the purposeful model falls short in important areas of life. Nor would I be persuaded by the argument that classifying action as for-itself means giving up on understanding it. Granted, it’s hard to see how for-itself action could be modeled with the rigor of rational choice. Unlike mathematics, which deals with the general, the for-itself concerns particulars, making it difficult to abstract. But a for-itself analysis of action has provided insight into many practical matters.
Just Because
We can benefit in several ways from understanding the boundary between the two realms. “Benefit” is perhaps an odd word when we’re talking about the for-itself, but it’s fair to ask what we can get out of all this. First, it can help us become more productive in the old-fashioned sense. We have already discussed ways in which seeing where the purposeful ends and the for-itself begins can make us better economists, investors, business managers, philanthropists, or policymakers. Second, recognizing the difference allows us to feel more at ease with behavior that we might otherwise be tempted to pathologize, yet it still leaves room for improvement through studying biases and heuristics. Finally it can mitigate a sense of fragmentation in our lives. Each of these concerns, even the last two, is a benefit in the rational choice realm; when I consult my inventory of desires, I’ll surely find being more at ease with my foibles and reduced alienation to be among them. If push came to shove, I suppose I could tell you how much alienation I’d accept on the margin in exchange for a slightly bigger kitchen.
To revisit an example from Chapter 4, institutional investors who recognize the distinction between the purposeful and the for-itself will make more money. They’ll relax their reflexive commitment to the “best practices” of the purposeful realm: metrics, market efficiency, mathematical models, attributing expected returns to various risk factors, and analysis based on measures of risk and reward. Instead, they’ll accept that real opportunities are unique. Each one stands for itself. Individuals who have “on the spot” knowledge that cannot be fully transmitted to others need to be able to act. This was what David Ricardo did when he bought British government bonds on the eve of Waterloo, and what many other successful investors have done before and since. How can an institution take similar for-itself leaps without descending into recklessness? This, too, comes down to the specifics. There is, and there can be, no general answer.
Beyond improving our results as we seek to gratify desires, acknowledging the for-itself gives us license to embrace specific conduct that we can’t credibly explain to ourselves or others in terms of purposeful choice. Keep working beyond the point when you can afford to retire. Don’t let the logic of rational choice bully you into hiring a gardener if you like mowing your own grass. Hold onto your beliefs, argue with those who oppose you—you can stand your ground without feeling that you’re debating in bad faith. As the trolley approaches, push or don’t push the fat man—it’s up to you. Hold open the subway door for a stranger even though you know it does more collective harm than good. You don’t need a rationalization for an inefficient altruistic gesture any more than the Good Samaritan did when he showered all that attention on one random man. Answering “just because” can be good enough.
Accepting the coexistence of the two realms is a therapy for those of us who are steeped in the theory of rational choice and feel disoriented when we try to reconcile our actions with its monolithic vision. Throughout this book, I’ve offered examples of individuals trying and failing to integrate abstracted versions of themselves or to make sense of their choices in terms of rationality. In the discussion of choice through time, a person applying the rational model had to referee an unwinnable fight between her present and future selves. Similarly, someone contemplating decisions that would change her beliefs risked becoming a new person with new preferences; adopting the language of fragmentation, she “debated with herself.” Stuck in this mode of thinking, she had to imagine the potential new identity that would result from each course of action, then assign the final decision to a homunculus who saw the whole scene from an even more detached point of view. Accepting the dual character of our actions, as depicted in the schema at the beginning of this chapter, can form the basis for a peace treaty between these warring selves.
The study of economics, which is now widespread even in high schools, transmits the alienation that comes from seeing the world in terms of abstract agents who calculate on behalf of potential selves. Economics students learn to think of themselves and others as agents that rationally optimize fixed preferences subject to constraints. By studying game theory, they come to view their opponents as agents seeking their own advantage and to understand that their opponents see them the same way. Studies have shown that those who study economics are less cooperative in games like the ultimatum game, but that’s another point altogether.8
Whether or not they make students selfish, such habits of thought are clearly conducive to a mechanistic understanding of life. Knowledge becomes nothing more than an instrument for maneuvering through the world. The reduction of all motives to a single abstraction takes us as far as possible from the concrete, unique individual. Rational choice economics can untether us from life as it is lived.
This is not to say that we should abandon the study of economic theory, but that it may be wise to reflect on its perils. Now, when I teach economics, I’m careful to address the for-itself realm. By recognizing that our thought process is not broken if we can’t explain “why,” perhaps we can protect ourselves from the consequences of overexposure. Perhaps teachers of economics (including me) ought to know when it’s time to “leave them kids alone.”
But “them kids” should still learn their economics. A million insights, large and small, come from seeing the world in terms of agents with stable preferences doing their best. Why do people in Houston keep their homes cooler in January than those living in Toronto? The answer, according to rational choice: it’s optimal to invest in thicker walls and more efficient heaters in colder climates, so the extra cost of raising the temperature when it’s cold outside is lower in Toronto. Why does an increase in wages generally reduce the amount of crime? Rational choice sees crime as just another occupation; as opportunities in the non-crime sector improve, the least-satisfied criminals raise their utility by going straight.
Nobody has to go all the way, though, as I once did, in clinging to the belief that rational choice explains everything. Life is complicated, and why shouldn’t it be? Not only does recognizing the for-itself realm improve our understanding of practical matters, it also facilitates a closer, more organic connection to our own choices.
Notes
ONE
Venturing beyond Purposeful Choice
1. Schopenhauer, World as Will and Idea, 1:29.
2. Williams, “Persons, Character and Morality,” 18.
3. See Loewenstein, “The Weighting of Waiting.”
4. Keynes, “My Early Beliefs,” 96.
5. These ideas can be found in David Hume’s Treatise of Human Nature, in which he said: “Reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them” (415). They appear again in Arthur Schopenhauer’s The World as Will and Idea and On the Fourfold Root of the Principle of Sufficient Reason, and in Friedrich Nietzsche’s Will to Power, where he wrote, “Everything of which we become conscious is a terminal phenomenon, an end—and causes nothing … And we have sought to understand the world through the reverse conception” (265).
6. Dostoevsky, Notes from Underground, 21.
7. Ibid., 25.
8. Nietzsche, Philosophy in the Tragic Age, 54–55.
TWO
Two Realms of Human Behavior
1. Kierkegaard, Either/Or, 163–164.
2. Be
cker, Economic Approach, 5. Neoclassical economics could be challenged on the assumption of perfect exchange, i.e., markets in equilibrium, and many have done so. Trading may break down due to heterogeneous goods and information asymmetries, imperfect performance on contracts, prices set via strategic bargaining rather than a Walrasian auctioneer, sheer deceit—you name it. In this case, observed behavior will fail to conform to neoclassical models and economists’ policy prescriptions will not fit the real world. See, e.g., Kohn, “Value and Exchange.” But that is not our focus. Here we are concerned with motives at the level of the individual.
3. Thaler, “Consumer Choice,” 43–47.
4. This logic resembles that of theorems on the impossibility of voting schemes that fully reflect social preferences. See, e.g., Arrow, Social Choice, 46–60.
5. Simon, “Rational Choice.”
6. Nietzsche, Thus Spoke Zarathustra, 33–35.
7. Hsee et al., “Overearning,” 852–853.
8. Richtel, “Can’t Take It with You.”
THREE
Acting in Character
1. Whitman, “Song of Myself.”
2. In “Economics and Identity,” Akerlof and Kranton model identity in terms of rational choice theory. In their setup, each person is assigned to an identity group, such as gender, with corresponding tastes for different types of action. An individual’s utility function includes conforming to the assigned identity (failure to do so imposes an unpleasant drop in identity) and a preference that others who share the same identity perform the prescribed actions. Violators or “mavericks” lessen group cohesion. One might seek to rein in mavericks by threatening to punish them with ridicule or ostracism. This imposes a cost on the punishers as well as the punished, so punishment is worthwhile to the extent that the cost to the punishers is low, their concern for group conformity is high, and potential mavericks are easily deterred. This model can account for workplace discrimination, social exclusion, sorting by gender into occupations, and certain aspects of allocation of time in the household if, for instance, a wife preferred to act in accordance with traditional roles. The authors note that rules can evolve, and indeed after less than twenty years, their examples, like secretaries who are called “office wives” to male bosses, feel straight out of a time capsule. Rereading Akerlof and Kranton today, one is struck by the fruits of social progress: looser rules and reduced pressure to conform. I am using “identity” in a much broader sense than Akerlof and Kranton, to refer to the totality of an individual’s attitudes and beliefs. This sense of “identity” can accommodate, for example, rebellion against gender roles. More importantly, it includes behavior that does not stem from membership in any particular group, such as a person subscribing to alternative medicine even if others in her Akerlof-and-Kranton-assigned identity group do not.
3. Peirce, “Fixation of Belief.”
4. Kierkegaard, Fear and Trembling/Repetition, 132–133.
5. There is no direct evidence linking this famous quote to Keynes, although Joan Robinson wrote in the Economic Journal in 1986 that Keynes would say it whenever he was accused of being inconsistent. The Wall Street Journal quoted Paul Samuelson in 1978 attributing a similar remark to Keynes. For an impressively rigorous analysis of the provenance of this quote, see http://quoteinvestigator.com/2011/07/22/keynes-change-mind/ (accessed February 7, 2019).
6. Nyhan et al., “Effective Messages in Vaccine Promotion,” 835.
7. Twain, Tom Sawyer Abroad, 77.
8. Hayek, “Use of Knowledge.”
9. The Supreme Court of the United Kingdom, Judgment in the matter of Lehman Brothers International (Europe) (in Administration) and in the Matter of the Insolvency Act 1986 (February 29, 2012), full transcript at https://www.supremecourt.uk/cases/docs/uksc-2010-0194-judgment.pdf (accessed February 7, 2019).
10. Russell, Problems of Philosophy, 96.
11. Darwin, Life and Letters, 310.
12. Kierkegaard, Fear and Trembling/Repetition, 43. Whatever his flaws, John D. Rockefeller was a knight of faith. In March 1930, during some of the darkest days of the Great Depression, he broke ground on New York City’s Rocke-feller Center. He later said, “It was clear that there were only two courses open to me. One was to abandon the entire development. The other to go forward with it in the definite knowledge that I myself would have to build it and finance it alone” (Okrent, Great Fortune, 70). “I,” “myself,” and “alone.” Rockefeller could have made more money with less risk by buying a diversified portfolio of shares, but he was already rich, and that’s not what he wanted to do. Two other knights of faith, John Jakob Raskob and Al Smith, reportedly hatched a plan to build the world’s tallest building in November 1928 to revive their spirits after Smith lost the presidency to Herbert Hoover. They announced the Empire State Building on August 29, 1929. Smith and Raskob raised money while the stock market crashed, broke ground on Saint Patrick’s Day in March 1930, and opened on May 1, 1931 (Berman, Empire State Building, 11).
FOUR
Making Money in Financial Markets
1. Stalwart believers in efficient markets will even deny the existence of market “bubbles.” In at least some cases, they’re right. For instance, most people believe that seventeenth-century Dutch traders lost their minds, bidding up the price of tulips to incredible heights and causing an economic crisis when prices finally collapsed. According to Peter Garber’s 1989 article debunking tulipmania, modern references to the tulip craze are based on a brief description from 1852 that drew in turn on unreliable secondary sources. Garber’s investigation shows that the price of rare bulbs did soar from 1634 to 1637, then gradually fell. But a temporary spike in prices for rare bulbs was a normal phenomenon for tulips as it was for hyacinths. A rare bulb could be propagated by asexual reproduction to double the supply each year, so a buyer could recover the initial outlay by selling off the new supply as prices declined. The only real oddity is the wild rise in the price of common bulbs in January 1637 before they plummeted that February. This spike appears to be the result of bets made in bars by traders goofing around—they put no money behind the contracts, had no money to pay, and perhaps no expectation that the contracts would be enforced. There are no credible contemporaneous accounts of economic distress; the speculation caused only the transfer of wealth, and little wealth was transferred in the end.
2. Zeckhauser, “Investing in the Unknown and Unknowable.” Ricardo persuaded Thomas Malthus to join him in buying bonds, but Malthus chickened out before the battle and sold at a small profit.
3. Smith, Wealth of Nations, 64. Emphasis mine.
FIVE
For-Itself Decision-Making within a Group
1. Even if the entrepreneur did manage to convince the venture capitalist, many communication hurdles would still lie ahead. The information that must be communicated is at its most intimate, unique, and personal at the start of a firm’s life. For this reason, initial funding for startups usually comes from those with the best chance of connecting with the entrepreneur’s vision—family and close friends. Next come “angel investors,” rich individuals who invest their own money. Often, the angel already knows the entrepreneur. After the business has gone a certain distance, it is ready for venture capital. The entrepreneur can expect a personal relationship, up to a point, with venture capitalists who are prepared to take the leap. But if the goal is a public offering of stock, the company must make a mountain of information available as freely transmittable facts. Privacy and close personal relationships are replaced by the larger investment community and the impersonal contact between managers and public investors. When a deal expands from a close personal circle to include the general public, communicating beliefs becomes quantumly more difficult.
SIX
Altruism
1. In business, cooperative behavior can be beneficial in two ways. First, it’s impossible to draw up contracts that anticipate every possible contingency. Even if it were possible, contracts would still be costly to monitor a
nd enforce. A party with a reputation for fair dealing can be counted on to stick to the spirit of a written or unwritten agreement even when he is not legally obligated to do so. Second, repeat dealings can facilitate gains from efficient favors when the transfer of money is prohibited by law or social convention. Today, I’ll scratch your back if it benefits you by more than it costs me. In the future, the opportunity might arise for you to scratch mine. But we have to trust each other.
2. Roth et al., “Bargaining and Market Behavior.” In a multiplayer version of the game, the allocators kept almost everything and the receivers accepted small offers. This held up in all four cities and became particularly pronounced after several rounds as players learned. Norms evidently do not apply in the same way when the opponent is a crowd rather than an individual.
3. Andersen et al., “Stakes Matter.” Like manners, the social norms for fairness and punishing unfairness vary across societies. Studies by Henrich et al. (“Markets, Religion,” and “Costly Punishment”) have shown that allocators offer larger shares of the pot in societies that are integrated with markets (e.g., wage workers in Accra City, Ghana, versus nomadic foragers in the savanna woodlands of Tanzania). For example, allocators among the Tsimane, hunter-gatherers in the jungles of Bolivia, offered an average of only 26 percent of the pot. The lower the offer, the more frequently it was rejected in all fifteen societies studied, although rejection rates differed sharply across societies. Most notably, members of small communities and those lacking market economies are more likely to accept low offers. For instance, 85 percent of inhabitants of Yasawa Island, Fiji (engaged in horticulture and marine foraging) accepted offers as low as 10 percent of the pot, while 100 percent of Emory University freshmen and Gusii (mixed farming/wage workers in the high plains of Kenya) rejected all offers of less than 40 percent. Evidently, societies less experienced with anonymous market transactions had not yet developed sophisticated norms for fairness in this kind of commerce, so players went for the highest payoff.
