Bigfoot 88
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Don't jump to conclusions (markets are smarter than you or I)
- Thread starter Bigfoot 88
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I agree that the obscene CEO pay should have higher MTR's. Not really sure about the rest.
RGacky3
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Markets arn't "smarter ... they just are determined by where the Money goes, so whoever has more Money has more pay, doesn't mean it picks Things that are better for society, only those Things which generate more profits ... for example what's better for a society a Public park in a low Income area, or more super mansions, markets will pick the latter, because it generates more profit, but arguable the former is much better for society.
But InFact climate change is one example that shows why markets are pretty stupid ... InFact all negative externalities and systemic failures, markets don't just not handle those problems well, they totally ignore them.
JP Hochbaum
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Markets are heavily determined by emotions, so calling it smarter than you or I, is akin to believing that our emotions, sans reason and logic, are better than our collective knowledge.
"Rationality
Rationality is defined as "the ability to reason" and "to exercise good judgment." Humans of course possess these traits, but they are not the ultimate driving force behind human behavior. One of the basic facts of modern psychology is that our intellect serves our emotions, not vice versa. Human behavior is not primarily the result of logical cost-benefit analysis, but of emotions like love, hate, loneliness, fear, greed, anxiety, sexual attraction, pleasure, pain, etc. We use our intellect only to fulfill or avoid these emotional states.
Let's consider the first half of the definition of rationality: "the ability to reason." Just one example of how emotions are irrational in this sense is sexual attraction. We do not "decide" or "think" to become sexually attracted to someone; we just are, thanks to our genes and hormones. The only role of the intellect here is to formulate a mating strategy.
Now let's consider the second half of the definition of rationality: "the ability to exercise good judgment." Just one example of how emotions are irrational in this sense is self-destructive behavior like alcoholism. People become addicted to alcohol because it chemically induces an emotional state: euphoria. But while pursuing this emotional state, alcoholics destroy their lives. George Vaillant is perhaps the nation's leading authority on alcoholism, and he offers the following portrait of an alcoholic's career. Most alcoholics go on and off the wagon, but their condition progressively worsens as they reach middle age. They will generally lose everything dear to them: their family, their friends, their jobs, their homes, their possessions, their reputations. Finally they will hit bottom: they will have nothing left to lose but their lives. This is the turning point for most. Roughly a third will die or stay in horrible shape at the bottom, another third will become abstinent, and another third will shift to more responsible social drinking. (1)
Although one might argue that most alcoholics ultimately do the rational thing at bottom and choose survival, the point is that the 20-year slide to the bottom is not rational in the first place. Losing a job would be a negative incentive that would compel a truly rational person to stop drinking. But the alcoholic goes on to the next negative incentive -- losing one's family -- and then on to the next -- losing one's house -- and so on, without ever making the obvious rational choice. And all in the pursuit of an emotional state.
A large part of the reason why alcoholics aren't rational is because they are in denial. In other words, they've constructed their own alternate reality to protect themselves from the ugly truth about their condition. For instance, they often blame everyone else for the negative events in their lives, when in fact people are just reacting as they normally would to a problematic person.
This sort of irrationality (or "rationalization") is not isolated to alcoholics. To varying degrees, we all rationalize our reality. The consensus of modern psychologists on this point is overwhelming, and finds its best expression in Cognitive Dissonance Theory, first advanced in 1957 by famed psychologist Leon Festinger.
A "cognition" is a belief or attitude. "Dissonance" is an inconsistency between cognitions, or between cognitions and actions. For example, dissonance occurs when you hit someone (say, on a regular basis) and then feel guilty about it between times. Dissonance is unpleasant, so people seek to reduce this unpleasantness by changing either their behavior or their cognition. In the above example, you could either stop hitting someone, or else stop feeling guilty about it ("He or she deserved it"). Most of the time, it's easier to change one's beliefs than behavior, especially when the behavior is addictive, pleasurable, genetic, etc. Psychologists have concluded that people create rationalizations or justifications for their beliefs and actions to maintain psychological stability -- they do not generally come to those beliefs or actions through objective rationality and self-interest. (2)"
Myth: Homo economicus is a valid assumption
"Rationality
Rationality is defined as "the ability to reason" and "to exercise good judgment." Humans of course possess these traits, but they are not the ultimate driving force behind human behavior. One of the basic facts of modern psychology is that our intellect serves our emotions, not vice versa. Human behavior is not primarily the result of logical cost-benefit analysis, but of emotions like love, hate, loneliness, fear, greed, anxiety, sexual attraction, pleasure, pain, etc. We use our intellect only to fulfill or avoid these emotional states.
Let's consider the first half of the definition of rationality: "the ability to reason." Just one example of how emotions are irrational in this sense is sexual attraction. We do not "decide" or "think" to become sexually attracted to someone; we just are, thanks to our genes and hormones. The only role of the intellect here is to formulate a mating strategy.
Now let's consider the second half of the definition of rationality: "the ability to exercise good judgment." Just one example of how emotions are irrational in this sense is self-destructive behavior like alcoholism. People become addicted to alcohol because it chemically induces an emotional state: euphoria. But while pursuing this emotional state, alcoholics destroy their lives. George Vaillant is perhaps the nation's leading authority on alcoholism, and he offers the following portrait of an alcoholic's career. Most alcoholics go on and off the wagon, but their condition progressively worsens as they reach middle age. They will generally lose everything dear to them: their family, their friends, their jobs, their homes, their possessions, their reputations. Finally they will hit bottom: they will have nothing left to lose but their lives. This is the turning point for most. Roughly a third will die or stay in horrible shape at the bottom, another third will become abstinent, and another third will shift to more responsible social drinking. (1)
Although one might argue that most alcoholics ultimately do the rational thing at bottom and choose survival, the point is that the 20-year slide to the bottom is not rational in the first place. Losing a job would be a negative incentive that would compel a truly rational person to stop drinking. But the alcoholic goes on to the next negative incentive -- losing one's family -- and then on to the next -- losing one's house -- and so on, without ever making the obvious rational choice. And all in the pursuit of an emotional state.
A large part of the reason why alcoholics aren't rational is because they are in denial. In other words, they've constructed their own alternate reality to protect themselves from the ugly truth about their condition. For instance, they often blame everyone else for the negative events in their lives, when in fact people are just reacting as they normally would to a problematic person.
This sort of irrationality (or "rationalization") is not isolated to alcoholics. To varying degrees, we all rationalize our reality. The consensus of modern psychologists on this point is overwhelming, and finds its best expression in Cognitive Dissonance Theory, first advanced in 1957 by famed psychologist Leon Festinger.
A "cognition" is a belief or attitude. "Dissonance" is an inconsistency between cognitions, or between cognitions and actions. For example, dissonance occurs when you hit someone (say, on a regular basis) and then feel guilty about it between times. Dissonance is unpleasant, so people seek to reduce this unpleasantness by changing either their behavior or their cognition. In the above example, you could either stop hitting someone, or else stop feeling guilty about it ("He or she deserved it"). Most of the time, it's easier to change one's beliefs than behavior, especially when the behavior is addictive, pleasurable, genetic, etc. Psychologists have concluded that people create rationalizations or justifications for their beliefs and actions to maintain psychological stability -- they do not generally come to those beliefs or actions through objective rationality and self-interest. (2)"
Myth: Homo economicus is a valid assumption
JP Hochbaum
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From the same link above:
"Examples of how real people differ from Homo economicus
Countless experiments and examples show the fallaciousness of Homo economicus.
Cornell economist Richard Thaler conducted a famous experiment in which he gave half his students coffee mugs that normally cost $6.00. He then invited students to buy, sell or keep their mugs, at whatever price they wanted to negotiate among themselves. Economic theory predicts that roughly half the mugs should change hands, and that mug-owners and non-mug owners would agree on the objective value of the mug, and therefore an average price. But in four different experiments, something different happened. Mug-owners demanded an average of $5.25; non-mug owners were willing to pay no more than $2.75. Consequently, only 12.5 percent of the mugs traded. In theory, both owners and non-owners were asking themselves the same question: the value of the mug. But somehow, the value of possession of the mug also worked itself into the equation. Apparently, humans have an instinctive and "irrational" predisposition to hoard material wealth. (5)
In 1985, Elizabeth Hoffman and Matthew Spitzer conducted the following experiment on rationality. They devised a simple game in which two people decide how to split $14. The rules allowed the players to split the money however they wanted. However, if no agreement was reached, then the first player would receive $12 and the second player would receive nothing. According to cooperative game theory, the most logical result is that the second player should agree to $1 and let first player take $13. That's because if the second player tries for anything more, he gets nothing since the first player can simply disagree and collect $12 anyway. So, under no circumstances should the first player agree to anything less than $13. But something very different happened during the actual experiment. When players 1 and 2 were determined by a coin toss, the players always agreed to split the money evenly… $7 apiece! (6) It appears that people are often more motivated by fair play, easy solutions or some other factor than "rational maximization."
Studies also show that people still tip in restaurants that they do not expect to visit again, in contrast to Homo economicus, who is predicted to keep his money since no retribution will result. Other experiments show that large numbers of people are willing to return lost wallets, cash intact, with no expectation of reward. Obviously, people often engage in civil behavior, not just out of virtue and morality, but because such behavior makes for a smoother running and more efficient society and economy. (7)
Another obvious irrationality is advertising. Take one of the most successful advertising ploys of all time: the inclusion of sexy young women in beer commercials. The implication of these commercials is "Drink our beer, get this girl." Interestingly enough, these subliminal messages work -- such beer ads are wildly successful. But a message closer to the truth is "Get this beer gut, drive this girl away." One of the more amusing topics in right-wing economics is the defense of such advertising as "rational."
"Examples of how real people differ from Homo economicus
Countless experiments and examples show the fallaciousness of Homo economicus.
Cornell economist Richard Thaler conducted a famous experiment in which he gave half his students coffee mugs that normally cost $6.00. He then invited students to buy, sell or keep their mugs, at whatever price they wanted to negotiate among themselves. Economic theory predicts that roughly half the mugs should change hands, and that mug-owners and non-mug owners would agree on the objective value of the mug, and therefore an average price. But in four different experiments, something different happened. Mug-owners demanded an average of $5.25; non-mug owners were willing to pay no more than $2.75. Consequently, only 12.5 percent of the mugs traded. In theory, both owners and non-owners were asking themselves the same question: the value of the mug. But somehow, the value of possession of the mug also worked itself into the equation. Apparently, humans have an instinctive and "irrational" predisposition to hoard material wealth. (5)
In 1985, Elizabeth Hoffman and Matthew Spitzer conducted the following experiment on rationality. They devised a simple game in which two people decide how to split $14. The rules allowed the players to split the money however they wanted. However, if no agreement was reached, then the first player would receive $12 and the second player would receive nothing. According to cooperative game theory, the most logical result is that the second player should agree to $1 and let first player take $13. That's because if the second player tries for anything more, he gets nothing since the first player can simply disagree and collect $12 anyway. So, under no circumstances should the first player agree to anything less than $13. But something very different happened during the actual experiment. When players 1 and 2 were determined by a coin toss, the players always agreed to split the money evenly… $7 apiece! (6) It appears that people are often more motivated by fair play, easy solutions or some other factor than "rational maximization."
Studies also show that people still tip in restaurants that they do not expect to visit again, in contrast to Homo economicus, who is predicted to keep his money since no retribution will result. Other experiments show that large numbers of people are willing to return lost wallets, cash intact, with no expectation of reward. Obviously, people often engage in civil behavior, not just out of virtue and morality, but because such behavior makes for a smoother running and more efficient society and economy. (7)
Another obvious irrationality is advertising. Take one of the most successful advertising ploys of all time: the inclusion of sexy young women in beer commercials. The implication of these commercials is "Drink our beer, get this girl." Interestingly enough, these subliminal messages work -- such beer ads are wildly successful. But a message closer to the truth is "Get this beer gut, drive this girl away." One of the more amusing topics in right-wing economics is the defense of such advertising as "rational."