loss aversion

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Thinking, Fast and Slow by Daniel Kahneman

Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, behavioural economics, Black Swan, book value, Cass Sunstein, Checklist Manifesto, choice architecture, classic study, cognitive bias, cognitive load, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hedonic treadmill, hindsight bias, index card, information asymmetry, job satisfaction, John Bogle, John von Neumann, Kenneth Arrow, libertarian paternalism, Linda problem, loss aversion, medical residency, mental accounting, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, peak-end rule, precautionary principle, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, Shai Danziger, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, TED Talk, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

The outside view and the risk policy are remedies against two distinct biases that affect many decisions: the exaggerated optimism of the planning fallacy and the exaggerated caution induced by loss aversion. The two biases oppose each other. Exaggerated optimism protects individuals and organizations from the paralyzing effects of loss aversion; loss aversion protects them from the follies of overconfident optimism. The upshot is rather comfortable for the d ecision maker. Optimists believe that the decisions they make are more prudent than they really are, and loss-averse decision makers correctly reject marginal propositions that they might otherwise accept. There is no guarantee, of course, that the biases cancel out in every situation.

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Every Nobel laureate receives an individual certificate with a personalized drawing, which is presumably chosen by the committee. My illustration was a stylized rendition of figure 10. “loss aversion ratio”: The loss aversion ratio is often found to be in the range of 1. 5 and 2.5: Nathan Novemsky and Daniel Kahneman, “The Boundaries of Loss Aversion,” Journal of Marketing Research 42 (2005): 119–28. emotional reaction to losses: Peter Sokol-Hessner et al., “Thinking Like a Trader Selectively Reduces Individuals’ Loss Aversion,” PNAS 106 (2009): 5035–40. Rabin’s theorem: For several consecutive years, I gave a guest lecture in the introductory finance class of my colleague Burton Malkiel.

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Novemsky and Kahneman, “The Boundaries of Loss Aversion.” Ian Bateman et al., “Testing Competing Models of Loss Aversion: An Adversarial Collaboration,” Journal of Public Economics 89 (2005): 1561–80. 28: Bad Events heartbeat accelerated: Paul J. Whalen et al., “Human Amygdala Responsivity to Masked Fearful Eye Whites,” Science 306 (2004): 2061. Individuals with focal lesions of the amygdala showed little or no loss aversion in their risky choices: Benedetto De Martino, Colin F. Camerer, and Ralph Adolphs, “Amygdala Damage Eliminates Monetary Loss Aversion,” PNAS 107 (2010): 3788–92. bypassing the visual cortex: Joseph LeDoux, The Emotional Brain: The Mysterious Underpinnings of Emotional Life (New York: Touchstone, 1996).

Irrationally Yours: On Missing Socks, Pickup Lines, and Other Existential Puzzles by Dan Ariely, William Haefeli

behavioural economics, endowment effect, financial independence, gamification, Google Hangouts, loss aversion, sealed-bid auction, Skype

The basic principle behind this emotional reaction to the elimination of these movies is loss aversion. Loss aversion is one of the most basic and well-understood principles in social science. The basic finding is that losing something has a stronger emotional impact than gaining something of the same value. Going back to Netflix, the implication is that having movies taken away from your account is perceived as a loss and because of that, it feels much more painful. The impact of loss aversion could be so strong that losing the not-so-great movies can still be more upsetting than the joy of getting movies that are objectively better. One other implication of loss aversion is that while old Netflix users, such as yourself, will view the new collection of movies on Netflix in a somewhat negative and loss-aversive way, new users who just see the new set of movies without the experience of having anything taken away from them will view the updated offering in a much more positive way.

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—YORAM When I was much younger I got to spend some time on a farm, where I heard farmers saying that they were going to hire a bull to “service” their cows. Maybe this is the answer to your question? Workplace, Language, Misery ON LOSS AVERSION AND SPORTS Dear Dan, You have mentioned many times the principle of loss aversion, where the pain of losing is much higher than the joy of winning. The recent World Cup was most likely the largest spectator event in the history of the world and fans from across the globe were clearly very involved. If indeed, as suggested by loss aversion, people suffer more from losing than they are elated by winning, why would anyone become a fan of a team? After all, as fans we have about an equal chance of losing (which you claim is very painful) and of winning (which you claim does not provide the same extreme emotional impact).

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After all, as fans we have about an equal chance of losing (which you claim is very painful) and of winning (which you claim does not provide the same extreme emotional impact). So in total, across many games, the outcome for fans is not a good deal. Am I missing something in my application of loss aversion? Is loss aversion not relevant to sports? —FERNANDO This description of “fan-ness” implies that people have a choice in the matter, and that they carefully consider the benefits versus the costs of becoming a fan of a particular team. Personally, I suspect that the choice of what team we root for is closer to religious convictions than to rational choice, which means that we don’t really make an active choice when choosing a team (at least not a deliberate, informed one) and that we are “given” our team affiliation by our surroundings, family, and friends.

Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dr. Dan Ariely, Jeff Kreisler

accounting loophole / creative accounting, Airbnb, Albert Einstein, behavioural economics, bitcoin, Burning Man, collateralized debt obligation, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, experimental economics, hedonic treadmill, IKEA effect, impact investing, invisible hand, loss aversion, mental accounting, mobile money, PalmPilot, placebo effect, price anchoring, Richard Thaler, sharing economy, Silicon Valley, Snapchat, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the payments system, Uber for X, ultimatum game, Walter Mischel, winner-take-all economy

IT’S IN THE WAY THAT YOU LOSE IT The endowment effect is deeply connected to LOSS AVERSION. The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky,6 holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it’s not just a small difference—it’s about twice as much. In other words, we feel the pain of losing $10 about twice as strongly as we do the pleasure of winning $10. Or, if we tried to make the emotional impact the same, it would take winning $20 to counteract the feeling of losing $10. Loss aversion works hand in hand with the endowment effect.

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Owners of an item, like the Bradleys with their home, value the potential loss of ownership much more than nonowners value the potential gain of the same item. This gap—fueled by loss aversion—gets us into all kinds of financial mistakes. We saw loss aversion at work when the Bradleys referenced the rising and falling real estate market. They thought about the price of their home in terms of its highest point, years ago, before the market slowed down. They thought about what they could have sold it for back then. They focused on the loss relative to the price during that previous historical moment. Retirement savings and investments are other areas where loss aversion and endowment effect can wreak havoc on our ability to see the world in an objective way.

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The statement might say, “We prefunded the account with $500, you contributed $100, and the company took back $400.” That made the loss very clear. It also triggered loss aversion in participants, who quickly began maximizing their 401(k) contributions. Once we understand loss aversion and that many things can be framed as either gains or losses—and that the loss framework is more motivating—maybe we can reframe choices, such as how much to contribute to retirement savings, in a way that will persuade us to act in ways that are more consistent with our long-term well-being. Speaking of long-term well-being, loss aversion also clouds our ability to gauge long-term risks. This problem specifically impacts investment planning.

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) by Michael J. Mauboussin

Alan Greenspan, Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, behavioural economics, Benoit Mandelbrot, Black Swan, Brownian motion, butter production in bangladesh, buy and hold, capital asset pricing model, Clayton Christensen, clockwork universe, complexity theory, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, dogs of the Dow, Drosophila, Edward Thorp, en.wikipedia.org, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, framing effect, functional fixedness, hindsight bias, hiring and firing, Howard Rheingold, index fund, information asymmetry, intangible asset, invisible hand, Isaac Newton, Jeff Bezos, John Bogle, Kenneth Arrow, Laplace demon, Long Term Capital Management, loss aversion, mandelbrot fractal, margin call, market bubble, Menlo Park, mental accounting, Milgram experiment, Murray Gell-Mann, Nash equilibrium, new economy, Paul Samuelson, Performance of Mutual Funds in the Period, Pierre-Simon Laplace, power law, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Richard Florida, Richard Thaler, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, Stuart Kauffman, survivorship bias, systems thinking, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

And since humans have a hard time relating to all but the easiest probabilities, we often fail to see the significance of streaks. 8 Time Is on My Side Myopic Loss Aversion and Portfolio Turnover The attractiveness of the risky asset depends on the time horizon of the investor. An investor who is prepared to wait a long time before evaluating the outcome of the investment as a gain or a loss will find the risky asset more attractive than another investor who expects to evaluate the outcome soon. —Richard H. Thaler, Amos Tversky, Daniel Kahneman, and Alan Schwartz, “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test” Loss aversion . . . can be considered a fact of life. In contrast, the frequency of evaluations is a policy choice that presumably could be altered, at least in principle.

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This response prompted Samuelson to prove a theorem showing that “no sequence is acceptable if each of its single plays is not acceptable.” According to economic theory, his learned colleague’s answer was irrational.1 Even though the lunch bet has a positive expected value, Samuelson’s proof doesn’t feel quite right to most people. The concept of loss aversion explains why. One of prospect theory’s main findings, loss aversion says that given a choice between risky outcomes we are about two times as averse to losses than to comparable gains.2 So Samuelson’s theoretical proof notwithstanding, most people intuitively agree with his lunch partner: The prospective regret of losing $100 on a single toss exceeds the pleasure of winning $200.

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From 1900 through 2006, stocks in the United States have earned a 5.7 percent annual premium over treasury bills (geometric returns). Other developed countries around the world have seen similar results.4 In a trailblazing 1995 paper, Shlomo Benartzi and Richard Thaler suggested a solution to the equity risk premium puzzle based on what they called “myopic loss aversion.” Their argument rests on two conceptual pillars:5 1. Loss aversion. We regret losses two to two and a half times more than similar-sized gains. Since the stock price is generally the frame of reference, the probability of loss or gain is important. Naturally, the longer the holding period in a financial market the higher the probability of a positive return.

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

3Com Palm IPO, Alan Greenspan, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, behavioural economics, Berlin Wall, Bernie Madoff, Black-Scholes formula, book value, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, low interest rates, market clearing, Mason jar, mental accounting, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, PalmPilot, Paul Samuelson, payday loans, Ponzi scheme, Post-Keynesian economics, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, risk free rate, Robert Shiller, Robert Solow, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

I just have to get a few stragglers to finish their new papers and complete the introduction.” The book came out, shortly after the last paper arrived and the introduction was finished, in 2000, almost four years later. The “timid choices” part of the Kahneman and Lovallo story is based on loss aversion. Each manager is loss averse regarding any outcomes that will be attributed to him. In an organizational setting, the natural feeling of loss aversion can be exacerbated by the system of rewards and punishment. In many companies, creating a large gain will lead to modest rewards, while creating an equal-sized loss will get you fired. Under those terms, even a manager who starts out risk neutral, willing to take any bet that will make money on average, will become highly risk averse.

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Again we see that losses are roughly twice as painful as gains are pleasurable, a finding that has been replicated numerous times over the years. The endowment effect experiments show that people have a tendency to stick with what they have, at least in part because of loss aversion. Once I have that mug, I think of it as mine. Giving it up would be a loss. And the endowment effect can kick in very fast. In our experiments, the subjects had “owned” that mug for a few minutes before the trading started. Danny liked to call this the “instant endowment effect.” And while loss aversion is certainly part of the explanation for our findings, there is a related phenomenon: inertia. In physics, an object in a state of rest stays that way, unless something happens.

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After the new regulation, investors were shown returns for the past year instead. As predicted by myopic loss aversion, after the change investors shifted more of their assets into stocks. They also traded less often, and were less prone to shifting money into funds with high recent returns. Altogether this was a highly sensible regulation. These experiments demonstrate that looking at the returns on your portfolio more often can make you less willing to take risk. In our “myopic loss aversion” paper, Benartzi and I used prospect theory and mental accounting to try to explain the equity premium puzzle.

No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, behavioural economics, business cycle, Cass Sunstein, cognitive load, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, it's over 9,000, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, low interest rates, machine readable, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, search costs, subprime mortgage crisis, the payments system, transaction costs, unbanked and underbanked, underbanked

In addition, individuals may be loss averse to the point that they will overwithhold their taxes to avoid having to write a check to the IRS. We defer a detailed discussion of these competing explanations to the next two sections. 12864-10_CH10_3rdPgs.indd 223 3/23/12 11:57 AM 224 michael s. barr and jane k. dokko Similarly, for loss aversion to color the interpretation of the relationship between portfolio allocation and wanting to overwithhold, the groups that are most likely to want overwithholding must also be the most loss averse. While the study provides no direct measure of loss aversion, the tax filers who are more likely to owe tax liability are identifiable by the size of their refunds.

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While the study provides no direct measure of loss aversion, the tax filers who are more likely to owe tax liability are identifiable by the size of their refunds. If loss aversion influences tax filers to want to overwithhold, then loss aversion may be manifested more strongly among those with a higher probability of writing a check to the IRS. This group may then express a stronger preference for overwithholding. By studying the behavior of this subsample of tax filers, the importance of loss aversion may be inferred. If, in addition, the relationship between portfolio allocation and wanting to overwithhold remains the same among the tax filers most likely to owe tax liability (as among all filers), then heterogeneity in loss aversion most likely does not explain tax filers’ preference for overwithholding.

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That is, this finding suggests an inverse relationship between the likelihood of owing taxes at the time of filing and a preference for overwithholding, which is the opposite of what a model of loss aversion predicts. Furthermore, those with mainly illiquid assets and those with one liquid asset are shown to be the groups most likely to want excess withholding. They are 18 and 13 percentage points, respectively, more likely to want to overwithhold than the group with no assets. These point estimates are well within a standard error of what table 10-4 shows, so the likelihood of owing taxes at the time of filing, and thus loss aversion, does not affect the interpretation of tax filers’ preference for overwithholding.18 Loss aversion can be an important motivation for some households to prefer overwithholding.

The Journey of Humanity: The Origins of Wealth and Inequality by Oded Galor

agricultural Revolution, Alfred Russel Wallace, Andrei Shleifer, Apollo 11, Berlin Wall, bioinformatics, colonial rule, Columbian Exchange, conceptual framework, COVID-19, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, deindustrialization, demographic dividend, demographic transition, Donald Trump, double entry bookkeeping, Easter island, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, general purpose technology, germ theory of disease, income per capita, intermodal, invention of agriculture, invention of movable type, invention of the printing press, invention of the telegraph, James Hargreaves, James Watt: steam engine, Joseph-Marie Jacquard, Kenneth Arrow, longitudinal study, loss aversion, Louis Pasteur, means of production, out of africa, phenotype, rent-seeking, rising living standards, Robert Solow, Scramble for Africa, The Death and Life of Great American Cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, Walter Mischel, Washington Consensus, wikimedia commons, women in the workforce, working-age population, World Values Survey

Regions of Planet Earth that resemble Volatilia, therefore, can be expected to contain a lower proportion of the loss-averse type, while regions that resemble Uniformia can be projected to have a greater proportion.[38] Experimental evidence, as well as polls conducted by the European Social Survey (2002–14), the World Values Survey (1981–2014) and the General Social Survey (1972–2018), provides estimates of the variation in the degree of loss aversion within and between countries. When combined with climate data from the past 1,500 years, and accounting for possible confounding factors from geography, culture and history, the evidence suggests that volatile climatic conditions have indeed contributed to the emergence of cultures with relatively low levels of loss aversion, while regions where climatic fluctuations are relatively uniform have contributed to more loss-averse cultures.[39] Again, of course, this association between climatic volatility and loss aversion may reflect the fact that loss-averse individuals and societies are more likely to settle in less volatile environments.

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The fact that these second-generation migrants are affected by their ancestral geographic environments suggests that these attitudes towards gender roles have been transmitted intergenerationally, and that this historical legacy endures even when families migrate to places with different institutions and education systems (although, as noted earlier, views on women entering the workforce tend to converge more rapidly with those of the dominant culture than other cultural traits).[36] Loss Aversion The Nobel Prize laureate Daniel Kahneman and cognitive psychologist Amos Tversky uncovered a common tendency among humans to attach greater weight to a loss than to a gain of equal or comparable size.[37] ‘Loss aversion’, as they term it, is an important determinant of the level of entrepreneurial activity in a population, which is in turn a significant factor in the driving of economic growth in the modern world.

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Thus, in Volatilia, inhabitants of certain areas escape weather-inflicted damage even in exceptionally difficult years, while in Uniformia, severe weather conditions affect the entire population and threaten mass extinction. Both continents are home to multiple societies. At first, some cultures on each of the continents are intensely loss-averse while others have more neutral attitudes towards losses. The loss-averse cultures adopt farming strategies that produce crop yields that are on average smaller but are also less vulnerable to climatic fluctuations. They can guarantee basic living conditions for their families regardless of weather conditions, so their population size remains stable over time.

Evil by Design: Interaction Design to Lead Us Into Temptation by Chris Nodder

4chan, affirmative action, Amazon Mechanical Turk, cognitive dissonance, crowdsourcing, Daniel Kahneman / Amos Tversky, Donald Trump, drop ship, Dunning–Kruger effect, en.wikipedia.org, endowment effect, game design, gamification, haute couture, Ian Bogost, jimmy wales, Jony Ive, Kickstarter, late fees, lolcat, loss aversion, Mark Zuckerberg, meta-analysis, Milgram experiment, Monty Hall problem, Netflix Prize, Nick Leeson, Occupy movement, Paradox of Choice, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, Stanford prison experiment, stealth mode startup, Steve Jobs, sunk-cost fallacy, TED Talk, telemarketer, Tim Cook: Apple, trickle-down economics, upwardly mobile

All of these situations work by framing the doubt in terms of what people may lose by choosing the undesired option. Although that’s a double negative, it has more power than reminding people of what they might gain by choosing the desired option. People feel loss more powerfully than gain, so it’s easier to manipulate them through doubt about negative outcomes. The magic of loss aversion will do all the rest. How to instill doubt Loss aversion is strongest when people have recently experienced the benefits of the product or service. If customers are canceling after a period of inactivity, find a way to convince them to use the product again (for instance by offering a free month of service, or access to a premium feature) so that they will feel the loss more keenly.

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Table of Contents Cover Credits About the Author About the Technical Editor Acknowledgments Foreword Introduction Evil designs and their virtuous counterparts Pride Misplaced pride causes cognitive dissonance Social proof: Using messages from friends to make it personal and emotional Closure: The appeal of completeness and desire for order Manipulating pride to change beliefs Sloth Sloth: Is it worth the effort? Gluttony Deserving our rewards Escalating commitment: foot-in-the-door, door-in-the-face Invoking gluttony with scarcity and loss aversion Anger Avoiding anger Embracing anger Using anger safely in your products Envy Manufacturing envy through desire and aspiration Status envy: demonstrating achievement and importance Manufacturing and maintaining envy in your products Lust Creating lust: Using emotion to shape behavior Controlling lust: Using desire to get a commitment Lustful behavior Greed Learning from casinos: Luck, probability, and partial reinforcement schedules Anchoring and arbitrary coherence Evil by Design Should you feel bad about deception?

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Companies encourage this overabundance by making us feel like we deserve to be rewarded and by escalating our level of commitment beyond what we first intended, drawing us in from early engagement through to full-on compliance. Sites also make us fearful of missing out—scarcity, exclusivity, and loss aversion play on the fears behind gluttony. Deserving our rewards We are easily fooled into gluttony. Just having healthy options available on menus or among the selections from a vending machine is sometimes enough to make our brains think we’ve satisfied our health and nutrition goals, and therefore have permission to choose less honorable options.

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

Alvin Roth, An Inconvenient Truth, assortative mating, Bear Stearns, behavioural economics, Burning Man, business process, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Daniel Kahneman / Amos Tversky, Demis Hassabis, end world poverty, endowment effect, Exxon Valdez, first-price auction, Ford Model T, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, name-letter effect, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, search costs, second-price auction, Skinner box, software as a service, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

* * * Supersizing the Incentive I should probably tell you now that we didn’t start out running our experiments in the way I just described. Initially, we set about to place some extra stress on our participants. Given our limited research budget, we wanted to create the strongest incentive we could with the fixed amount of money we had. We chose to do this by adding the force of loss aversion to the mix.* Loss aversion is the simple idea that the misery produced by losing something that we feel is ours—say, money—outweighs the happiness of gaining the same amount of money. For example, think about how happy you would be if one day you discovered that due to a very lucky investment, your portfolio had increased by 5 percent.

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Contrast that fortunate feeling to the misery that you would feel if, on another day, you discovered that due to a very unlucky investment, your portfolio had decreased by 5 percent. If your unhappiness with the loss would be higher than the happiness with the gain, you are susceptible to loss aversion. (Don’t worry; most of us are.) To introduce loss aversion into our experiment, we prepaid participants in the small-bonus condition 24 rupees (6 times 4). Participants in the medium-bonus condition received 240 rupees (6 times 40), and participants in the very-large-bonus condition were prepaid 2,400 rupees (6 times 400).

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First, it was difficult for me to accept the doctors’ recommendation because of two related psychological forces we call the endowment effect and loss aversion. Under the influence of these biases, we commonly overvalue what we have and we consider giving it up to be a loss. Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense. A second irrational influence is known as the status quo bias.

Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein

Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, behavioural economics, Cass Sunstein, choice architecture, clean water, cognitive load, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

The purely semantic reframing has a major effect on people’s judgments. Similarly, people are “loss averse,” in the sense that they dislike losses more than they like corresponding gains. If people face a five-cent tax for using a plastic bag (a loss), they are much more likely to be affected than if they are given a five-cent bonus (a gain) for bringing their own bag.8 In response to questions, people persistently show both framing effects and loss aversion. (There is a nice lesson here for policymakers. If you want to have an impact, choose effective frames and enlist loss aversion. Is it paternalistic for policymakers to heed that lesson?

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—Consumers might lack information or a full appreciation of information even when it is presented. —Consumers might be especially averse to the short-term losses associated with the higher prices of energy-efficient products relative to the uncertain future fuel savings, even if the expected present value of those fuel savings exceeds the cost (the behavioral phenomenon of “loss aversion”). —Even if consumers have relevant knowledge, the benefits of energy-efficient vehicles might not be sufficiently salient to them at the time of purchase, and the lack of salience might lead consumers to neglect an attribute that it would be in their economic interest to consider. —U.S. Environmental Protection Agency, Final Rule on Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards Contents INTRODUCTION Behaviorally Informed Paternalism ONE Occasions for Paternalism TWO The Paternalist’s Toolbox THREE Paternalism and Welfare FOUR Paternalism and Autonomy FIVE Soft Paternalism and Its Discontents EPILOGUE The Lives We Save May Be Our Own Notes Acknowledgments Index Why Nudge?

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Before you answer “yes,” note that some kind of framing is inevitable.) Now assume that people are answering those same questions in a foreign language—that is, a language that they speak, but in which they are not entirely comfortable. Here is the key finding: It turns out that they do not show either framing effects or loss aversion.9 Asked to resolve problems in a language that is not their own, people are less likely to depart from standard accounts of rationality. In an unfamiliar language, they are more likely to get the right answer. How can this be? The answer is straightforward. When people are using their own language, they think quickly and effortlessly, so System 1 has the upper hand.

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

availability heuristic, behavioural economics, book value, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, Dr. Strangelove, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, Linda problem, loss aversion, market bubble, McDonald's hot coffee lawsuit, mental accounting, meta-analysis, Nash equilibrium, new economy, no-fly zone, Paul Samuelson, payday loans, Philip Mirowski, Potemkin village, power law, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, rolodex, social intelligence, starchitect, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, three-martini lunch, ultimatum game, working poor

Prospect Theory 97 “I would go batty”: Barbara Tversky interview, July 8, 2008. 97 “interesting choices”: Kahneman Nobel autobiography, nobelprize.org/nobel_prizes/economics/laureates/2002/kahneman=autobio.html. 97 Tversky’s idea to put a negative sign on amounts: Kahneman Nobel autobiography. 98 “We reasoned that”: Ibid. 98 “Our perceptual apparatus”: Kahneman and Tversky 1979, 277. 99 “extends to the domain of moral intuitions”: Kahneman Nobel autobiography. 101 Loss aversion in real estate: Ibid. 101 Loss aversion their greatest contribution: Ibid. 102 “The major points of prospect theory”: Lambert 2006. 102 the most cited article ever to appear in Econometrica: Laibson and Zeckhauser 1998, 8, which finds 1,703 citations. 102 Merckle suicide: Moulson 2009. 102 “Humans did not evolve to be happy”: Camerer, Loewenstein, and Prelec 2005, 27. 103 “Many of the losses people fear most”: Camerer n.d. (“Three cheers—psychological, theoretical, empirical—for loss-aversion”), 9–10. 17. Rules of Fairness 104 “spend a lot of money honestly”: Kahneman, Nobel autobiography, nobelprize.org/nobel_prizes/economics/laureates/2002/kahneman=autobio.html. 104 Russell Sage biography: Sarnoff 1965.

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This is much like the “adaptation level” of psychophysics. The reference point determines whether something is entered as a gain or a loss on the mental ledger. That can make a huge difference in behavior. A second key idea of prospect theory is loss aversion. Losing money (anything of value) hurts more than gaining that same thing delights. You can demonstrate loss aversion by offering a bet on a coin toss. Tails you lose $100, and heads you win X. How big does X have to be for you to take the bet? Surveys show that few want to accept a “fair” bet with X = $100. Few accept X = $110, which offers a nice expected profit.

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Replace “food” with “money” or any other gain, and you have prospect theory. We act as if losing $500 at poker is a life-or-death issue. Camerer suggests that loss aversion is a form of unreasoning fear, like that an acrophobic experiences looking out the window of a penthouse. “Many of the losses people fear most are not life-threatening, but there is no telling that to an emotional system overadapted to conveying fear signals,” Camerer wrote. “Thinking of loss-aversion as fear also implies the possibility that inducing emotions can push around buying and selling prices.” Seventeen Rules of Fairness Kahneman and Tversky spent the 1977–78 academic year at Stanford, polishing their prospect theory paper.

The Personal MBA: A World-Class Business Education in a Single Volume by Josh Kaufman

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As a result, people tend to become more conservative, avoiding risks that could make things worse. Unfortunately, some of those risks—like starting a new business—may actually present a major opportunity to make things better. The best way to overcome Loss Aversion is to Reinterpret the risk of loss as “no big deal.” Casinos are in the business of overcoming Loss Aversion every single day—in a sense, the ostentatious buildings on the Las Vegas Strip are enormous monuments to human stupidity. If Loss Aversion is such a big deal, how do casinos encourage people to play games in which they’re mathematically certain to lose money? Casinos win by abstracting the loss. Instead of having players gamble with currency, which is perceived as valuable, the casino converts currency into chips or debit cards, which don’t feel as valuable.

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SHARE THIS CONCEPT: http://book.personalmba.com/willpower-depletion/ Loss Aversion Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt. —WILLIAM SHAKESPEARE, MEASURE FOR MEASURE Recently, my wife, Kelsey, decided to withdraw some funds from an investment account. When the brokerage deposited the money into her bank account, they deposited an additional $10,000 by mistake. Rationally, it shouldn’t have been a big deal—it was a simple mistake that was easily corrected. Emotionally, however, Kelsey felt like she was “losing” the extra money, even though it wasn’t really hers at all. Loss Aversion is the idea that people hate to lose things more than they like to gain them.

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If you notice that your portfolio went down 100 percent, you’ll feel horrible. Loss Aversion explains why threats typically take precedence over opportunities when it comes to Motivation. The threat of loss used to require immediate attention, because losses were extremely costly—even life threatening. Dying or losing a loved one to a predator, sickness, exposure, or starvation is universally a horrible experience, so we’re built to do everything in our power to prevent that from happening. The potential losses we typically face now are rarely as serious, but our minds still give them automatic priority. Loss Aversion also explains why uncertainty appears risky.

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, behavioural economics, Black Monday: stock market crash in 1987, Black Swan, book value, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, disinformation, diversification, diversified portfolio, Donald Trump, Dunning–Kruger effect, endowment effect, equity risk premium, fake news, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impact investing, impulse control, index fund, Isaac Newton, Japanese asset price bubble, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, Nick Bostrom, passive investing, pattern recognition, Pepsi Challenge, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, sunk-cost fallacy, systems thinking, TED Talk, Thales of Miletus, The Signal and the Noise by Nate Silver, Tragedy of the Commons, trolley problem, tulip mania, Vanguard fund, When a measure becomes a target

One consequence of being wired to live is loss aversion; an asymmetric fear of bad stuff happening to you. Loss aversion is driven by the amygdalae, two tiny almond-shaped structures that are the seat of all of your emotional responses. Evolutionarily, loss aversion makes a lot of sense and many scientists believe it is why Homo sapiens outlasted other human species on the way to the top of the food chain. As McDermott, Fowler and Smirnov (2008) point out, running out of food was fatal and so a disposition toward avoiding loss is what prompted our ancient ancestors to pack up and forage in a new spot.19 While loss aversion is derided as being irrational in an investment context, those with a genetic predisposition against it didn’t live to see a time when their even-headedness could prevail.

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All paths to conservatism, it would seem, run through some form of loss aversion. It is perhaps the most widely disseminated finding of behavioral finance that our risk and reward preferences are asymmetrical and that we care far more about avoiding loss than we do about achieving gain. What is less understood is the brain science behind this phenomenon As reported in Scientific American, Dr. Russell Poldrack and his colleagues found that, “…the brain regions that process value and reward may be silenced more when we evaluate a potential loss than they are activated when we assess a similar sized gain.” Loss aversion is as much a physiological construct as it is a psychological one.

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Non-identification – Now that you have recognized, accepted and investigated your stress, you must realize that you are more than your emotions. You can feel something without being defined by it. What’s the big idea? Physical states can impact emotion just as surely as the reverse is true. Loss aversion kept our ancestors alive. It keeps you from being a successful investor. The body longs for homeostasis. Thinking about money disrupts homeostasis. Stress is as much a physical as it is a psychic phenomenon. Taking financial risk causes real bodily pain. Fear is impossible to extinguish since the body stores it for a rainy day.

Mindware: Tools for Smart Thinking by Richard E. Nisbett

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We don’t always behave in the fully rational way demanded by cost-benefit theory, but we can arrange the world so that we don’t have to in order to get the same benefits we would if we were professional economists. Loss Aversion We have a general tendency to avoid giving up what we already have, even in situations where the cost-benefit considerations say that we should relinquish what we have for the clear prospect of getting something better. The tendency is called loss aversion. Across a wide range of situations, it appears that gaining something only makes you about half as happy as losing the same thing makes you unhappy.1 We pay dearly for our aversion to loss.

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Unlucky students who did not get a mug are asked to examine one and say how much they would pay for a mug just like it. Mug owners are asked how much they would sell their mugs for. There is a heavy discrepancy between the two amounts. On average, owners are willing to sell only when the price is double what the average nonowner is willing to pay.2 Loss aversion lies behind this endowment effect. People don’t want to give up things they own, even for more than they originally considered a fair price. Imagine you bought a ticket to a football game for two hundred dollars but would have been willing to pay five hundred dollars. Then a couple of weeks later you discover on the Internet that there are lots of desperate people willing to pay up to two thousand dollars for a ticket.

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The previous point requires a huge qualification. Sentimental value is properly considered when thinking about a transaction. You couldn’t afford to buy my wedding band. But few people have an attachment to a bottle of Château de Something-or-Other that they would describe as sentimental. Changing the Status Quo Loss aversion produces inertia. Changing our behavior usually involves a cost of some kind. “Shall I change the channel? I have to get up to find the remote. I have to decide what would be a more interesting program to watch. Or maybe I would enjoy reading a book more. What book? Oh, well, I haven’t watched Jeopardy!

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, behavioural economics, call centre, carbon tax, Cass Sunstein, choice architecture, continuous integration, currency risk, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, do well by doing good, endowment effect, equity premium, feminist movement, financial engineering, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, low interest rates, machine readable, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Saturday Night Live, school choice, school vouchers, systems thinking, Tragedy of the Commons, transaction costs, Vanguard fund, Zipcar

When they have to give something up, they are hurt more than they are pleased if they acquire the very same thing. It is also possible to measure loss aversion with gambles. Suppose I ask you whether you want to make a bet. Heads you win $X, tails you lose $100. How much does X have to be for you to take the bet? For most people, the answer to this question is somewhere around $200. This implies that the prospect of winning $200 just offsets the prospect of losing $100. Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings. If you are reluctant to give up what you have because you do not want to incur losses, then you will turn down trades you might have otherwise made.

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The mugs and the chocolate cost about the same, and in pretests students were as likely to choose one as the other. Yet when offered the opportunity to switch from a mug to a candy bar or vice versa, only one in ten switched. As we will see, loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much in our interests. Status Quo Bias Loss aversion is not the only reason for inertia. For lots of reasons, people have a more general tendency to stick with their current situation. This phenomenon, which William Samuelson and Richard Zeckhauser (1988) have dubbed the “status quo bias,” has been demonstrated in numerous situations.

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Louis Germany, organ donations in Gilovich, Tom Give More Tomorrow Goldstein, Dan Goolsbee, Austan Gore, Al Gould, Stephen Jay government: distrust of, libertarian paternalism of, neutrality in, paternalism of, and RECAP, and retirement plans, and slippery slope, starting points provided by, transparency in government bonds greenhouse gas emissions Greenhouse Gas Inventory (GGI), proposed Green Lights, EPA program, Gross, David, group norms, gut feelings Hackman, Gene Halloween night experiment H&R Block, and FAFSA software Harvard School of Public Health Hazard Communication Standard (HCS) health care, birth control pills, choosing, costs of, defensive medicine, Destiny Health Plan, deterrent effect of tort liability in, drug compliance, framing in, freedom of contract in, incentive conflicts in, ineffective lawsuits in, libertarian paternalists on, medical malpractice liability, negligence defined in, “no-fault” system in some countries, organ donations, prescription drug plan, right to sue for negligence, social influences in, treatment options “heuristics and biases” approach Hoffman, Dustin home-building industry home equity loans Home Ownership and Equity Protection Act homo economicus (economic man) “hot-cold empathy gap,” hot-hand theory hot states Houston Natural Gas Howell, William Hoxby, Carolyn Humans: Automatic Systems used by, conformity of, difficult choices for, influenced by a nudge, loss aversion of, and money, social pressures on, use of term Hurricane Katrina Illinois First Person Consent registry imitation incentives, conflicts of, in free markets, in investments, and salience income tax: Automatic Tax Return, compliance in, refunds from index funds inertia: and default option, and loss aversion, and organ donations, power of, and status quo bias, “yeah, whatever,” information, spread of Informed Decisions inheritance INSEAD School of Business, France insurance: costs of, fraught choices in, health Internal Revenue Service (IRS) intuitive thinking, test of investment goods investments, asset allocation in, in company stock, default options, and ERISA, error expected in, feedback in, incentives in, index funds, “lifestyle” funds, mappings in, and market timing, mental accounting in, mutual funds, past performance of, portfolio management, portfolio theory, rates of return, risk in, rules of thumb for, stocks and bonds, structuring complex choices, “target maturity funds,” iPhone and iPod IRAs Johnson, Eric Johnson, Samuel Jones, Rev.

Decisive: How to Make Better Choices in Life and Work by Chip Heath, Dan Heath

behavioural economics, billion-dollar mistake, call centre, Captain Sullenberger Hudson, Cass Sunstein, classic study, Daniel Kahneman / Amos Tversky, en.wikipedia.org, endowment effect, Great Leap Forward, hindsight bias, index fund, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job satisfaction, Kevin Kelly, loss aversion, Max Levchin, medical residency, mental accounting, meta-analysis, Mikhail Gorbachev, PalmPilot, Paradox of Choice, pattern recognition, Peter Thiel, pets.com, Richard Thaler, Ronald Reagan, shareholder value, Silicon Valley, unpaid internship, Upton Sinclair, US Airways Flight 1549, young professional

Compounding this preference for the status quo is another bias called loss aversion, which says that we find losses more painful than gains are pleasant. Imagine that we offer you the chance to play a game. We’ll flip a coin; if it turns up heads, you’ll win $100, and if it lands on tails, you owe us $50. Would you play? Most people wouldn’t, because they are loss averse: Losing $50 is so painful that even a potential gain twice as large doesn’t seem sufficient to compensate. Indeed, researchers have found again and again that people act as though losses are from two to four times more painful than gains are pleasurable. Loss aversion shows up in many different contexts.

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• A 10/10/10 analysis tipped Annie toward saying “I love you” first to Karl. 4. Our decisions are often altered by two subtle short-term emotions: (1) mere exposure: we like what’s familiar to us; and (2) loss aversion: losses are more painful than gains are pleasant. • How many of our organizational truths are ideas that we like merely because they’ve been repeated a lot? • Students given a mug won’t sell it for less than $7.12, even though five minutes earlier they wouldn’t have paid more than $2.87! 5. Loss aversion + mere exposure = status-quo bias. • PayPal: Ditching the PalmPilot product was a no-brainer—but it didn’t feel that way. 6. We can attain distance by looking at our situation from an observer’s perspective

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Mita, Marshall Dermer, and Jeffrey Knight (1977), “Reversed Facial Images and the Mere Exposure Hypothesis,” Journal of Personality and Social Psychology 35: 597–601. Repetition sparked trust: Alice Dechêne, et al. (2010), “The Truth About the Truth: A Meta-analytic Review of the Truth Effect,” Personality and Social Psychology Review 14: 238–57. 5 Loss aversion. The classic first discussion of loss aversion is Daniel Kahneman and Amos Tversky (1979), “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47: 263–92. This paper by two psychologists appeared in the journal that is the high temple of technical economics and became the most cited paper ever to appear in the journal.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

This tendency to base decisions on the short-term fluctuations in the market has been referred to as myopic loss aversion. Since over longer periods, the probability of stocks showing a loss is much smaller, investors influenced by loss aversion would be more likely to hold stocks if they monitored their performance less frequently. Dave: That’s so true. When I look at stocks in the very short run, they seem so risky that I wonder why anyone holds them. But over the long run, the superior performance of equities is so overwhelming, I wonder why anyone doesn’t hold stocks! IC: Exactly. Shlomo Bernartzi and Richard Thaler claim that myopic loss aversion is the key to solving the equity premium puzzle.27 For years, econ26 Shlomo Bernartzi and Richard Thaler, “Myopic Loss Aversion and the Equity Premium Puzzle,” Quarterly Journal of Economics, 1995, pp. 73–91. 27 See Chapter 8 for a further description of the equity premium puzzle.

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318 Chapter 19 Behavioral Finance and the Psychology of Investing 319 The Technology Bubble, 1999 to 2001 320 Behavioral Finance 322 Fads, Social Dynamics, and Stock Bubbles 323 Excessive Trading, Overconfidence, and the Representative Bias 325 Prospect Theory, Loss Aversion, and Holding On to Losing Trades 328 Rules for Avoiding Behavioral Traps 331 Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium 332 Contrarian Investing and Investor Sentiment: Strategies to Enhance Portfolio Returns 333 Out-of-Favor Stocks and the Dow 10 Strategy 335 PART 5 BUILDING WEALTH THROUGH STOCKS Chapter 20 Fund Performance, Indexing, and Beating the Market 341 The Performance of Equity Mutual Funds 342 Finding Skilled Money Managers 346 xiv Persistence of Superior Returns 348 Reasons for Underperformance of Managed Money 348 A Little Learning Is a Dangerous Thing 349 Profiting from Informed Trading 349 How Costs Affect Returns 350 The Increased Popularity of Passive Investing 351 The Pitfalls of Capitalization-Weighted Indexing 351 Fundamentally Weighted versus Capitalization-Weighted Indexation 353 The History of Fundamentally Weighted Indexation 356 Conclusion 357 Chapter 21 Structuring a Portfolio for Long-Term Growth 359 Practical Aspects of Investing 360 Guides to Successful Investing 360 Implementing the Plan and the Role of an Investment Advisor 363 Concluding Comment 364 Index 367 CONTENTS F O R E W O R D Some people find the process of assembling data to be a deadly bore.

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Prospect Theory, Loss Aversion, and Holding On to Losing Trades Dave: I see. Can we talk about individual stocks? Why do I end up holding so many losers in my portfolio? IC: Remember I said before that Kahneman and Tversky had kicked off behavioral finance with prospect theory? A key point in their theory was that individuals form a reference point from which they judge their performance. They found that from that reference point individuals are much more upset about losing a given amount of money than they are from gaining the same amount. They called this behavior loss aversion, and they suggested that the decision to hold or sell an investment will be dramatically influenced by whether your stock has gone up or down— in other words, whether you have had a gain or loss.

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

This tendency to base decisions on the short-term fluctuations in the market has been referred to as myopic loss aversion. Since over longer periods, the probability of stocks showing a loss is much smaller, investors influenced by loss aversion would be more likely to hold stocks if they monitored their performance less frequently. Dave: That’s so true. When I look at stocks in the very short run, they seem so risky that I wonder why anyone holds them. But over the long run, the superior performance of equities is so overwhelming, I wonder why anyone doesn’t hold stocks! IC: Exactly. Bernartzi and Thaler claim that myopic loss aversion is the key to solving the equity premium puzzle29 For years, economists have been trying to figure out why stocks have returned so much more than fixed-income investments.

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Chapter 22 Behavioral Finance and the Psychology of Investing The Technology Bubble, 1999 to 2001 Behavioral Finance Fads, Social Dynamics, and Stock Bubbles Excessive Trading, Overconfidence, and the Representative Bias Prospect Theory, Loss Aversion, and the Decision to Hold on to Losing Trades Rules for Avoiding Behavioral Traps Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium Contrarian Investing and Investor Sentiment: Strategies to Enhance Portfolio Returns Out-of-Favor Stocks and the Dow 10 Strategy PART V BUILDING WEALTH THROUGH STOCKS Chapter 23 Fund Performance, Indexing, and Beating the Market The Performance of Equity Mutual Funds Finding Skilled Money Managers Persistence of Superior Returns Reasons for Underperformance of Managed Money A Little Learning Is a Dangerous Thing Profiting from Informed Trading How Costs Affect Returns The Increased Popularity of Passive Investing The Pitfalls of Capitalization-Weighted Indexing Fundamentally Weighted Versus Capitalization-Weighted Indexation The History of Fundamentally Weighted Indexation Conclusion Chapter 24 Structuring a Portfolio for Long-Term Growth Practical Aspects of Investing Guides to Successful Investing Implementing the Plan and the Role of an Investment Advisor Concluding Comment Notes Index FOREWORD In July 1997 I called Peter Bernstein and said I was going to be in New York and would love to lunch with him.

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And according to news reports, there are some reformed traders who are establishing Traders’ Anonymous programs designed to help people who cannot resist the temptations of trading too frequently.27 Maybe you should look into those programs. Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium Dave: Because of how badly I was doing in the market, I even considered giving up on stocks and sticking with bonds, although I know that in the long run that is a very bad idea. How often do you suggest that I monitor my stock portfolio? IC: Important question. If you buy stocks, it is very likely that the value will drop below the price you paid, if but for a short time after your purchase. We have already spoken about how loss aversion makes this decline very disturbing. However, since the long-term trend in stocks is upward, if you wait a period of time before checking your portfolio, the probability that you will see a loss decreases.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

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Expected value = ½($250) + ½(–$100) = $75. Kahneman and Tversky concluded that losses were 2½ times as undesirable as equivalent gains were desirable. In other words, a dollar loss is 2½ times as painful as a dollar gain is pleasurable. People exhibit extreme loss aversion, even though a change of $100 of wealth would hardly be noticed for most people with substantial assets. We’ll see later how loss aversion leads many investors to make costly mistakes. Interestingly, however, when individuals faced a situation where sure losses were involved, the psychologists found that they were overwhelmingly likely to take the gamble. Consider the following two alternatives: 1.

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REAPING REWARD BY INCREASING RISK Beta and Systematic Risk The Capital-Asset Pricing Model (CAPM) Let’s Look at the Record An Appraisal of the Evidence The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory The Fama-French Three-Factor Model A Summing Up 10. BEHAVIORAL FINANCE The Irrational Behavior of Individual Investors Overconfidence Biased Judgments Herding Loss Aversion Pride and Regret Behavioral Finance and Savings The Limits to Arbitrage What Are the Lessons for Investors from Behavioral Finance? 1. Avoid Herd Behavior 2. Avoid Overtrading 3. If You Do Trade: Sell Losers, Not Winners 4. Other Stupid Investor Tricks Does Behavioral Finance Teach Ways to Beat the Market?

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Moreover, people deviate in systematic ways from rationality, and the irrational trades of investors tend to be correlated. Behavioral finance then takes that statement further by asserting that it is possible to quantify or classify such irrational behavior. Basically, there are four factors that create irrational market behavior: overconfidence, biased judgments, herd mentality, and loss aversion. Well, yes, believers in efficient markets say. But—and we believers always have a but—the distortions caused by such factors are countered by the work of arbitrageurs. This last is the fancy word used to describe people who profit from any deviation of market prices from their rational value.

Fancy Bear Goes Phishing: The Dark History of the Information Age, in Five Extraordinary Hacks by Scott J. Shapiro

3D printing, 4chan, active measures, address space layout randomization, air gap, Airbnb, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, availability heuristic, Bernie Sanders, bitcoin, blockchain, borderless world, Brian Krebs, business logic, call centre, carbon tax, Cass Sunstein, cellular automata, cloud computing, cognitive dissonance, commoditize, Compatible Time-Sharing System, Computing Machinery and Intelligence, coronavirus, COVID-19, CRISPR, cryptocurrency, cyber-physical system, Daniel Kahneman / Amos Tversky, Debian, Dennis Ritchie, disinformation, Donald Trump, double helix, Dr. Strangelove, dumpster diving, Edward Snowden, en.wikipedia.org, Evgeny Morozov, evil maid attack, facts on the ground, false flag, feminist movement, Gabriella Coleman, gig economy, Hacker News, independent contractor, information security, Internet Archive, Internet of things, invisible hand, John Markoff, John von Neumann, Julian Assange, Ken Thompson, Larry Ellison, Laura Poitras, Linda problem, loss aversion, macro virus, Marc Andreessen, Mark Zuckerberg, Menlo Park, meta-analysis, Minecraft, Morris worm, Multics, PalmPilot, Paul Graham, pirate software, pre–internet, QWERTY keyboard, Ralph Nader, RAND corporation, ransomware, Reflections on Trusting Trust, Richard Stallman, Richard Thaler, Ronald Reagan, Satoshi Nakamoto, security theater, Shoshana Zuboff, side hustle, Silicon Valley, Skype, SoftBank, SQL injection, Steve Ballmer, Steve Jobs, Steven Levy, Stuxnet, supply-chain attack, surveillance capitalism, systems thinking, TaskRabbit, tech billionaire, tech worker, technological solutionism, the Cathedral and the Bazaar, the new new thing, the payments system, Turing machine, Turing test, Unsafe at Any Speed, vertical integration, Von Neumann architecture, Wargames Reagan, WarGames: Global Thermonuclear War, Wayback Machine, web application, WikiLeaks, winner-take-all economy, young professional, zero day, éminence grise

As Kahneman and Tversky argued, happiness is not only a function of one’s “endowments” (the stuff one owns), but also changes in it. Jack and Jill have the same endowments, but Jack’s has gone up and Jill’s has gone down. Kahneman and Tversky argued that human beings are “loss averse”: we are far more sensitive to losses than to gains. Put bluntly, we really hate to lose. Kahneman and Tversky demonstrated the power of loss aversion by offering participants in studies the choice of several gambles. Here’s the first choice: Option 1: Gamble with an 80 percent chance of winning $4,000 and a 20 percent chance of winning $0. Option 2: Gamble with a 100 percent chance of winning $3,000.

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Johnson, “The Affect Heuristic in Judgments of Risks and Benefits,” Journal of Behavioral Decision Making 13 (2000): 5. Nigerian Astronaut: Katharine Trendacosta, “Here’s the Best Nigerian Prince Email Scam in the Galaxy,” Gizmodo, February 12, 2016, https://gizmodo.com/we-found-the-best-nigerian-prince-email-scam-in-the-gal-1758786973. “loss averse”: Amos Tversky and Daniel Kahneman, “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” The Quarterly Journal of Economics, November 1991. Jack and Jill example from Kahneman, Thinking, Fast and Slow, 275. promise gains: Teodor Sommestad and Henrik Karlzén, “A Meta-Analysis of Field Experiments on Phishing Susceptibility” (2019 APWG Symposium on Electronic Crime Research [eCrime]).

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By ratcheting up anxiety, Fancy Bear hoped to persuade campaign staffers that clicking on the blue link would have high benefits and low risks. Fear, in other words, was designed to mask any contradictory evidence suggesting that the link was malicious. To magnify this effect, Fancy Bear added time pressure. The recipient must click the link immediately. Loss Aversion We’ve all gotten those Nigerian Prince phishing emails. But the Nigerian Astronaut version pushes this internet scam to eleven. It purports to be from Dr. Bakare Tunde, the cousin of Nigerian astronaut and air force major Abacha Tunde. Major Tunde, the doctor informs us, was the first African in space when he made a secret flight to the Salyut 6 space station in 1979.

Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

banking crisis, behavioural economics, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game, uranium enrichment

But first let me leave you with a crucial lesson about loss aversion: In a tough negotiation, it’s not enough to show the other party that you can deliver the thing they want. To get real leverage, you have to persuade them that they have something concrete to lose if the deal falls through. 1. ANCHOR THEIR EMOTIONS To bend your counterpart’s reality, you have to start with the basics of empathy. So start out with an accusation audit acknowledging all of their fears. By anchoring their emotions in preparation for a loss, you inflame the other side’s loss aversion so that they’ll jump at the chance to avoid it.

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Martin Parish, Louisiana, 162–63, 171 “proof of life” and, 34, 147, 148–49, 165, 170 Schilling case, 96, 98–105 terrorists and, 232 “that’s right” and, 101–5 “knowing their religion,” 225, 228–29, 244 offering reasons that reference counterpart’s religion, 231 power of hopes and dreams and, 230–31 similarity principle and, 229–30 Koresh, David, 13 labeling, 19, 50, 54–73, 112 accusation audit, 64–68, 73, 254–55 Assertive (bargaining style) and, 196 avoiding “I,” 56 cranky grandfather example, 59 deescalating angry confrontations with, 58–59 to discover source of incongruence, 176 empathy as a mood enhancer, 62 empathy building and, 239 to extract information, 239, 257–58 of fears, 61–62 fill-in-the-blank examples, 255, 258 Girl Scout fundraiser and, 62–63 intentionally mislabeling an emotion, 91, 94 key lessons of, 71–73 labeling and calming fear, 61, 63, 64, 67, 73 lawyers and “taking the sting out” technique, 65 Lieberman brain imaging study, 55 negativity and, 57–61, 64–68, 70 phrasing the label, 56 Rule of Three and, 177 rules about form and delivery, 55 Schilling kidnapping case and, 103 silences and, 56–57, 71, 72 step one: detecting the other person’s emotional state, 55–56 step two: labeling it aloud, 56 as transformative, 63 Washington Redskins ticket holder script, 60–61 “words, music, and dance” and, 55 Lanceley, Fred, 14–15 Langer, Ellen, 231 late-night FM DJ voice, 19, 31–33, 47 contract discussion and, 34 downward-inflecting statement, 32, 33 general demeanor and delivery, 32 Harlem fugitive stand-off negotiation and, 51 hostage negotiation and, 33–34, 38 lawyer-negotiators, 192–93 Leonsis, Ted, 231 “Lessons of Waco: Proposed Changes in Federal Law Enforcement” (Heymann), 14 leverage, 220–24 Black Swans as leverage multipliers, 220–21, 224, 244 in a kidnapping, 221 loss aversion and, 128 negative, 222–23, 226, 227, 244 normative, 224, 226, 244 personal negotiation styles and, 192 positive, 221–22, 226, 244 what it is, 220 liars. See falsehoods and liars Lieberman, Matthew, 55 listening. See active listening loss aversion, 12, 127–28, 139, 223, 257 Macapagal-Arroyo, Gloria, 140 Malhotra, Deepak, 178, 179, 233 Mehrabian, Albert, 176 Memphis Bar Association, 132 Middle Eastern merchants, 33 Miller, George A., 28 Miller, Winnie, 227 mindset finding and acting on Black Swans and, 218, 219 as key to successful negotiation, 43 multiple hypotheses approach, 25 positive, 33, 47 ready-to-walk, 204–5 win-win, 115 mirroring (isopraxism), 19, 35–36, 44, 48, 70, 71, 183 active listening and, 103 body language and, 36 to elicit information, 185 four step process for workplace negotiation, 44–46 reaction to use of “fair” in negotiations, 125 silences and, 37, 44, 72 use with Assertive bargainers, 196 use with assertive people, 191–92 verbal, 36 Wiseman waiter study, 36 Misino, Dominick, 41–42 Mnookin, Robert, 2–4, 5 Moore, Don A., 120 Moore, Margaret, 214–15, 217 Mousavian, Seyed Hossein, 124 MSU (making shit up) approach, 30 Mueller, Robert, 143 negotiation.

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There’s the Framing Effect, which demonstrates that people respond differently to the same choice depending on how it is framed (people place greater value on moving from 90 percent to 100 percent—high probability to certainty—than from 45 percent to 55 percent, even though they’re both ten percentage points). Prospect Theory explains why we take unwarranted risks in the face of uncertain losses. And the most famous is Loss Aversion, which shows how people are statistically more likely to act to avert a loss than to achieve an equal gain. Kahneman later codified his research in the 2011 bestseller Thinking, Fast and Slow.3 Man, he wrote, has two systems of thought: System 1, our animal mind, is fast, instinctive, and emotional; System 2 is slow, deliberative, and logical.

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

The two main behavioral explanations both require combining loss aversion with one other behavioral feature—a short time horizon (myopia) or the house money effect:• The myopic loss aversion model relies on a variant of mental accounting related to the investment time horizon (evaluation period). A given expected return advantage will attract investors more, the longer their investment horizon is. If investors evaluate their portfolios very frequently, the odds of risky assets outperforming riskless ones are close to 50/50 and loss aversion kicks in. Over longer horizons, the odds steadily improve. A typical degree of loss aversion applied to annual changes in financial wealth can justify an equity premium of 6.5%, suggesting that an annual portfolio evaluation period is plausible for the overall market

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• Yale’s Nicholas Barberis and co-authors develop an equilibrium model in which investors derive utility both from consumption and from annual changes in wealth. They too assume a typical degree of loss aversion (just above 2) but find that a model with constant loss aversion cannot fully explain the equity premium puzzle. However, they can resolve the puzzle if they include in their model the “house money effect”—the idea that the degree of loss aversion varies dynamically with prior gains and losses. The model thus implies that investors’ risk attitudes become more conservative in down-markets. The next section shows that estimates of the equity premium have edged lower since the 1990s.

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More risk preferences The house money effect is an important example of mental accounting. Gamblers tend to become less loss averse and more willing to take risks when they are ahead (“playing with house money)”. Greater willingness to gamble after recent gains suggests that losses are easier to take when they can be mentally added to earlier gains. At first blush, this may sound inconsistent with PT. However, PT as described above pertains to one-off gambles. Risk preferences in a sequence of gambles depend on how prior gains and losses influence loss aversion over time. An experimental study by Thaler and Johnson finds evidence in favor of the house money effect—more aggressive risk taking following successful trading, and cautiousness following losses.

Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

Alan Greenspan, availability heuristic, behavioural economics, Berlin Wall, bitcoin, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, Cass Sunstein, choice architecture, cognitive bias, collapse of Lehman Brothers, Corn Laws, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, double helix, endogenous growth, endowment effect, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, fixed income, Ford Model T, full employment, hindsight bias, income inequality, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, liquidity trap, loss aversion, mass immigration, means of production, mental accounting, Myron Scholes, paradox of thrift, Pareto efficiency, Paul Samuelson, Post-Keynesian economics, price mechanism, pushing on a string, quantitative easing, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, school vouchers, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Toyota Production System, trade route, transaction costs, unorthodox policies, Vilfredo Pareto, women in the workforce

The problems occur when one party wants to avoid losses and another to make gains. Good examples in real life are renegotiations of existing contracts such as pay agreements between managers and unions or global trade agreements between large and small countries. Loss aversion creates an asymmetry that makes agreements hard to reach, Kahneman says. Loss aversion affects how people behave on the high street, in the workplace and at home. Kahneman and colleagues found that in this situation the existing sale price, wage or rent sets the reference point, which creates a position that must not be infringed. People see that companies are behaving unfairly if they try to impose losses (relative to the reference point) by hiking prices or rents or trimming wages – unless they can show that it is to defend their own position.

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Adam Smith, The Theory of Moral Sentiments (1759), Part VI, Sect. 1. 232 The Great Economists The significance is that assumptions of rational behaviour that simply look at the chances of a particular gamble coming off without any reference to the financial position of the gambler ignore the impact that the phrasing of the bet can have, and the way that people’s aversion to suffering losses can alter the way they make decisions. The danger of loss aversion is that it leads us to try to minimise these feelings of loss – even when it does not make financial sense to do so. Loss aversion has a noticeable effect in the housing market as evidence suggests that people are often unwilling to sell their home for less than they paid for it. Their reference point is what they paid for it in the past rather than its current value, which may be about to fall further.

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This involves both an assessment of the mathematical probabilities but also a subjective view of the outcomes, particularly set against the reference point. They found that people were more worried about suffering a loss then they were about making a gain, that they valued a sure gain over a probable gain (the certainty effect) and that they preferred a probable loss over a certain loss. Adam Smith had alluded to this idea of loss aversion when he said, ‘we suffer Chapter 10 • Daniel Kahneman231 more … when we fall from a better to a worse situation than we ever enjoy when we rise from a worse to a better’.4 Kahneman said that people were driven more strongly to avoid losses than to achieve gains. A reference point is sometimes the status quo, but it can also be a goal in the future: not achieving a goal is a loss; exceeding it is a gain.

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, behavioural economics, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, National Debt Clock, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

Amos Tversky showed that investors are more sensitive to decreases in the value of their portfolio than to increases in value.41 Even in good times, many investors tend to suffer from what experts refer to as “myopic loss aversion”—a basic tenet from the field of behavioral finance, which holds that people psychologically weigh losses twice as heavily as gains. Here’s an example of myopic loss aversion. I flip a coin: Heads, you win $110. Tails, you lose $100. Will you take the bet? Behavioral finance shows us that there will be few takers of the gamble. How much would most people need to win before they would be willing to take the gamble?

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Then...pre-meltdown • In November 2007, the Consumer Confidence Survey checked in at a rather robust score of 87.3.5 • On October 8, 2007, the Dow was at 14,043.6 Now...post-meltdown • In October 2008, the Consumer Confidence Survey had dropped to 38%, the most pessimistic number in more than 25 years.7 In fact, 62% of American adults now believe that today’s children will not be better off than their parents.8 • On September 15, 2008, the stock market would begin a three-week slide that would see the Dow lose 2,937 points, or 26% of its value.9 The Retirement Brain Game Regret and pride—People avoid actions that create regret and seek actions that cause pride. Regret is emotional pain. Pride is emotional joy. Is this causing us to buy high and sell low? Research indicates that two of the most troublesome emotions that plague investors are pride and regret. Myopic loss aversion—One type of event in particular has overwhelming, disproportional impact on investors—loss. As we discussed in the Introduction, research shows that, on average, before people would be willing to risk loss, they would need to see their gains reach at least 2.25 times the potential loss. This is what led Dr.

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Our fear, our confidence, and our emotions convince us to take irrational chances with our investments. We often pull money out of the market when the market goes down and wait until it gets back to its highs to buy again. We repeat the same pattern of buying high and selling low. If you’re doing this, you’re not alone. Loss: A Cautionary Tale What myopic loss aversion means is that we have become so short-sighted, so fearful of loss, so concerned with losing our money, that we often make no decision, or make the wrong decision—either of which may prove costly. For example, suppose your child just entered college and the $10,000 bill for his tuition is due. You can either sell Stock A, for which you paid $20,000 and is now worth $10,000.

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan by Ben Carlson

Albert Einstein, asset allocation, backtesting, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, book value, business cycle, buy and hold, buy low sell high, commodity super cycle, corporate governance, delayed gratification, discounted cash flows, diversification, diversified portfolio, do what you love, endowment effect, family office, financial independence, fixed income, Gordon Gekko, high net worth, index fund, John Bogle, junk bonds, loss aversion, market bubble, medical residency, Occam's razor, paper trading, passive investing, Ponzi scheme, price anchoring, Reminiscences of a Stock Operator, Richard Thaler, risk tolerance, Robert Shiller, robo advisor, South Sea Bubble, sovereign wealth fund, stocks for the long run, technology bubble, Ted Nelson, transaction costs, Vanguard fund, Vilfredo Pareto

Historically, 53 percent of all days have been positive and 47 percent negative. With our understanding of loss aversion, the fact that losses hurt more than twice as much as gains make us feel good, if you check the value of your portfolio every single day you're likely to feel terrible about the stock market every single day. Every good feeling you get from gains will get completely wiped out by the terrible feelings on the down days. Loss aversion could also mean that most people are twice as likely to make bone-headed decisions when markets fall because of those feelings. But lengthen your time horizon and the effects of loss aversion slowly start to fade. On an annual basis stocks are up roughly three out of every four years.

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In fact, studies show that economic growth can even have an impact on people's happiness, which can affect their perception of risk in financial assets. Researchers looked at data on life satisfaction and compared it to economic growth in a number of countries. They found that happiness is around six times more sensitive to negative economic growth than it is to positive GDP. This is another form of loss aversion, whereby losses sting more than gains feel good. Difficult environments can leave lasting impressions on our psyches. So not only is it likely that your investments will be down, but your unhappiness will be rising, a terrible combination for making rational decisions with your money.7 While it makes sense to view your entire portfolio in aggregate for asset allocation and performance monitoring purposes, you can also think about it in terms of multiple time horizons.

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It turns into something of a game. However if the same clients lost money, they felt much more regret than if the decision was theirs alone. So following someone else's recommendations reduces the emotional impact of losses. A financial professional can act as something of a shock absorber to your loss aversion. This is why people pay for investment advice. It's a way to defer not only your decisions, but your emotional state in the case of losses.4 Education should be a huge aspect of any financial advisor–client relationship. This cannot be overstated. If an advisor is ever going to be able to save you from yourself, first they must educate you.

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, carbon tax, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, sugar pill, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, Tyler Cowen, US Airways Flight 1549

True to his word, Levitt hasn’t touched a bowling ball since. Loss Aversion in the NFL (SJD) Football coaches are known for being extraordinarily conservative when it comes to calling risky plays, since a single bad decision (or even a good decision that doesn’t work out) can get you fired. In the jargon of behavioral economics, coaches are “loss-averse”; this concept, pioneered by Amos Tversky and Daniel Kahneman, holds that we experience more pain with a loss of x than we experience pleasure with a gain of x. Who experiences loss aversion? Well, just about everyone: day traders, capuchin monkeys, and especially football coaches.

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This is bad news for those who argue that payoffs that come years or decades in the future are sufficient to motivate students. The very best results come when we give the students the money before the test, and then we take the money back if they don’t meet the standards. This result is consistent with what psychologists call “loss aversion.” With young kids, it is a lot cheaper to bribe them with trinkets like trophies and whoopee cushions, but cash is the only thing that works for the older students. It is remarkable how offended people get when you pay students for doing well—so many negative e-mails and comments. Roland Fryer endured the same onslaught as he has experimented with financial incentives in cities around the U.S.

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.”: “My friend Anders Ericsson popularized the magic number of 10,000 hours of practice”: See Dubner and Levitt, “A Star is Made,” The New York Times Magazine, May 7, 2006; K. Anders Ericsson, Neil Charness, Paul J. Feltovich, and Robert R. Hoffman, The Cambridge Handbook of Expertise and Expert Performance, Cambridge University Press, 2006. 206 “LOSS AVERSION IN THE NFL”: “Just about everyone . . . capuchin monkeys”: See Dubner and Levitt, “Monkey Business,” The New York Times Magazine, June 5, 2005. 208 “BILL BELICHICK IS GREAT”: “Teams seem to punt way too much”: See David Romer, “Do Firms Maximize? Evidence from Professional Football,” Journal of Political Economy 118, no. 2 (2006). / 209 “I’ve seen the same thing in my research on penalty kicks in soccer”: Pierre-André Chiappori, Steven D.

The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, An Inconvenient Truth, assortative mating, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, cognitive load, compensation consultant, computer vision, Cornelius Vanderbilt, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Demis Hassabis, Donald Trump, end world poverty, endowment effect, Exxon Valdez, fake it until you make it, financial engineering, first-price auction, Ford Model T, Frederick Winslow Taylor, fudge factor, Garrett Hardin, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, John Perry Barlow, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, name-letter effect, new economy, operational security, Pepsi Challenge, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, search costs, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skinner box, Skype, social contagion, software as a service, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, ultimatum game, Upton Sinclair, Walter Mischel, young professional

* * * Supersizing the Incentive I should probably tell you now that we didn’t start out running our experiments in the way I just described. Initially, we set about to place some extra stress on our participants. Given our limited research budget, we wanted to create the strongest incentive we could with the fixed amount of money we had. We chose to do this by adding the force of loss aversion to the mix.* Loss aversion is the simple idea that the misery produced by losing something that we feel is ours—say, money—outweighs the happiness of gaining the same amount of money. For example, think about how happy you would be if one day you discovered that due to a very lucky investment, your portfolio had increased by 5 percent.

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Contrast that fortunate feeling to the misery that you would feel if, on another day, you discovered that due to a very unlucky investment, your portfolio had decreased by 5 percent. If your unhappiness with the loss would be higher than the happiness with the gain, you are susceptible to loss aversion. (Don’t worry; most of us are.) To introduce loss aversion into our experiment, we prepaid participants in the small-bonus condition 24 rupees (6 times 4). Participants in the medium-bonus condition received 240 rupees (6 times 40), and participants in the very-large-bonus condition were prepaid 2,400 rupees (6 times 400).

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First, it was difficult for me to accept the doctors’ recommendation because of two related psychological forces we call the endowment effect and loss aversion. Under the influence of these biases, we commonly overvalue what we have and we consider giving it up to be a loss. Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense. A second irrational influence is known as the status quo bias.

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Alan Greenspan, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

It became obvious to them that, when people were faced with economic choices with uncertain outcomes, they had peculiar but systematic biases in their behavior. Kahneman and Tversky set out to test these systematic biases in an experimental setting. From a financial perspective, one of the most important of these biases is called loss aversion. When we make choices involving risky outcomes, most of us place greater weight on losses than on gains. We’re much more averse to losing in a risky situation than simple mathematics would predict. Loss aversion is so embedded in our behavior that it can be difficult for us to see. Kahneman and Tversky brought it to light by ruthlessly stripping the behavior down to its bare minimum in an experimental setting.

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Some economists claim that regulatory forbearance is partly responsible for the recent financial crisis,14 offering elaborate explanations for why regulatory forbearance might occur, such as global competition among regulatory agencies and the political economy of regulation.15 But a more mundane explanation is loss aversion: a sure loss to the regulator if she calculates that a bank’s assets have declined, and a riskier but less psychologically painful alternative if she maintains the older, higher estimate. Although we still have much to learn about the behavior of bank supervisors and other financial regulators in the years leading up to the financial crisis,16 we shouldn’t dismiss the possibility that they didn’t react sooner simply because they were too human. PROBABILITY MATCHING AND MARCH MADNESS Loss aversion is only one of many behavioral biases discovered by psychologists like Tversky and Kahneman.

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When it comes to losses, most people are willing to take much greater risks to avoid losses, even if those risks aren’t compensated by higher expected payoffs. Apparently, a thorn in the hand is worth much less than the possibility of many thorns in the bush if that possibility also includes a chance of avoiding thorns altogether. Why should loss aversion be interesting to anyone other than academics? It’s because this behavior is especially counterproductive in a financial context. To see why, take the combination of Alfa and Delta, the two choices most people pick. This pair is equivalent to a single investment that pays $240,000 with 25 percent probability and loses $760,000 with 75 percent probability (Alfa yields $240,000 for sure, and with 25 percent probability Delta loses nothing in which case the $240,000 is yours to keep, but with 75 percent probability Delta loses $1 million in which case your total earnings are $240,000 minus $1 million for a net loss of $760,000).

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, behavioural economics, book value, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial engineering, financial independence, financial innovation, high net worth, index fund, John Bogle, junk bonds, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

But when it comes to investing your hard-earned dollars, please keep this thought in mind: the stock market is a very expensive place to learn that neither you nor anyone else is endowed with the gift of investment prophecy. Loss Aversion Do you check your portfolio every day? Do you sell a stock or mutual fund when it earns a healthy return to lock in the profit? Do you sell stocks/mutual funds whenever you see them going down? Are you a young person who keeps most of your savings in bonds or safe, ultraconservative investments? If so, you may be hurting your potential returns through loss aversion. Loss aversion is the flip side of overconfidence. Although overconfidence tends to make us overly bold, loss aversion makes us overly timid about investing. Experiments have determined that at the emotional level, we feel the pain of a $100 loss twice as much as we enjoy the benefit of a $100 gain.

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Perhaps you know people who lost a fortune in the stock market crash of 1929, the 1973 to 1974 bear market, or the tech wreck of 2000 who now keep all their money in bank certificates of deposit. They may think their investments are risk free. However, if you factor in the taxes due on the interest earned and inflation, many of them are actually losing purchasing power. What's perceived as safe isn't always as safe as those who are loss averse believe it to be. Paralysis by Analysis This investment trap is the first cousin to loss aversion. When it comes time to invest, we have literally thousands of funds to choose from and an abundance of noise telling us why we should invest in a certain way. The more choices people are given, the harder it becomes to choose one. As a result, some people don't make a choice and don't invest.

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HOW TO ESCAPE THE EMOTIONAL TRAPS Finally, for the common emotional traps mentioned earlier, we offer the following tools for escape: • Recency bias. Never assume today's results predict tomorrow's. It's a changing world. • Overconfidence. No one can consistently predict short-term movements in the market. This means you and/or the person investing your money. • Loss aversion. Be a risk manager instead of a risk avoider. Believing you are avoiding risk can be a costly illusion. • Paralysis by analysis. Every day you don't invest is a day less you'll have the power of compounding working for you. Put together an intelligent investment plan and get started. If you need help, seek out a good financial planner to assist you

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

So the behavioralists have had to fight back with another clever technique known as “auto escalation,” an opt-in feature that automatically increases employees’ savings rates whenever they get a pay rise until they hit a maximum level of contributions.17 By synchronizing contribution increases and salary hikes, this “Save More Tomorrow” option also gets around another human foible known as “loss aversion,” which means that people weigh losses more heavily than gains. Loss aversion appears to have very deep neurological roots. In a 2005 study, a trio of academics from Yale introduced a colony of capuchin monkeys to the concept of money. The monkeys were first trained to understand that they could exchange a token for food. Having grasped its purpose, some familiar patterns of behavior emerged.

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People who are paid to think about the industry’s future wonder about the potential for an “old people’s bank” for the baby boomers, whose services would be explicitly based around budgeting, managed drawdowns of savings, and the like. In the meantime, the annuity is the obvious answer to the problem of not knowing when you are going to die, but it has its flaws. If you have a small pension pot, an annuity may deliver only a meager stream of income; fixed annuities offer no protection against the effect of inflation; and loss aversion means that people hate the idea of “losing out” to the annuity provider if they die early. Another option is to squeeze more juice out of the assets that older people do own. The biggest of those is likely to be their houses. In 2009 half of home owners aged sixty-two and older in the United States had at least 55 percent of their net worth tied up in home equity.

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., 32 Keys, Benjamin, 48 Kharroubi, Enisse, 79 Kickstarter, 172 King, Stephen, 99 Klein, David, 182 Krugman, Paul, xv Lahoud, Sal, 166 Lang, Luke, 153, 161–162 Laplanche, Renaud, 179, 184, 188, 190, 193–194, 196–197 Latency, 53 Law of large numbers, 17 Layering, 57 Left-digit bias, 46 Lehman Brothers, x, 44, 65 Lending direct, 84 marketplace, 184 payday, 200 relationship-based, 11, 151, 206–208 secured, xiv, 76 unsecured, 206 See also Loans; Peer-to-peer lending Lending Club, 172, 179–180, 182–184, 187, 189, 194–195, 197 Leonardo of Pisa (Fibonacci), 19 Lerner, Josh, 59 Lethal pandemic, risk-modeling for demographic profile, 230 exceedance-probability curve, 231–232, 232 figure 3 historical data, 228–229 infectiousness and virulence, 229–230 location of outbreak, 230–231 Leverage, 51, 70–71, 80, 186, 188 Leverage ratio, 76–77 Lewis, Michael, 57 Liber Abaci or Book of Calculation (Fibonacci), 19 LIBOR (London Interbank Offered Rate), 41 Liebman, Jeffrey, 98 Life expectancy government reaction to, 128–129 projections of, 124–127, 126 figure 2 ratio of young to older people, 127–128 Life-insurance policies, 142 Life-settlements industry, 142–143 Life table, 20 Limited liability, 212 Liquidity, 12–14, 39, 185–186 List, John, 109 The Little Book of Behavioral Investing (Montier), 156 Lo, Andrew, 113–115, 117–123 Loans low-documentation, 48–49 secured, 76 small business, 181, 216 student, 164, 166–167, 169–171, 182 syndicated, 41 Victory Loans, 28 See also Lending; Peer-to-Peer lending Logistic regression, 201 London, early fire insurance in, 16–17 London, Great Fire of, 16 London Interbank Offered Rate (LIBOR), 41 Long-Term Capital Management, 123 Longevity, betting on, 143–144 Loss aversion, 136 Lotteries, 212, 213 Low-documentation loans, 48–49 Lumni, 165, 168, 175 Lustgarten, Anders, 111 Lynn, Jeff, 160–161 Mack, John, 180 Mahwah, New Jersey, 52, 53 Marginal borrowers assessment of, 216–217 behavioral finance and, 208–214 industrialization of credit, 206 microfinance and, 203 savings schemes, 209–214 small businesses, 215–219 unsecured lending to, 206 Wonga, 203, 205, 208 Marginal borrowers (continued) ZestFinance, 199, 202, 205–206 Maritime piracy, solutions to, 151–152 Maritime trade, role of in history of finance, 3, 7–8, 14, 17, 23 Market makers, 15–16, 55 MarketInvoice, 195, 207, 217–218 Marketplace lending, 184 Markowitz, Harry, 118 Massachusetts, use of inflation-protected bonds in, 26 Massachusetts, use of social-impact bonds in, 98 Matching engine, 52 Maturity transformation, 12–13, 187–188, 193 McKinsey & Company, ix, 42 Mercator Advisory Group, 203 Merrill, Charles, 28 Merrill, Douglas, 199, 201 Merrill Lynch, 28 Merton, Robert, 31, 113–114, 123–124, 129–132, 142, 145 Mian, Atif, 204 Michigan, University of, financial survey by, 134–135 Microfinance, 203 Micropayment model, 217 Microwave technology, 53 The Million Adventure, 213–214 Minsky, Hyman, 42 Minsky moment, 42 Mississippi scheme, 36 Mitchell, Justin, 166–167 Momentum Ignition, 57 Monaco, modeling risk of earthquake in, 227 Money, history of, 4–5 Money illusion, 73–74 Money laundering, 192 Money-market funds, 43, 44 Monkeys, Yale University study of loss aversion with, 136 Montier, James, 156–157 Moody, John, 24 Moody’s, 24, 235 Moore’s law, 114 Morgan Stanley, 188 Mortgage-backed securities, 49, 233 Mortgage credit by ZIP code, study of, 204 Mortgage debt, role of in 2007–2008 crisis, 69–70 Mortgage products, unsound, 36–37 Mortgage securitization, 47 Multisystemic therapy, 96 Munnell, Alicia, 129 Naked credit-default swaps, 143 Nature Biotechnology, on drug-development megafunds, 118 “Neglected Risks, Financial Innovation and Financial Fragility” (Gennaioli, Shleifer, and Vishny), 42 Network effects, 181 New York, skyscraper craze in, 74–75 New York City, prisoner-rehabilitation program in, 108 New York Stock Exchange (NYSE), 31, 52, 53, 61, 64 New York Times, Merrill Lynch ad in, 28 Noncorrelated assets, 122 Nonprofits, growth of in United States, 105–106 Northern Rock, x NYMEX, 60 NYSE Euronext, 52 NYSE (New York Stock Exchange), 31, 52, 53, 61, 64 OECD (Organization for Economic Co-operation and Development), 128, 147 Oldfield, Sean, 67–68, 80–84 OnDeck, 216–218 One Service, 94–95, 105, 112 Operating expense ratio, 188–189 Options, 15, 124 Order-to-trade ratios, 63 Oregon, interest in income-share agreements, 172, 176 Organization for Economic Co-operation and Development (OECD), 128, 147 Overtrading, 24 Packard, Norman, 60 Pandit, Vikram, 184 Park, Sun Young, 233 Partnership mortgage, 81 Pasion, 11 Pave, 166–168, 173, 175, 182 Payday lending Consumer Financial Protection Bureau, survey on, 200 information on applicants, acquisition of, 202 underwriting of, 201 PayPal, 219 Peak child, 127 Peak risk, 228 Peer-to-peer lending advantages of, 187–189 auction system, 195 big investors in, 183 borrowers, assessment of, 197 in Britain, 181 commercial mortgages, 181 CommonBond, 182, 184, 197 consumer credit, 181 diversification, 196 explained, 180 Funding Circle, 181–182, 189, 197 investors in, 195 Lending Club, 179–180, 182–184, 187, 189, 194–195, 197 network effects, 181 ordinary savers and, 184 Prosper, 181, 187, 195 RateSetter, 181, 187, 196 Relendex, 181 risk management, 195–197 securitization, 183–184, 196 Peer-to-peer lending (continued) small business loans, 181 SoFi, 184 student loans, 182 Zopa, 181, 187, 188, 195 Pensions, cost of, 125–126 Perry, Rick, 142–143 Peterborough, England, social-impact bond pilot in, 90–92, 94–95, 104–105, 112 Petri, Tom, 172 Pharmaceuticals, decline of investment in, 114–115 Piracy Reporting Centre, International Maritime Bureau, 151 Polese, Kim, 210 Poor, Henry Varnum, 24 “Portfolio Selection” (Markowitz), 118 Prediction Company, 60–61 Preferred shares, 25 Prepaid cards, 203 Present value of cash flows, 19 Prime borrowers, 197 Prince, Chuck, 50–51, 62 Principal-agent problem, 8 Prisoner rehabilitation programs, 90–91, 94–95, 98, 108, 112 Private-equity firms, 69, 85, 91, 105, 107 Projection bias, 72–73 Property banking crises and, xiv, 69 banking mistakes involving, 75–80 behavioral biases and, 72–75 dangerous characteristics of, 70–72 fresh thinking, need for, xvii, 80 investors’ systematic errors in, 74–75 perception of as safe investment, 76, 80 Prosper, 181, 187, 195 Provisioning funds, 187 Put options, 9, 82 Quants, 19, 63, 113 QuickBooks, 218 Quote stuffing, 57 Raffray, André-François, 144 Railways, affect of on finance, 23–25 Randomized control trials (RCTs), 101 Raphoen, Christoffel, 15–16 Raphoen, Jan, 15–16 RateSetter, 181, 187, 196 RCTs (randomized control trials), 101 Ready for Zero, 210–211 Rectangularization, 125, 126 figure 2 Regulation NMS, 61 Reinhart, Carmen, 35 Reinsurance, 224 Relendex, 181 Rentes viagères, 20 Repurchase “repo” transactions, 15, 185 Research-backed obligations, 119 Reserve Primary Fund, 44 Retirement, funding for anchoring effect, 137–138 annuities, 139 auto-enrollment in pension schemes, 135 auto-escalation, 135–136 conventional funding, 127–128 decumulation, 138–139 government reaction to increased longevity, 128–129 home equity, 139–140 life expectancy, projections of, 124–127, 126 figure 2 life insurance policies, cash-surrender value of, 142 personal retirement savings, 128–129, 132–133 replacement rate, 125 reverse mortgage, 140–142 savings cues, experiment with, 137 SmartNest, 129–131 Reverse mortgages, 140–142 Risk-adjusted returns, 118 Risk appetite, 116 Risk assessment, 24, 45, 77–78, 208 Risk aversion, 116, 215 Risk-based capital, 77 Risk-based pricing model, 176 Risk management, 55, 117–118, 123, 195–197 Risk Management Solutions, 222 Risk sharing, 8, 82 Risk-transfer instrument, 226 Risk weights, 77–78 Rogoff, Kenneth, 35 “The Role of Government in Education” (Friedman), 165 Roman Empire business corporation in, 7 financial crisis in, 36 forerunners of banks in, 11 maritime insurance in, 8 Rotating Savings and Credit Associations (ROSCAs), 209–210 Roulette wheel, use of in experiment on anchoring, 138 Royal Bank of Scotland, 186 Rubio, Marco, 172 Russia, mortgage market in, 67 S-curve, in diffusion of innovations, 45 Salmon, Felix, 155 Samurai bonds, 27 Satsuma Rebellion (1877), 27 Sauter, George, 58 Save to Win, 214 Savings-and-loan crisis in US (1990s), 30 Savings cues, experiment with, 137 Scared Straight social program, 101 Scholes, Myron, 31, 123–124 Science, Technology, and Industry Scoreboard of OECD, 147 Securities and Exchange Commission (SEC), 54, 56, 57, 58, 64 Securities markets, 14 Securitization, xi, 20, 37–38, 117–122, 183–184, 196, 236 Seedrs, 160–161 Sellaband, 159 Shared equity, 80–84 Shared-equity mortgage, 84 Shepard, Chris, xii–xiii Shiller, Robert, xv–xvi, 242 Shleifer, Andrei, 42, 44 Short termism, 58 SIBs.

The Moral Landscape: How Science Can Determine Human Values by Sam Harris

Albert Einstein, banking crisis, Bayesian statistics, behavioural economics, cognitive bias, cognitive load, end world poverty, endowment effect, energy security, experimental subject, framing effect, higher-order functions, hindsight bias, impulse control, John Nash: game theory, language acquisition, longitudinal study, loss aversion, meta-analysis, mirror neurons, Monty Hall problem, out of africa, Paradox of Choice, pattern recognition, peak-end rule, placebo effect, Ponzi scheme, public intellectual, Richard Feynman, risk tolerance, scientific worldview, stem cell, Stephen Hawking, Steven Pinker, TED Talk, the scientific method, theory of mind, traumatic brain injury, trolley problem, ultimatum game, World Values Survey

It is also an important impediment to conflict resolution through negotiation: for if each party values his opponent’s concessions as gains and his own as losses, each is bound to perceive his sacrifice as being greater.34 Loss aversion has been studied with functional magnetic resonance imaging (fMRI). If this bias were the result of negative feelings associated with potential loss, we would expect brain regions known to govern negative emotion to be involved. However, researchers have not found increased activity in any areas of the brain as losses increase. Instead, those regions that represent gains show decreasing activity as the size of the potential losses increases. In fact, these brain structures themselves exhibit a pattern of “neural loss aversion”: their activity decreases at a steeper rate in the face of potential losses than they increase for potential gains.35 There are clearly cases in which such biases seem to produce moral illusions—where a person’s view of right and wrong will depend on whether an outcome is described in terms of gains or losses.

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The Monist, 59 (2), 204–217. Tiihonen, J., Rossi, R., Laakso, M. P., Hodgins, S., Testa, C., Perez, J., et al. (2008). Brain anatomy of persistent violent offenders: More rather than less. Psychiatry Res, 163 (3), 201–212. Tom, S. M., Fox, C. R., Trepel, C., & Poldrack, R. A. (2007). The neural basis of loss aversion in decision-making under risk. Science, 315 (5811), 515–518. Tomasello, M. (2007, January 13). For human eyes only. New York Times. Tomlin, D., Kayali, M. A., King-Casas, B., Anen, C., Camerer, C. F., Quartz, S. R., et al. (2006). Agent-specific responses in the cingulate cortex during economic exchanges.

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., 228n61 beehive approach to morality, 89 belief: adoption of, for feeling better, 137–39 bias and, 122–26, 137, 226n36 brain science on, 11, 14, 116–22, 197n22 definitions of, 117 different categories of, 139–40 ethical beliefs, 14 extraneous information and/or context as influence on, 140–42 factual beliefs, 14 freedom of, 136–44 inseparability of reasoning and emotion, 126–31 internet’s influence on, 123 as intrinsically epistemic, 138 knowledge as, 115, 196–97n22 lie detection and, 133–36 meaning of, 115–18, 219–20n15 memory and, 116 mental properties of, 136–40 motivation for, 126 reasoning and, 122, 131–33 religious belief, 137–38, 148–54 science and, 144 wrong beliefs, 21 Benedict, Pope, 200n14 Benedict, Ruth, 20, 60–62 Bentham, Jeremy, 207n12 bias: adaptive fitness versus, 226–27n38 belief and, 122–26, 137, 226n36 decisional conflict, 231n75 definition of, 132 endowment effect and, 75 factors causing, 226n36 internet’s influence on, 123 knowledge and, 123–24 of liberals, 125–26 loss aversion, 75–77, 209n35 medical decisions and, 143, 231n75 of parents, 73 of political conservatives, 124–25 in reasoning, 132, 142–43 of science, 47 sins of commission versus sins of omission, 77 truth bias, 120, 223n26 unconscious and, 122–23 Bible, 3, 34, 38, 150, 166, 236–37n82 Biblical Creationism, 34, 37, 151, 202n19 Bin Laden, Osama, 5 Bingham, Roger, 5–6, 23 BioLogos Foundation, 169 birth control.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Expected value ½($250) + ½ (–$100) $75. Kahneman and Tversky concluded that losses were 2½ times as undesirable as equivalent gains were desirable. In other words, a dollar loss is 2½ times as painful as a dollar gain is pleasurable. People exhibit extreme loss aversion, even though a change of $100 of wealth would hardly be noticed for most people with substantial assets. We’ll see later how loss aversion leads many investors to make costly mistakes. Interestingly, however, when individuals faced a situation where sure losses were involved, the psychologists found that they were overwhelmingly likely to take the gamble. Consider the following two alternatives: 1.

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REAPING REWARD BY INCREASING RISK Beta and Systematic Risk The Capital-Asset Pricing Model (CAPM) Let’s Look at the Record An Appraisal of the Evidence The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory The Fama-French Three-Factor Model A Summing Up 10. BEHAVIORAL FINANCE The Irrational Behavior of Individual Investors Overconfidence Biased Judgments Herding Loss Aversion Pride and Regret Behavioral Finance and Savings The Limits to Arbitrage What Are the Lessons for Investors from Behavioral Finance? 1. Avoid Herd Behavior 2. Avoid Overtrading 3. If You Do Trade: Sell Losers, Not Winners 4. Other Stupid Investor Tricks Does Behavioral Finance Teach Ways to Beat the Market?

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Moreover, people deviate in systematic ways from rationality, and the irrational trades of investors tend to be correlated. Behavioral finance then takes that statement further by asserting that it is possible to quantify or classify such irrational behavior. Basically, there are four factors that create irrational market behavior: overconfidence, biased judgments, herd mentality, and loss aversion. Well, yes, believers in efficient markets say. But—and we believers always have a but—the distortions caused by such factors are countered by the work of arbitrageurs. This last is the fancy word used to describe people who profit from any deviation of market prices from their rational value.

Little Bets: How Breakthrough Ideas Emerge From Small Discoveries by Peter Sims

Alan Greenspan, Amazon Web Services, Black Swan, Clayton Christensen, complexity theory, David Heinemeier Hansson, deliberate practice, discovery of penicillin, endowment effect, fail fast, fear of failure, Frank Gehry, Guggenheim Bilbao, Jeff Bezos, knowledge economy, lateral thinking, Lean Startup, longitudinal study, loss aversion, meta-analysis, PageRank, Richard Florida, Richard Thaler, Ruby on Rails, Salesforce, scientific management, Silicon Valley, statistical model, Steve Ballmer, Steve Jobs, Steve Wozniak, systems thinking, TED Talk, theory of mind, Toyota Production System, urban planning, Wall-E

Jerry Seinfeld: Drawn from The Comedian (DVD), Directed by Christian Charles, with Jerry Seinfeld (2002). John Legend and Kevin Brereton: Interviews with Legend and Brereton. Status quo bias and loss aversion: Origin of status quo bias terminology and research: “Status Quo Bias in Decision Making,” by William Samuelson and Richard Zeckhauser, Journal of Risk and Uncertainty, vol. 1, 1988, 7–59. Addition of loss aversion and endowment effect: “The Endowment Effect, Loss Aversion, and Status Quo Bias,” by Daniel Kahneman, Jack L. Knetsch, Richard H. Thaler, Journal of Economic Perspectives, vol. 5, 193–206. “Timid Choices and Bold Forecasts,” by Daniel Kahneman and Dan Lavallo, Management Science, 39, 17–31.

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and “why not?” The authors wrote that the innovators steer “entirely clear” of what’s called the status quo bias. This research demonstrates that people do not like to change unless there is a compelling reason to do so, such as an attractive incentive. Related research shows that people exhibit strong “loss aversion,” in that they are twice as likely to seek to avoid losses as they are to acquire gains. The researchers who discovered this phenomenon found that people wanted to be able to gain at least forty dollars on a coin toss before they risked losing twenty dollars, a roughly two to one (fear-of-loss to pleasure-of-gain) ratio.

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., 19–33 failing quickly to learn fast, 51–64 growth mind-set and, 35–49 learning a lot from a little, 131–40 openness to experience and, 117–30 play and, 65–76 prototyping and, 52–64 questions and, 97–116 smallifying problems and, 77–95 small wins and, 141–52 London, 109 Los Angeles, 78–83, 111, 112, 161 Los Angeles Philharmonic, 80, 83 Loss aversion, 110 Lucas, George, 30, 31, 143 Lucasfilm, 30 Luck, 121–24, 129 making your own, 124–29 network of, 124 Luxo Jr. (film), 143–44 MacFarland, Sean, 94–95 Macintosh, 108 Maeda, John, The Laws of Simplicity, 170 Malaria, 9 Management by walking around, 120–21 Manufacturing, 15 Marketing, 4–5, 6, 20, 21 Market research, 21–22, 111, 135 Martin, Roger, 63 The Design of Business, 172 Mayer, Marissa, 78 McCain, John, 125 McEnroe, John, 37, 38 McGrath (Rita Gunther) and MacMillan (Ian C.), Discovery-Driven Growth, 174 McMaster, H.

The Gig Economy: The Complete Guide to Getting Better Work, Taking More Time Off, and Financing the Life You Want by Diane Mulcahy

Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, basic income, Clayton Christensen, cognitive bias, collective bargaining, creative destruction, David Brooks, deliberate practice, digital nomad, diversification, diversified portfolio, fear of failure, financial independence, future of work, gig economy, helicopter parent, Home mortgage interest deduction, housing crisis, independent contractor, job satisfaction, Kickstarter, loss aversion, low interest rates, low skilled workers, Lyft, mass immigration, mental accounting, minimum wage unemployment, mortgage tax deduction, negative equity, passive income, Paul Graham, remote working, risk tolerance, Robert Shiller, seminal paper, Silicon Valley, Snapchat, social contagion, TaskRabbit, TED Talk, the strength of weak ties, Uber and Lyft, uber lyft, universal basic income, wage slave, WeWork, Y Combinator, Zipcar

Why does it hold us back and keep us small even when the opportunity for something bigger and better lies right in front of us? One reason is that we let our fears fester and grow, unchallenged, in our heads. We don’t examine them in the cold light of day and see what they’re made of. Another reason is that we are loss averse. We feel the pain of loss much more than the pleasure of gain. We pay greater attention to potential losses than gains, and we’re inclined to avoid possible setbacks more than we are to seek potential wins. Facing Fear It’s easiest to deconstruct our fears and identify our risks if we see them in front of us.

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Just having better information can help Beth overcome some of her fear. We’re not very good at assessing our fears and risks accurately. Our assessment of risk is distorted by a series of cognitive biases like overconfidence (which researchers implicate in gambling), anchoring (we assess gains and losses depending on how they are framed), and loss aversion (we hate losses more than we love equivalent gains). These cognitive biases can cause us to either overestimate or underestimate risk and make (sometimes big) decisions based on our inaccurate perception. We tend to hold unfounded fears about events and outcomes that are unlikely yet seem oblivious to the very real risks in our everyday lives.

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We’re much more likely to waste our time than our money because we have a higher level of pain over losing money than over “losing” or wasting time. For example, tossing a fifty-dollar bill into the fireplace to burn causes us pain over the loss of the fifty dollars, but if we waste an hour in front of that same fire watching cat videos on Facebook, we don’t feel the same level of pain. It doesn’t make sense that we feel less loss aversion to wasting time than money because, unlike money, our time here on Earth is so limited. Except for a few tweaks around the edges, like wearing our seatbelts, not smoking, and taking other life-prolonging steps, there’s not much we can do to create more of it. We can’t bank our time and save it for use later like we can our money.

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb

anti-fragile, availability heuristic, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Black Swan, Brownian motion, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, data science, David Graeber, disintermediation, Donald Trump, Edward Thorp, equity premium, fake news, financial independence, information asymmetry, invisible hand, knowledge economy, loss aversion, mandelbrot fractal, Mark Spitznagel, mental accounting, microbiome, mirror neurons, moral hazard, Murray Gell-Mann, offshore financial centre, p-value, Paradox of Choice, Paul Samuelson, Ponzi scheme, power law, precautionary principle, price mechanism, principal–agent problem, public intellectual, Ralph Nader, random walk, rent-seeking, Richard Feynman, Richard Thaler, Ronald Coase, Ronald Reagan, Rory Sutherland, Rupert Read, Silicon Valley, Social Justice Warrior, Steven Pinker, stochastic process, survivorship bias, systematic bias, tail risk, TED Talk, The Nature of the Firm, Tragedy of the Commons, transaction costs, urban planning, Yogi Berra

Cognitive dissonance (a psychological theory by Leon Festinger about sour grapes, by which people, in order to avoid inconsistent beliefs, rationalize that, say, the grapes they can’t reach got to be sour). It is seen first in Aesop, of course, repackaged by La Fontaine. But its roots look even more ancient, with the Assyrian Ahiqar of Nineveh. Loss aversion (a psychological theory by which a loss is more painful than a gain is pleasant): in Livy’s Annals (XXX, 21) Men feel the good less intensely than the bad.fn6 Nearly all the letters of Seneca have some element of loss aversion. Negative advice (via negativa): We know the wrong better than what’s right; recall the superiority of the Silver over the Golden Rule. The good is not as good as the absence of bad,fn7 Ennius, repeated by Cicero.

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The flaw in psychology papers is to believe that the subject doesn’t take any other tail risks anywhere outside the experiment and, crucially, will never again take any risk at all. The idea in social science of “loss aversion” has not been thought through properly—it is not measurable the way it has been measured (if it is at all measurable). Say you ask a subject how much he would pay to insure a 1 percent probability of losing $100. You are trying to figure out how much he is “overpaying” for “risk aversion” or something even more foolish, “loss aversion.” But you cannot possibly ignore all the other financial risks he is taking: if he has a car parked outside that can be scratched, if he has a financial portfolio that can lose money, if he has a bakery that may risk a fine, if he has a child in college who may cost unexpectedly more, if he can be laid off, if he may be unexpectedly ill in the future.

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Languages The One-Way Street of Religions Decentralize, Again Imposing Virtue on Others Stability of the Minority Rule, a Probabilistic Argument Popper-Goedel’s Paradox Irreverence of Markets and Science Unus sed Leo: Only One but a Lion Summary and Next Appendix to Book 3: A Few More Counterintuitive Things About the Collective Zero-Intelligence Markets BOOK 4: WOLVES AMONG DOGS Chapter 3. How to Legally Own Another Person To Own a Pilot From the Company Man to the Companies Person Coase’s Theory of the Firm Complexity A Curious Form of Slave Ownership Freedom is Never Free Wolves Among the Dogs Loss Aversion Waiting for Constantinople Do Not Rock Bureaucristan Next Chapter 4. The Skin of Others in Your Game A Mortgage and Two Cats Finding Hidden Vulnerabilities How to Put Skin in the Game of Suicide Bombers Next BOOK 5: BEING ALIVE MEANS TAKING CERTAIN RISKS Chapter 5. Life in the Simulation Machine Jesus Was a Risk Taker Pascal’s Wager The Matrix The Donald Next Chapter 6.

Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

There were some who suggested that it was merely survivorship bias that explained this phenomenon; that is, there were stocks that went bankrupt or otherwise delisted and so this high premium was not real after all.48 Others suggested that there were frictions unaccounted for, such as transaction costs. The behavioral economists mounted a different set of explanations. One of the most cited and well-regarded explanations, put forth by Shlomo Benartzi and Richard Thaler in 1995, is “myopic loss aversion,” a notion that borrows heavily from the concepts developed in prospect theory, including the fact that individuals tend to exhibit loss aversion and that they care about changes in wealth more keenly than about absolute levels of wealth. Investors who frequently look at the value of their equity portfolio—say, on a daily or weekly basis when the market behaves randomly over these short time frames, moving up and down—will thus experience more disutility on average, given that they derive greater pain from losses than pleasure from the same magnitude of gains.

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Investors who frequently look at the value of their equity portfolio—say, on a daily or weekly basis when the market behaves randomly over these short time frames, moving up and down—will thus experience more disutility on average, given that they derive greater pain from losses than pleasure from the same magnitude of gains. Over long evaluation periods, The Emergence of Investment Theory 253 however, where market movements have a general upward trend, this feeling of loss aversion is reduced because equities tend to appreciate over time, so it is more palatable to hold on to equities. The size of the equity premium, then, is really due to loss aversion experienced by investors whose frequency of evaluations is too great; if investors looked at their equities portfolios over longer time frames, they would demand lower premiums and this puzzle would be resolved.49 Other explanations that have been offered by behavioral economists focus on earnings uncertainty and how that influences investors’ willingness to bear risk, and yet others develop a dynamic loss aversion model where investors react differently to stocks that fall after a run-up compared to those that fall directly after purchase.

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Their pioneering paper noted many 252 Investment: A History of the known behaviors that represent aberrations from expected utility theory, including lottery problems (in which individuals tend to elect a lump-sum payment up front even if that is smaller than the expected value of receiving a larger amount or zero when a coin flip is involved) and probabilistic insurance (in which individuals have a more disproportionate dislike for a form of insurance that would cover losses based on a coin flip more than the math suggests they should). Prospect theory contends that individuals’ choices are more centered on changes in utility or wealth rather than end values; it also suggests that most people exhibit loss aversion in which losses cause more harm to one’s welfare than the benefit from happiness one receives from gaining the same amount of reward.46 This theory may seem intellectually interesting, but how does it relate precisely to finance and investing? Since Kahneman and Tversky’s seminal paper, subsequent work has made many connections to markets, one of which is the “equity premium puzzle.”

The Choice Factory: 25 Behavioural Biases That Influence What We Buy by Richard Shotton

active measures, behavioural economics, call centre, cashless society, cognitive dissonance, Daniel Kahneman / Amos Tversky, data science, David Brooks, Estimating the Reproducibility of Psychological Science, Firefox, framing effect, fundamental attribution error, Goodhart's law, Google Chrome, Kickstarter, loss aversion, nudge unit, Ocado, placebo effect, price anchoring, principal–agent problem, Ralph Waldo Emerson, replication crisis, Richard Feynman, Richard Thaler, Robert Shiller, Rory Sutherland, TED Talk, Veblen good, When a measure becomes a target, World Values Survey

Simply promoting the end date would boost the attendees in the last few weeks. One explanation for the appeal of scarce items is loss aversion – that people feel losses more powerfully than the same level of gains. Stressing the end date taps into this by emphasising that consumers are in danger of missing the opportunity. Brands can apply this bias by tweaking their copy: rather than promoting their benefits, focus on what is being missed out by not switching. Working with Gabrielle Hobday, I surveyed 834 respondents to see how loss aversion could influence advertising claims. Half were told they could save £100 by switching to a new energy provider, while the remainder were informed they stood to lose £100 if they didn’t switch.

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Index 118 118 ad campaigns ad design ad messaging advertising advertising expenditure Alter, Adam anchoring Anderson, Eric Apple iPod Ariely, Dan Aristotle Arkes, Hal Aronson, Elliot Asch, Solomon auctions Audi Avis Banks, Iain banner ads Batey, Ifan Batson, Daniel behaviour contexts Behavioural Insight Team behavioural science Bernbach, Bill biases Binet, Les Black Sheep Vodka Borges, Jorge Louis brand flaws brand ideals brand measurement brand purpose brand reviews brand tracking brands Brink, Lois British Airways ads broken escalator phenomenon Bronner, Fred Brooks, Roy Brown, Millward brownies example browser choice Bruner, Jerome budget airlines budget setting see advertising expenditure Bullmore, Jeremy business growth business success Busse, Meghan bystander effect camera experiment Camerer, Colin Campbell’s soup experiment canned laughter Cantril, Hadley car deals examples card payments category norms CBS Outdoor and TNS cell methodology charity campaigns charm pricing Cherry, Colin Christiaensen, Luc Cialdini, Robert Cimbalo, Richard cinema ads claimed data Clay, Richard cocktail party effect cognitive illusions coin exaggeration Comparethemarket comparison sets confirmation bias Confused consumer overconfidence consumers habits contactless cards contexts behaviour media target cookies example Copernicus Consulting copywriting Corrigan, Spencer Costa coffee credit cards customer reviews Darley, John De Beers diamonds de Crane, Anton Deaux, Kay Deppe, Michael descriptive norms diamonds see De Beers diamonds diary-based experiment digital ads digital brand tracking direct mail discounts distinctiveness distraction dress sales experiment Dunning, David Dzamic, Lazar Ebbinghaus, Herman Eno, Brian estate agents ethics evaluation expectancy theory explicit messages fake beer experiment fake brands Fanelli, Daniele Ferguson, Alex Festinger, Leon Field, Peter first impressions football sponsorships Ford found data fundamental attribution error general election, UK Genovese, Kitty Genovese syndrome see bystander effect Gilbert, Dan Give Blood campaign, NHS gluten-free products Gocompare Goldstein, Noah good mood Goodhart’s Law Goodman, Cecile Gossett, William Sealy green goods Griffiths, Dylan Griskevicus, Vladas groups Guinness Gumroad habits Haidt, Jonathan Halifax Halpern, David Harford, Tim Hastorf, Albert heavy buyers Hegarty, John Hershfield, Hal Hobday, Gabrielle Hoffman, Bob Housman, Michael injunctive norm IPA Effectiveness Databank isolation effect JC Decaux Jenkins, Jeff Jones, John Joyner, Cynthia Jung, Carl Kahneman, Daniel Kandasamy, Anna Kay, John King Cobra beer knowledge Kruger, Justin labelling lager choice example Larrey, Dominique Jean Latané, Bibb leading brands Leahy, Terry Levenson, Bob lies life events Linford, Claire localisation loss aversion Lumen Research Maccoby, Nathan Maclean, Laura Magners cider male incontinence brand Manchester United Many Labs Replication Project market leaders marketing marketing managers marketing triage Martin, Steve maximisers McDonald’s media contexts medical practice method planning mimicry Mirenberg, Matthew Moneysupermarket mood Moseley, Winston motivation music musicians National Survey of Sexual Attitudes and Lifestyle (NATSAL) Neale, Margaret negative opinions negative social proof Nespresso new energy provider example New Look campaign newspaper ads Newton, Elizabeth NHS Give Blood campaign nine-enders Nokia nominative determinism Northcraft, Gregory Nosek, Brian nudges Nurse Family Partnership observed behaviour observed data Ocado O’Callaghan, Aidan online advertising overconfidence painkillers payment methods contactless cards credit cards Pelham, Brett perfume experiment Perry, Katy personal appeal personalisation persuasion petrified wood experiment placebo effect Polkinghorne, Vic popularity pratfall effect Prelec, Drazen pre-paid gift cards presentation Prezzo, Mark price price illusions price relativity primacy effect principal-agent problem product flaws programmatic advertising promotions Quinn, Jeffrey Raghubir, Priya recall Red Bull rejecters replicability Restorff, Hedwig von Riddell, Jenny Rosenzweig, Phil Ross, Lee Ross, Stephen Rosser Reeves fallacy Rudder, Christian Sainsbury’s satisficers scarcity serial position effect sexism sexual partners Shapiro, Matthew Sharp, Byron Sherif, Muzafer Shiv, Baba Shotton, Richard ad design Black Sheep Vodka brand purpose charity campaigns contactless cards fake beer experiment general election good mood green goods lager choice leading brands life events loss aversion male incontinence brand New Look campaign nine-enders overconfidence perfume experiment product flaws scarcity spending patterns sponsorships thought experiment value perception shower gel example Shteynberg, Garriy Simester, Duncan Simon, Herbert Simonsohn, Uri Simonson, Itamar Slovic, Paul Snickers chocolate bars social media social proof negative spending patterns sponsorships Srivastava, Joydeep Stella Artois Stengel, Jim Stengel Stephens-Davidowitz, Seth Street Bump app, Boston Strong, Rebecca supermarkets surveys Sutherland, Rory Svenson, Ola switched brands tailored approach target audiences target contexts target setting targeting ads tax payments Tesco Thaler, Richard The Wasp Factory (Banks, 1984) thought experiment time frames Total Recall Touchpoints towel experiment tracking data transparency Trott, Dave TV ads Tversky, Amos unintended consequences Vallance, Charles value perception video-conferencing Vietnam visual illusions vitamins example Von Restorff effect VW ad campaign Wansink, Brian waste websites Weston, Laura wheel of fortune example Whiskas Wikipedia Wilcox, Keith winner’s curse wishful seeing Wood, Wendy Worchel, Stephen Yahoo younger age groups Zettelmayer, Florian Zhang, Yong Zinkan, George

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Index 118 118 ad campaigns ad design ad messaging advertising advertising expenditure Alter, Adam anchoring Anderson, Eric Apple iPod Ariely, Dan Aristotle Arkes, Hal Aronson, Elliot Asch, Solomon auctions Audi Avis Banks, Iain banner ads Batey, Ifan Batson, Daniel behaviour contexts Behavioural Insight Team behavioural science Bernbach, Bill biases Binet, Les Black Sheep Vodka Borges, Jorge Louis brand flaws brand ideals brand measurement brand purpose brand reviews brand tracking brands Brink, Lois British Airways ads broken escalator phenomenon Bronner, Fred Brooks, Roy Brown, Millward brownies example browser choice Bruner, Jerome budget airlines budget setting see advertising expenditure Bullmore, Jeremy business growth business success Busse, Meghan bystander effect camera experiment Camerer, Colin Campbell’s soup experiment canned laughter Cantril, Hadley car deals examples card payments category norms CBS Outdoor and TNS cell methodology charity campaigns charm pricing Cherry, Colin Christiaensen, Luc Cialdini, Robert Cimbalo, Richard cinema ads claimed data Clay, Richard cocktail party effect cognitive illusions coin exaggeration Comparethemarket comparison sets confirmation bias Confused consumer overconfidence consumers habits contactless cards contexts behaviour media target cookies example Copernicus Consulting copywriting Corrigan, Spencer Costa coffee credit cards customer reviews Darley, John De Beers diamonds de Crane, Anton Deaux, Kay Deppe, Michael descriptive norms diamonds see De Beers diamonds diary-based experiment digital ads digital brand tracking direct mail discounts distinctiveness distraction dress sales experiment Dunning, David Dzamic, Lazar Ebbinghaus, Herman Eno, Brian estate agents ethics evaluation expectancy theory explicit messages fake beer experiment fake brands Fanelli, Daniele Ferguson, Alex Festinger, Leon Field, Peter first impressions football sponsorships Ford found data fundamental attribution error general election, UK Genovese, Kitty Genovese syndrome see bystander effect Gilbert, Dan Give Blood campaign, NHS gluten-free products Gocompare Goldstein, Noah good mood Goodhart’s Law Goodman, Cecile Gossett, William Sealy green goods Griffiths, Dylan Griskevicus, Vladas groups Guinness Gumroad habits Haidt, Jonathan Halifax Halpern, David Harford, Tim Hastorf, Albert heavy buyers Hegarty, John Hershfield, Hal Hobday, Gabrielle Hoffman, Bob Housman, Michael injunctive norm IPA Effectiveness Databank isolation effect JC Decaux Jenkins, Jeff Jones, John Joyner, Cynthia Jung, Carl Kahneman, Daniel Kandasamy, Anna Kay, John King Cobra beer knowledge Kruger, Justin labelling lager choice example Larrey, Dominique Jean Latané, Bibb leading brands Leahy, Terry Levenson, Bob lies life events Linford, Claire localisation loss aversion Lumen Research Maccoby, Nathan Maclean, Laura Magners cider male incontinence brand Manchester United Many Labs Replication Project market leaders marketing marketing managers marketing triage Martin, Steve maximisers McDonald’s media contexts medical practice method planning mimicry Mirenberg, Matthew Moneysupermarket mood Moseley, Winston motivation music musicians National Survey of Sexual Attitudes and Lifestyle (NATSAL) Neale, Margaret negative opinions negative social proof Nespresso new energy provider example New Look campaign newspaper ads Newton, Elizabeth NHS Give Blood campaign nine-enders Nokia nominative determinism Northcraft, Gregory Nosek, Brian nudges Nurse Family Partnership observed behaviour observed data Ocado O’Callaghan, Aidan online advertising overconfidence painkillers payment methods contactless cards credit cards Pelham, Brett perfume experiment Perry, Katy personal appeal personalisation persuasion petrified wood experiment placebo effect Polkinghorne, Vic popularity pratfall effect Prelec, Drazen pre-paid gift cards presentation Prezzo, Mark price price illusions price relativity primacy effect principal-agent problem product flaws programmatic advertising promotions Quinn, Jeffrey Raghubir, Priya recall Red Bull rejecters replicability Restorff, Hedwig von Riddell, Jenny Rosenzweig, Phil Ross, Lee Ross, Stephen Rosser Reeves fallacy Rudder, Christian Sainsbury’s satisficers scarcity serial position effect sexism sexual partners Shapiro, Matthew Sharp, Byron Sherif, Muzafer Shiv, Baba Shotton, Richard ad design Black Sheep Vodka brand purpose charity campaigns contactless cards fake beer experiment general election good mood green goods lager choice leading brands life events loss aversion male incontinence brand New Look campaign nine-enders overconfidence perfume experiment product flaws scarcity spending patterns sponsorships thought experiment value perception shower gel example Shteynberg, Garriy Simester, Duncan Simon, Herbert Simonsohn, Uri Simonson, Itamar Slovic, Paul Snickers chocolate bars social media social proof negative spending patterns sponsorships Srivastava, Joydeep Stella Artois Stengel, Jim Stengel Stephens-Davidowitz, Seth Street Bump app, Boston Strong, Rebecca supermarkets surveys Sutherland, Rory Svenson, Ola switched brands tailored approach target audiences target contexts target setting targeting ads tax payments Tesco Thaler, Richard The Wasp Factory (Banks, 1984) thought experiment time frames Total Recall Touchpoints towel experiment tracking data transparency Trott, Dave TV ads Tversky, Amos unintended consequences Vallance, Charles value perception video-conferencing Vietnam visual illusions vitamins example Von Restorff effect VW ad campaign Wansink, Brian waste websites Weston, Laura wheel of fortune example Whiskas Wikipedia Wilcox, Keith winner’s curse wishful seeing Wood, Wendy Worchel, Stephen Yahoo younger age groups Zettelmayer, Florian Zhang, Yong Zinkan, George

Walk Away by Douglas E. French

Alan Greenspan, Bear Stearns, behavioural economics, business cycle, Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, low interest rates, McMansion, mental accounting, mortgage debt, mortgage tax deduction, negative equity, New Journalism, Own Your Own Home, Richard Thaler, risk free rate, Robert Shiller, Savings and loan crisis, Tax Reform Act of 1986, the market place, transaction costs, unbiased observer, wealth creators

Most all attempt to negotiate a modification with their lender and are turned away at the door because they are current on their payments or if they are invited to pursue a modification, the “process turns out, however, to be immensely frustrating and ultimately unsuccessful for many homeowners.” Research has shown that investment decisions are driven by biases locked in the human brain and humans are especially loss-averse and tend to rationalize bad investment decisions. David Genesove and Christopher Mayer write in a chapter entitled “Loss-Aversion and Seller Behavior: Evidence from the Housing Market” from Advances In Behavioral Economics, “housing professionals are not surprised that many sellers are reluctant to realize a loss on their house.” These authors found that during the boom and bust in the Boston downtown real estate market of 1990–97, sellers subject to losses set higher asking prices of 25–35% of the difference between the expected selling price of a property and their original purchase price.

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“One especially successful broker even noted that she tried to avoid taking on clients who were facing ‘too large’ a potential loss on their property because such clients often had unrealistic target selling prices,” write Genesove and Mayer. And the cold, hard realities of the market are slow to change sellers’ minds according to Genesove and Mayer. According to their data, lower prices and increased time on the market do not significantly influence loss-aversion. Dražen Prelec and George Lowenstein believe that people do an accounting in their heads that affects their behavior. The linkages tying together specific acts of consumption with specific payments “generates pleasure or pain depending on whether the accounts are in the red or in the black.” In an article entitled “The Red and the Black: Mental Accounting of Savings and Debt” which appeared as a chapter in Exotic Preferences: Behavioral Economics and Human Motivation, the authors’ modeling predicts that most people are debt averse and show “that people generally like sequences of events that improve over time and dislike sequences that deteriorate.”

Luxury Fever: Why Money Fails to Satisfy in an Era of Excess by Robert H. Frank

Alan Greenspan, business cycle, clean water, company town, compensation consultant, Cornelius Vanderbilt, correlation coefficient, Daniel Kahneman / Amos Tversky, full employment, Garrett Hardin, germ theory of disease, global village, haute couture, hedonic treadmill, impulse control, income inequality, invisible hand, job satisfaction, Kenneth Arrow, lake wobegon effect, loss aversion, market clearing, McMansion, means of production, mega-rich, mortgage debt, New Urbanism, Pareto efficiency, Post-Keynesian economics, RAND corporation, rent control, Richard Thaler, rising living standards, Ronald Reagan, Silicon Valley, Tax Reform Act of 1986, telemarketer, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, trickle-down economics, ultimatum game, winner-take-all economy, working poor

If the value people assign to winning such a gamble were on a par with the value they assign to losing, they might nonetheless be inclined to roll the dice. For most people, however, these values are highly discrepant. As a burgeoning literature in psychology and economics has amply demonstrated, people assign much greater weight to losses than to gains of the same magnitude.11 The economist Richard Thaler coined the term loss aversion to describe this tendency. Loss aversion means not just that the pain of losing, say, $1,000, is larger, for most of us, than the pleasure from winning that same amount. It means that it is much larger. Thaler illustrates the asymmetry in our reactions to gains and losses by asking his students to consider the following hypothetical questions: 1.

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Thaler reports that the median responses from his students are approximately $800 for the first question and $100,000 for the second.13 “In general,” Thaler explains, “people seem willing to pay more to keep something already in their possession than to acquire the same item had they not already owned it [in these examples, their good health].”14 Loss aversion also helps us understand why workers expend vastly more effort to avoid a 10 percent cut in pay than to win a 10 percent increase. One important consequence of loss aversion, Friedman argues, is that the overriding goal for a majority of citizens in a stagnant economy becomes the protection of their current positions. In such environments, proposals to reduce employment barriers almost invariably fall on deaf ears.

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Over a much broader range of the existing income distribution, therefore, in a growing economy people will be willing to accept enhanced mobility, and they will support measures like anti-discrimination laws, or special education programs for disadvantaged children, designed to make actual mobility greater.15 The concept of loss aversion also enriches our understanding of the relationship between wealth and the amounts people are willing to spend for environmental cleanup and other public goods. In particular, it suggests that the rate of change of wealth is likely to be important. In a rapidly growing economy, the cost of having a cleaner environment is a slight reduction in the rate of growth of private consumption.

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

Richard Thaler and Cass Sunstein take the idea of aversion to loss one step further.8 They explain that investors also suffer from myopic loss aversion; the more often we evaluate our portfolios, the more likely we are to see losses. And the more often we see losses, the more often we experience loss aversion, which then becomes a vicious cycle. (Financial losses are processed in the same area of the brain that responds to mortal danger.) Investors should learn the big lesson from Buffett’s insurance underwriting practices: always think in terms of expected value. Be risk averse but do not be loss averse, that is, do not be afraid to take calculated risks. Investing is not a business in which every investment is profitable.

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The answer lies in an attribute intrinsic to all humans and the overarching theory that forms the bedrock for most biases in behavioral finance. Loss aversion. Human beings are more motivated by the thought of losing something than by the thought of gaining something of equal value. This is especially true under conditions of uncertainty. The threat of potential loss plays a significant role in our decision-making, and we have a natural tendency to be loss averse. Or, in Munger’s words, “The quantity of a man’s pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss.”7 This is the foundational principle of Daniel Kahneman and Amos Tversky’s prospect theory (figure 31.3).

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(Buffett often has talked about his love for toll roads in a figurative manner, such as newspapers in one-newspaper towns.) Likewise, licenses and regulatory approvals confer legal oligopoly status through regulatory fiat (as is the case with ratings agencies). Switching Costs Switching costs come in many forms and may be explicit (in the form of money and time) or psychological (resulting from deep-rooted loss aversion or status quo bias). These costs tend to be associated with critical products (such as Oracle’s SAP software) that are so tightly integrated with the customer’s business processes that it would be too disruptive and costly to switch vendors, or with products that have high benefit-to-cost ratios (such as Moody’s).

Bulletproof Problem Solving by Charles Conn, Robert McLean

active transport: walking or cycling, Airbnb, Amazon Mechanical Turk, asset allocation, availability heuristic, Bayesian statistics, behavioural economics, Big Tech, Black Swan, blockchain, book value, business logic, business process, call centre, carbon footprint, cloud computing, correlation does not imply causation, Credit Default Swap, crowdsourcing, David Brooks, deep learning, Donald Trump, driverless car, drop ship, Elon Musk, endowment effect, fail fast, fake news, future of work, Garrett Hardin, Hyperloop, Innovator's Dilemma, inventory management, iterative process, loss aversion, megaproject, meta-analysis, Nate Silver, nudge unit, Occam's razor, pattern recognition, pets.com, prediction markets, principal–agent problem, RAND corporation, randomized controlled trial, risk tolerance, Silicon Valley, SimCity, smart contracts, stem cell, sunk-cost fallacy, the rule of 72, the scientific method, The Signal and the Noise by Nate Silver, time value of money, Tragedy of the Commons, transfer pricing, Vilfredo Pareto, walkable city, WikiLeaks

This has been underscored by recent work on forecasting.8  Executives rank reducing decision bias as their number one aspiration for improving performance.9  For example, a food products company Rob was serving was trying to exit a loss‐making business. They could have drawn a line under the losses if they took an offer to exit when they had lost $125 million. But they would only accept offers to recover accounting book value (a measure of the original cost). Their loss aversion, a form of sunk‐cost bias, meant that several years later they finally exited with losses in excess of $500 million! Groupthink amongst a team of managers with similar backgrounds and traditional hierarchy made it hard for them see the real alternatives clearly; this is a common problem in business.

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This is what the seven steps process is all about. A Practical Way to Deal with Biases Lets talk about the main sources of bias and error in problem solving. In conversations with our former colleague and Kahneman collaborator, Professor Dan Lovallo, he suggests that the most important to address are confirmation bias, anchoring bias, and loss aversion.4 We will add in availability bias and overoptimism as additional issues to address in your team processes. Indeed, as Exhibit 4.6 shows, many of the other biases described in the literature are forms of these five underlying issues. EXHIBIT 4.6 Confirmation bias is falling in love with your one‐day answer.

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EXHIBIT 4.6 Confirmation bias is falling in love with your one‐day answer. It is the failure to seriously consider the antithesis to your thesis, ignoring dissenting views—essentially picking low hanging mental fruit. Anchoring bias is the mistaken mental attachment to an initial data range or data pattern that colors your subsequent understanding of the problem. Loss aversion, and its relatives, the sunk cost fallacy, book loss fear, and the endowment effect, are a failure to ignore costs already spent (sunk) or any asymmetric valuing of losses and gains. Availability bias is use of an existing mental map because it is readily at hand, rather than developing a new model for a new problem, or just being influenced by more recent facts or events.

Model Thinker: What You Need to Know to Make Data Work for You by Scott E. Page

Airbnb, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Alvin Roth, assortative mating, behavioural economics, Bernie Madoff, bitcoin, Black Swan, blockchain, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Checklist Manifesto, computer age, corporate governance, correlation does not imply causation, cuban missile crisis, data science, deep learning, deliberate practice, discrete time, distributed ledger, Easter island, en.wikipedia.org, Estimating the Reproducibility of Psychological Science, Everything should be made as simple as possible, experimental economics, first-price auction, Flash crash, Ford Model T, Geoffrey West, Santa Fe Institute, germ theory of disease, Gini coefficient, Higgs boson, High speed trading, impulse control, income inequality, Isaac Newton, John von Neumann, Kenneth Rogoff, knowledge economy, knowledge worker, Long Term Capital Management, loss aversion, low skilled workers, Mark Zuckerberg, market design, meta-analysis, money market fund, multi-armed bandit, Nash equilibrium, natural language processing, Network effects, opioid epidemic / opioid crisis, p-value, Pareto efficiency, pattern recognition, Paul Erdős, Paul Samuelson, phenotype, Phillips curve, power law, pre–internet, prisoner's dilemma, race to the bottom, random walk, randomized controlled trial, Richard Feynman, Richard Thaler, Robert Solow, school choice, scientific management, sealed-bid auction, second-price auction, selection bias, six sigma, social graph, spectrum auction, statistical model, Stephen Hawking, Supply of New York City Cabdrivers, systems thinking, tacit knowledge, The Bell Curve by Richard Herrnstein and Charles Murray, The Great Moderation, the long tail, The Rise and Fall of American Growth, the rule of 72, the scientific method, The Spirit Level, the strength of weak ties, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, urban sprawl, value at risk, web application, winner-take-all economy, zero-sum game

More realistic models may require more sophisticated mathematics.13 None of these concerns is so persuasive to suggest abandoning models with psychologically realistic behaviors, but collectively they imply that we proceed with caution and emphasize well-documented behavioral regularities. Two deviations that have been replicated many times are loss aversion and hyperbolic discounting. Loss aversion states that people are risk-averse over gains and risk-loving over losses. Kahneman and Tversky refer to this general theory of behavior as prospect theory.14 Loss aversion does not at first appear irrational, but it implies that people choose different actions when an identical scenario is presented as a potential loss as opposed to a potential gain. For example, people prefer winning $400 for certain rather than entering a lottery with an even chance of winning $1,000.

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The rational actor will be less successful at predicting human behavior than as a tool for communicating, evaluating actions, and designing policies. We then show how we can add psychological biases and altruistic preferences onto the standard rational-actor model. The choice of whether to include a bias or a concern for others rests again on what we are studying. Some human biases such as loss aversion and presentist bias—caring more about delays today than in the future—may be necessary to include in some instances. For example, those assumptions may be important for models of retirement savings or riots. The assumptions may be less important for models of driving behavior or disease transmission.

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Psychological Biases The rational-actor model has been challenged by psychologists, economists, and neuroscientists, who note that it does not match up with how humans behave. Empirical findings from laboratory and natural experiments show that people suffer a variety of biases, including a status quo bias. We ignore base rates when making probability calculations, we attach too much significance to sure things, and we are loss-averse. As researchers begin to link behavior and beliefs to processes within the brain, evidence of hardwired biases becomes more compelling. For example, neuroeconomics uses brain imaging studies to study economically relevant behaviors such as attitudes toward risk, levels of confidence, and responses to information.9 Kahneman argues that what we know so far supports making a distinction between two types of thinking: quick, intuitive rules (fast thinking) and deliberate contemplation (slow thinking).

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Alan Greenspan, Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, behavioural economics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial engineering, financial innovation, full employment, Great Leap Forward, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, Post-Keynesian economics, probability theory / Blaise Pascal / Pierre de Fermat, prudent man rule, random walk, Richard Thaler, Robert Shiller, Robert Solow, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

The answer to a question should be the same regardless of the setting in which it is posed. Kahneman and Tversky interpret the evidence produced by these experiments as a demonstration that people are not risk-averse: they are perfectly willing to choose a gamble when they consider it appropriate. But if they are not risk-averse, what are they? "The major driving force is loss aversion," writes Tversky (italics added). "It is not so much that people hate uncertainty-but rather, they hate losing."6 Losses will always loom larger than gains. Indeed, losses that go unresolved-such as the loss of a child or a large insurance claim that never gets settled-are likely to provoke intense, irrational, and abiding risk-aversion.?

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One of the most familiar manifestations of the failure of invariance is in the old Wall Street saw, "You never get poor by taking a profit." It would follow that cutting your losses is also a good idea, but investors hate to take losses, because, tax considerations aside, a loss taken is an acknowledgment of error. Loss-aversion combined with ego leads investors to gamble by clinging to their mistakes in the fond hope that some day the market will vindicate their judgment and make them whole. Von Neumann would not approve. The failure of invariance frequently takes the form of what is known as "mental accounting," a process in which we separate the components of the total picture.

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Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."4 Prospect Theory confirms Keynes's conclusion by predicting which decision you will make. First, the absolute performance of the stock you select is relatively unimportant. The start-up company's performance as compared with Johnson & Johnson's performance taken as a reference point is what matters. Second, loss aversion and anxiety will make the joy of winning on the start-up company less than the pain if you lose on it. Johnson & Johnson is an acceptable "long-term" holding even if it often underperforms. The stocks of good companies are not necessarily good stocks, but you can make life easier by agreeing with your clients that they are.

The Paradox of Choice: Why More Is Less by Barry Schwartz

accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, hedonic treadmill, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, PalmPilot, Paradox of Choice, Pareto efficiency, peak-end rule, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, search costs, The Wealth of Nations by Adam Smith

Losing $100 produces a feeling of negativity that is more intense than the feelings of elation produced by a gain. Some studies have estimated that losses have more than twice the psychological impact as equivalent gains. The fact is, we all hate to lose, which Kahneman and Tversky refer to as loss aversion. The last and crucial element to the graph is the location of the neutral point. This is the dividing line between what counts as a gain and what counts as a loss, and here, too, subjectivity rules. When there is a difference in price between cash and credit at the gas station, is it a discount for cash or a surcharge for credit?

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You think about it for a while and decide. Now imagine trying to decide whether to buy a mountain bike or a digital camera. Each option represents a gain (positive features it has that the other doesn’t) and a loss (positive features it doesn’t have that the other does). We saw in Chapter 3 that people tend to display loss aversion. The loss of $100 is more painful than the gain of $100 is pleasurable. What that means is that when the mountain bike and the digital camera are compared, each will suffer from the comparison. If you choose the camera, you’ll gain the quality and convenience of digital photography but lose the exercise in lovely surroundings.

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Or suppose you are Many examples of phenomena discussed in this section can be found in articles collected in D. Kahneman and A. Tversky (eds.), Choices, Values, and Frames (New York: Cambridge University Press, 2000). On the endowment effect, see D. Kahneman, J. Knetsch, and R. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” On decisions to sell stock, see T. Odean, “Are Investors Reluctant to Realize Their Losses?” On sunk costs, see R. Thaler, “Mental Accounting Matters,” and R. Thaler, “Toward a Positive Theory of Consumer Choice.” On health insurance decisions, see E. Johnson, J. Hershey, J.

Thinking in Bets by Annie Duke

banking crisis, behavioural economics, Bernie Madoff, Cass Sunstein, cognitive bias, cognitive dissonance, cognitive load, Daniel Kahneman / Amos Tversky, delayed gratification, Demis Hassabis, disinformation, Donald Trump, Dr. Strangelove, en.wikipedia.org, endowment effect, Estimating the Reproducibility of Psychological Science, fake news, Filter Bubble, Herman Kahn, hindsight bias, Jean Tirole, John Nash: game theory, John von Neumann, loss aversion, market design, mutually assured destruction, Nate Silver, p-value, phenotype, prediction markets, Richard Feynman, ride hailing / ride sharing, Stanford marshmallow experiment, Stephen Hawking, Steven Pinker, systematic bias, TED Talk, the scientific method, The Signal and the Noise by Nate Silver, urban planning, Walter Mischel, Yogi Berra, zero-sum game

Don’t fall in love or even date anybody if you want only positive results. The world is structured to give us lots of opportunities to feel bad about being wrong if we want to measure ourselves by outcomes. Don’t fall for it! Second, being wrong hurts us more than being right feels good. We know from Daniel Kahneman and Amos Tversky’s work on loss aversion, part of prospect theory (which won Kahneman the Nobel Prize in Economics in 2002), that losses in general feel about two times as bad as wins feel good. So winning $100 at blackjack feels as good to us as losing $50 feels bad to us. Because being right feels like winning and being wrong feels like losing, that means we need two favorable results for every one unfavorable result just to break even emotionally.

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Edward Russo, and Nancy Pennington. “Back to the Future: Temporal Perspective in the Explanation of Events.” Journal of Behavioral Decision Making 2, no. 1 (January 1989): 25–38. Morewedge, Carey, Lisa Shu, Daniel Gilbert, and Timothy Wilson. “Bad Riddance or Good Rubbish? Ownership and Not Loss Aversion Causes the Endowment Effect.” Journal of Experimental Social Psychology 45, no. 4 (July 2009): 947–51. Mullally, Sinead, and Eleanor Maguire. “Memory, Imagination, and Predicting the Future: A Common Brain Mechanism?” The Neuroscientist 20, no. 3 (June 2014): 220–34. Munnell, Alice, Wenliang Hou, and Anthony Webb.

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Baltimore: Johns Hopkins University Press, 2002. Tomlin, Damon, David Rand, Elliot Ludvig, and Jonathan Cohen. “The Evolution and Devolution of Cognitive Control: The Costs of Deliberation in a Competitive World.” Scientific Reports 5 (June 16, 2015). Tversky, Amos, and Daniel Kahneman. “Loss Aversion in Riskless Choice: A Reference-Dependent Model.” Quarterly Journal of Economics 106, no. 4 (November 1991): 1039–61. Von Neumann, John, and Oskar Morgenstern. Theory of Games and Economic Behavior. 60th anniv. ed. Princeton, NJ: Princeton University Press, 1944, 2004. Wachowski, Lana, and Wachowski, Lilly, dirs.

Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

Abraham Maslow, Abraham Wald, affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, Apollo 13, Apple Newton, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, dark pattern, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Dunning–Kruger effect, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fake news, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Goodhart's law, Gödel, Escher, Bach, heat death of the universe, hindsight bias, housing crisis, if you see hoof prints, think horses—not zebras, Ignaz Semmelweis: hand washing, illegal immigration, imposter syndrome, incognito mode, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, karōshi / gwarosa / guolaosi, lateral thinking, loss aversion, Louis Pasteur, LuLaRoe, Lyft, mail merge, Mark Zuckerberg, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nocebo, nuclear winter, offshore financial centre, p-value, Paradox of Choice, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, power law, precautionary principle, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, Salesforce, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, Streisand effect, sunk-cost fallacy, survivorship bias, systems thinking, The future is already here, The last Blockbuster video rental store is in Bend, Oregon, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, vertical integration, Vilfredo Pareto, warehouse robotics, WarGames: Global Thermonuclear War, When a measure becomes a target, wikimedia commons

Other times you may find that what it would take to get where you originally wanted to go is just not worth the effort anymore. Unfortunately, psychologically, your mind is working hard against you here, and loss aversion is the model that explains why. You are more inclined to avoid losses, to be averse to them, than you are to want to make similar gains. Quite simply, you get more displeasure from losing fifty dollars than pleasure from gaining fifty dollars. Since you hate losing, loss aversion can cause you harm under many circumstances. You may hold losing stocks way too long, hoping they will recover back to the value they had when you bought them.

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Daniel Kahneman and Amos Tversky’s work on this topic, detailed in the October 1992 issue of the Journal of Risk and Uncertainty, demonstrated that across many risky situations, such as winning or losing money based on a coin toss, people tend to want the potential payoff to be around double the potential loss before they are willing to take the gamble. That is, people want to have a fifty-fifty chance of winning one hundred dollars if they have to put fifty dollars on the line. Loss aversion can be better understood using the frame of reference model (see Chapter 1). When you already have a win on your hands, you tend to want to lock in your gains. From this frame of reference, you tend to act more conservatively and are more likely to pass up a chance at a bigger gain if it means risking your current winnings.

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Use the Pareto principle to find the 80/20 in any activity and increase your leverage at every turn. Recognize when you’ve hit diminishing returns and avoid negative returns. Use commitment and the default effect to avoid present bias, and periodic evaluations to avoid loss aversion and the sunk-cost fallacy. Look for shortcuts via existing design patterns, tools, or clever algorithms. Consider whether you can reframe the problem. 4 Becoming One with Nature BEFORE THE INDUSTRIAL REVOLUTION, most peppered moths in Manchester, England, were light-colored, using trees covered with pale bark and lichens as camouflage to avoid becoming prey for birds.

Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Alan Greenspan, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, behavioural economics, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, Gary Kildall, high-speed rail, hindsight bias, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, invisible hand, labor-force participation, lake wobegon effect, loss aversion, low interest rates, meritocracy, minimum wage unemployment, Network effects, Paradox of Choice, Paul Samuelson, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, selection bias, side project, sovereign wealth fund, Steve Jobs, the long tail, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy

The labour of his body, and the work of his hands, we may say, are properly his.”8 With these words, Locke became the patron saint of tax resisters around the world. This sense of entitlement to the fruits of one’s labors may owe much to the phenomenon known as loss aversion. One of the most reliable findings in behavioral economics, loss aversion refers to the fact that people will fight much harder to avoid a loss than they would to achieve a gain of the same amount.9 Since most successful people work extremely hard for the money they earn, it feels like they own it, and that makes taxation feel like theft.

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Chunliang Feng, Yi Luo, Ruolei Gu, Lucas S Broster, Xueyi Shen, Tengxiang Tian, Yue-Jia Luo, Frank Krueger, “The Flexible Fairness: Equality, Earned Entitlement, and Self-Interest,” PLOS ONE 8.9 (September 2013), http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0073106. 7. Mechanical Turk, https://www.mturk.com/mturk/welcome. 8. John Locke, Second Treatise on Civil Government, 1689, chap. 5, section 27, http://www.constitution.org/jl/2ndtr05.htm. 9. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5.1 (1991): 193–206. 10. Liam Murphy and Thomas Nagel, The Myth of Ownership, New York: Oxford University Press, 2001. 11. David DeSteno, Monica Y. Bartlett, Jolie Baumann, Lisa A. Williams, and Leah Dickens, “Gratitude as Moral Sentiment: Emotion-Guided Cooperation in Economic Exchange,” Emotion 10.2 (2010): 289–93. 12.

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, AOL-Time Warner, asset allocation, Bear Stearns, behavioural economics, bitcoin, Bretton Woods, buy and hold, buy low sell high, Carl Icahn, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial engineering, financial innovation, fixed income, global macro, hindsight bias, index fund, initial coin offering, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, low interest rates, Market Wizards by Jack D. Schwager, mega-rich, merger arbitrage, multilevel marketing, Myron Scholes, Paul Samuelson, Pershing Square Capital Management, quantitative easing, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, Robert Shiller, short squeeze, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, subprime mortgage crisis, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

You go back and forth several times, but finally decide to pull the trigger on the team with the less talented quarterback but a stronger defense. After you've walked to the counter and placed your bet, you'll immediately feel much better about your decision than before you parted with your dollars. Kahneman, Knetsch, and Thaler documented this in an experiment in their 1991 paper, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.”1 In an advanced undergraduate economics class at Cornell, 22 students in alternating seats were given coffee mugs that sell for $6 at the bookstore. When sellers were given the option to sell, and buyers given the option to buy, the study found that the median owner was unwilling to sell for less than $5.25, while the median buyer was unwilling to pay more than $2.25.

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Making decisions ahead of time, especially decisions that involve admitting defeat, can help conquer one of the biggest hurdles investors face; looking in the mirror and seeing an ability that we just do not possess. Notes 1. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (Winter 1991): 193–206. 2. Robert Shiller, Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000), 60. 3. David Dreman, Contrarian Investment Strategies: The Psychological Edge (New York: Free Press, 2012), 176. 4.

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Index 13D registration, 90 101 Years on Wall Street (Brown), 50 Abbot Labs, 91 ABX Index, 134 Ackman, Bill, 3, 85, 88 CNN interview, 92 confidence, 88–89 persistence, 89 Adams, Evelyn, 131 Airbnb, 151 Alcoa, trading, 157 Alfond, Harold, 81 Amazon, 139–140 earnings, 7 Animal spirits, 126 “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias” (Kahneman/Knetsch/Thaler), 75 AOL/Time Warner, merger, 49 Apple earnings, certainty (example), 120 shareholder wealth, 109 Arthur Lipper, tracking, 70 Art of Contrary Thinking, The, (Neill), 67 Assets under management (AUM), reduction, 61 Automatic, Sacca investment, 149 Bacon, Louis, 103 Balanced fund, transformation, 50 Bank of England, currency defense, 103 Bank of Taiwan, investments, 40 Baruch, Bernard, 7 Batnick, Michael, 155 Behavior gap, 99 Bell, Alexander Graham, 29 Benchmarks, 77 Benjamin Graham Joint Account, 7 Berkowitz, David, 88 Berkshire Hathaway Buffett control, 76 drawdowns, 143 market cap, 79 recovery, 114 shares, decline, 142 stock, Buffett purchase, 76 value loss, 57 Bernstein, Peter, 121, 164 Bernstein, William, 37 Betting on Zero (Silvan), 94 Betty Crocker, comparison, 91 Black Monday, 102 Black‐Scholes option pricing model, 39–40 Blood money, 91 Blue Chip Stamps, 141–142 Bogle, Jack, 45, 159 firing (Wellington Management), 51 impact, 47 performance, problems, 51 Boston Security Analysis Society, Samuelson remarks, 51 Brokerage house, offer, 20 Brokers, long‐term relationship, 61 Brooks, John, 68 Brown, John Dennis, 50 Brown, Josh, 162–163 Bucket shops closure, 18 usage, 16 Buffalo Evening News (purchase), 142 Buffett, Warren, 4, 10, 73, 140 annual forecasts, 77 circle of competence, 80 comparison, 100 gross returns, 76 investment philosophy, 76–77 limited partnership, closure, 111 Oracle of Omaha, 76, 78 Pearson, contrast, 114 Bull market, margin for error, 67 Cabot, Walter, 50 Capital, usage, 17 Carr, Fred, 69 Cayne, James, 40 Charlie Munger: The Complete Investor (Griffin), 81 Charmin, comparison, 91 Chartered Financial Analyst (CFA) exam, 158–159 Chasing the Last Laugh (Zacks), 27 Chesapeake & Atlantic, 20–21 Chicago, Burlington and Quincy Railroad, 16 Chicago Herald (problems), 30 Church and Dwight, value, 91 Churchill, Winston, 91 Circle of competence (Buffett), 80 Cisco, gains, 57 Citron Research, 113–114 Clemens, Samuel.

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, Brexit referendum, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, Philippa Foot, principal–agent problem, profit maximization, profit motive, Richard Thaler, search costs, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, trolley problem, ultimatum game

Since the 1960s, detractors of the efficient market hypothesis have identified potential anomalies in the data that a savvy trader could exploit, and defenders have counterattacked with one of three claims: (1) The detractors looked at hundreds of possible anomalies and only published one—even if markets are perfectly unpredictable, some patterns will appear by chance, (2) There’s a flaw in the detractors’ analysis (for instance, transaction costs would chew up apparent profit or the securities were not really available at the published price), or (3) Any above-market returns can be attributed to risk, since the payoff is positively correlated with other financial assets or human capital. In return, detractors point to alleged cognitive biases, such as loss aversion, as the reason that money-making opportunities persist. Defenders then respond that some people may be biased some of the time, but even a small number of arbitrageurs can force the market to its proper level.1 I am neither in favor of the efficient market hypothesis, nor against it. I am against the way it frames the debate: it mischaracterizes markets by ignoring different ways of possessing information.

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This field investigates the systematic mistakes that we could correct by recognizing our biases and mental shortcuts. It shouldn’t be hard to persuade anyone who falls for the gambler’s fallacy that the ball is no more likely to land on red in the next spin of the roulette wheel because it was red the last five times or the opposite, that black is not due to catch up. A person exhibiting loss aversion might reject a bet with a 50 percent chance of winning two dollars and a 50 percent chance of losing one dollar. She pays over the odds to avoid small losses because losing is accompanied by psychological discomfort. (This is different from risk aversion, which deals with losses on a large scale.)

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., 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.

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

"Friedman doctrine" OR "shareholder theory", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Abraham Maslow, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Alan Greenspan, American Society of Civil Engineers: Report Card, AOL-Time Warner, asset allocation, business cycle, business process, carbon tax, Carl Icahn, Cass Sunstein, centre right, choice architecture, classic study, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, disruptive innovation, double helix, Evgeny Morozov, factory automation, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, full employment, game design, Glass-Steagall Act, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, insecure affluence, invisible hand, It's morning again in America, job automation, John Markoff, Joseph Schumpeter, junk bonds, knowledge worker, late fees, Long Term Capital Management, loss aversion, low interest rates, low skilled workers, mass immigration, Michael Shellenberger, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, stock buybacks, technological determinism, technological solutionism, technoutopianism, Ted Nordhaus, the built environment, the long tail, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, value engineering, Walter Mischel, winner-take-all economy

Or, to quote the acronym that traders and executives repeated whenever anyone raised concerns about the deals being done, “IBG YBG”—as in “I’ll Be Gone, You’ll Be Gone.”42 Gamblers, when their luck turns sour, often exhibit a behavioral tic known as loss aversion. It’s a survival thing—because we were adapted for scarcity, we’re predisposed to hate losing any sort of asset. In studies involving gambling, subjects perceive losses to be twice as large as wins even though the losses and wins involve the same amount of money.43 Loss aversion is why blackjack players will double-down repeatedly after a bad hand, and why stock traders will ride a losing stock into the ground. It’s also why homeowners often refuse to lower their selling price even when the market is collapsing, which is what began to happen in 2006.

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We couldn’t sell the houses.”44 Adding to the misery, however, realtors now had to get clients to understand that the massive wealth they’d possessed only months before was now gone. “You had to counsel people. I had one client come to me. He had twelve houses. He had been buying them and flipping them, and he got stuck with twelve houses. I said to him, ‘The market has stopped.’ ” Loss aversion is also an apt description of how the entire market, and especially the financial market, reacted to the collapse—with increasingly desperate moves that made the final damage so much worse. As the economy stalled and corporate earnings flattened, panicked CEOs initiated massive share buybacks.

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“IBG YBG,” review of Jonathan Knee, The Accidental Investment Banker (Oxford University Press, 2006), in Words, Words, Words, http://wordsthrice.blogspot.com/2006/12/ibg-ybg.html. 43. Yexin Jessica Li, Douglas Kenrick, Vladas Griskevicius, and Stephen L. Neuberg, “Economic Decision Biases in Evolutionary Perspectives: How Mating and Self-Protection Motives Alter Loss Aversion,” Journal of Personality and Social Psychology 102, no. 3 (2012), http://www.csom.umn.edu/marketinginstitute/research/documents/HowMatingandSelf-ProtectionMotivesAlterLossAversion.pdf. 44. Interview with author. 45. William Lazonick, “The Innovative Enterprise and the Developmental State: Toward an Economics of ‘Organizational Success.’”

When the Money Runs Out: The End of Western Affluence by Stephen D. King

Alan Greenspan, Albert Einstein, Apollo 11, Asian financial crisis, asset-backed security, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, bond market vigilante , British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, currency risk, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, Ford Model T, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, junk bonds, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, low interest rates, market clearing, mass immigration, Minsky moment, moral hazard, mortgage debt, Neil Armstrong, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, risk free rate, Savings and loan crisis, seminal paper, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

This feature is not uniquely Argentine or Japanese. It is a deeply embedded psychological characteristic. It's called loss aversion. Standard economic theory suggests that individuals treat gains and losses in similar fashion. In reality, however, people dislike losses far more than they enjoy gains. An economic system that seems to offer individuals the equal possibility of gains and losses – a world of stagnation rather than growth – is one that's likely to be dominated by loss aversion. Entrepreneurial activity falls by the wayside. What we already think we have – or we are entitled to – we'll not give up easily, even if we are much better off than previous generations.

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The Sellers started off with mugs but no money. In their experiments, the authors found that Sellers valued their mugs far more highly than the Choosers even though both groups were, in effect, faced with the same choice: both would go home either with a mug or some cash. The difference relates to loss aversion. We don't like to lose things we already own. The Sellers had an ‘emotional’ attachment to their coffee mugs. This psychological insight is incredibly important in a world of economic stagnation or contraction, Smith's dull and melancholy states. Melancholia sets in not just because there is an absence of economic progress but, worse, because there is a fight over the spoils of economic endeavour.

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(i) Knickerbocker Trust Company (i) Korea (i), (ii), (iii), (iv), (v) Krugman, Paul (i), (ii), (iii) labour market (i), (ii) productivity (i) Landes, David (i) Latin American debt crisis (i) Layard, Richard (i), (ii) Lehman Brothers (i), (ii) Leveson inquiry (i) Libor (i) life expectancy (i) liquidity (i), (ii) liquidity trap (i) Liquidity Coverage Ratio (LCR) (i) Little Dorrit (Dickens) (i) living standards (i), (ii), (iii), (iv), (v) belief in ever rising (i), (ii) China (i) Indonesia (i) Japan (i) Korea (i) late 19th century (i), (ii) Malaysia (i) post-Second World War (i) US (i), (ii) loan-to-value ratios, mortgage (i) Long Depression (i) loss aversion (i) lotteries (i) Macroeconomic Imbalance Procedure (MIP) (i) macroeconomic policies (i), (ii), (iii), (iv), (v) Japan (i) macroprudential rules (i) Madoff, Bernie (i) Mahathir Mohamad (i), (ii) Malaysia (i), (ii), (iii) Malthus, Thomas (i) Manchester United (i) Marr, Wilhelm (i) Marx, Karl (i), (ii) Mary Poppins (i) May Report (i) Megawati Sukarnoputri (i) Mellon, Andrew (i), (ii) Mexico (i) Mieno, Yasushi (i) miners (i) Mississippi (i) mistrust creditors and debtors (i) cross-border (i) endemic (i) governments (i), (ii) of money (i) and political extremism (i) monetarism (i) monetary policy (i), (ii), (iii), (iv), (v), (vi) a new monetary framework (i) see also Gold Standard; interest rates; quantitative easing (QE) Monetary Policy Committee (i) monetary unions (i) see also eurozone moral hazard (i) mortgage-backed securities (i), (ii), (iii) mortgages (i), (ii) Napoleon Bonaparte (i) Napoleon III (i) National Bank of North America (i) national incomes (i), (ii), (iii), (iv) Germany (i) Japan (i) UK (i), (ii), (iii) US (i), (ii), (iii), (iv), (v) National Lottery (i) nationalism (i) the Netherlands (i) New Deal (i) ‘new economy’ of the 1990s (i) New Order (Indonesia) (i) New Zealand (i) Nicholson, Viv (i) Nigeria (i) Northern Rock (i), (ii), (iii), (iv) Norway (i) Occupy movement (i), (ii) Office for Budget Responsibility (i) Oliver Twist (Dickens) (i) Osborne, George (i) Overend, Gurney and Co.

No Rules Rules: Netflix and the Culture of Reinvention by Reed Hastings, Erin Meyer

Airbnb, An Inconvenient Truth, Downton Abbey, Elon Musk, en.wikipedia.org, FedEx blackjack story, global village, hiring and firing, job-hopping, karōshi / gwarosa / guolaosi, late fees, loose coupling, loss aversion, out of africa, performance metric, Saturday Night Live, Sheryl Sandberg, Silicon Valley, Skype, Stephen Hawking, Steve Ballmer, Steve Jobs, subscription business, super pumped, tech worker, The last Blockbuster video rental store is in Bend, Oregon, work culture

According to a survey conducted by Glassdoor in 2017, American workers took only about 54 percent of their entitled vacation days. Employees are likely to take even less time off if you remove the vacation allotment altogether because of a well-documented human behavior, which psychologists refer to as “loss aversion.” We humans hate to lose what we already have, even more than we like getting something new. Faced with losing something, we will do everything we can to avoid losing it. We take that vacation. If you’re not allotted vacation, you don’t fear losing it, and are less likely to take any at all.

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A Academy Awards, xvii, 165, 233 “accept or discard” feedback guideline, 31, 33 accidents and safety issues, management style and, 213–14, 269–71 “actionable” feedback guideline, 30, 31, 33, 36, 193, 257 “adapt” feedback guideline, 264 “aim to assist” feedback guideline, 30, 31, 33, 36 Airbnb, 136 Alexa and Katie, 145 alignment, 217–18, 231 on a North Star, 218–21 as tree, 221–31 Allmovie.com, 87 Amazon, 3, 81, 97, 136, 208, 232 Prime, 146, 148 amygdala, 21 Anitta, 97 annual performance reviews, 191 Antioco, John, xi–xii AOL, xviii, 236 Apple, xvii, 77, 97 “appreciate” feedback guideline, 31, 33 Arc de Triomphe, 268–69 Ariely, Dan, 83 Armstrong, Lance, 207, 232–33 Aronson, Elliot, 124 Aspen Institute, 107–8 autonomy, 133 see also decision-making; decision-making approvals, eliminating Avalos, Diego, 151 B Ballad of Buster Scruggs, The, xviii Ballmer, Steve, 122–23 Baptiste, Nigel, 64–66, 68 Bazay, Dominique, 223, 224, 227–31 Bde Maka Ska, 267, 268 Becker, Justin, 35–36 belonging cues, 24–25 bet-taking analogy, 138–40, 153–57, 225–27 Bird Box, 165 Blacklist, The, 26 Black Mirror, 157–59 Blitstein, Ryan, 52 Blockbuster, 3, 171, 236 bankruptcy of, xii, xviii late fees of, 3 Netflix’s offer to, xi–xii size of, xi, xii bonuses, 80–84 Booz Allen Hamilton, 81 brain: feedback and, 20, 21 secrets and, 103 Branson, Richard, xxiv, 50 Brazil, 137, 150, 224–26, 243, 247, 249–51, 257, 264 Brier, David, xxiv brilliant jerks, 34–36, 200 Brown, Brené, 123 Bruk, Anna, 123–24 Bull Durham, 169 Bullock, Sandra, 165 bungee jumping, 194–95 C Canada, 241 candor, 18–21, 141, 175 cultural differences around the world, 250-55, 260, 263–64 culture of, 22–23 dentist visits compared to, 190–91 as disliked but needed, 20–22 failure to speak up, 18, 27, 141 increasing, xx, xxi, 1, 12–37, 72, 100–127, 188–205 jerks and, 34–36 misuse of, 29, 30, 36 “only say about someone what you will say to their face,” 15, 189–90 performance and, 17–20 and readiness to release decision-making controls, 133–35 saying what you really think with positive intent, 13–37 see also feedback; transparency Carey, Chris, 181 Caro, Manolo, 137 Caruso, Rob, 113–14 Casa De Papel, La, xviii celebrating wins, 140, 152 Chapman, Jack, 86 Chase, Chevy, 222 cheating, 62–64 Chelsea, 115–16 children’s programming, 144–45, 226–31 Choy, Josephine, 252–54, 257 Christensen, Nathan, 51 circle of feedback (360-degree assessments), 26–27, 189–205 benefits of, 202–3 discussion facilitated by, 194 in Japan, 256 live, 197–203 stepping out of line during, 200–201 tips for, 199–200 written, names used in, 191–97 Cobb, Melissa, 221–27, 231 Coen, Joel and Ethan, xii Coherent Software, 101, 104 collaboration, 170, 178 Colombia, 251 Comparably, xvii competitiveness, internal, 177–78 compliments and praise, 21, 23 computer software, 77–78, 216 conformity, 141–42 connecting the dots, xxiv first dot, 10–11 second dot, 36 third dot, 69 fourth dot, 98 fifth dot, 125 sixth dot, 160 seventh dot, 185 eighth dot, 203–4 ninth dot, 233 last dot, 264–65 consensus building, 149 contagious behavior, 8–10 context, see leading with context, not control contract signing, 149–51 control, leadership by, 209 ExxonMobil example of, 213–14 leading with context versus, 209–12 see also leading with context, not control controls, removing, xx, xxi, 1, 38–72, 128–61, 206–36 decision-making approvals, 129–61 bet-taking analogy in, 138–40, 153–57, 225–27 Informed Captain model in, 140, 149–52, 216, 223, 224, 231, 248 and picking the best people, 165–66 readiness for, 133–35 signing contracts, 149–51 travel and expense approvals, 55–72 cheating and, 62–64 company’s best interest and, 58, 59, 61, 66, 68–69 context and, 59–62 Freedom and Responsibility ethos and, 60–62 frugality and, 64–69 vacation policy, xv, 39–53, 56, 69–70 freedom and responsibility and, 52–53 Hastings’ nightmares about, 40–41, 42, 44 Hastings’ vacations, 44, 45, 47 Japanese workers and, 46–47 leaders’ modeling and, 42–47 loss aversion and, xv–xvi and setting and reinforcing context to guide employee behavior, 48–49 value added by, 50–52 see also leading with context, not control corporate culture, xiii of Netflix, xiii, xxii, xxiii, 45 Netflix Culture Deck, xiii–xvi, 172–73 Costa, Omarson, 150–51 coupling: alignment and, 218 loose versus tight, 215–17 Coyle, Daniel, 24 creative positions, 78–79, 83–84 criticism (negative feedback), 19–21, 23 belonging cues and, 24 brain and, 20, 21 cultural differences around the world, 251, 261 as disliked but needed, 20–22 language used in, 251–52 responding to, 24, 31 upgraders and downgraders in, 251–52 see also feedback Crook-Davies, Danielle, 19–20 Crown, The, xvii Cryan, John, 82–83 Cuarón, Alfonso, xii, 165 cultural differences around the world, see global expansion and cultural differences Culture Code, The (Coyle), 24 culture map, 242–50 Culture Map, The (Meyer), xxii, 19, 242–50 culture of freedom and responsibility, see Freedom and Responsibility D Daring Greatly: How the Courage to Be Vulnerable Transforms the Way We Live, Love, Parent, and Lead (Brown), 123 Dark, xvii days off, 39–40 see also vacation policy, removing decision-making: dispersed, 216–17 innovation and, 130, 131, 135, 136 and leading with context, 210, 216, 217 to please the boss, 129–30, 133, 152–53 pyramid structure for, 129, 221–23 spreadsheet system and, 143–44 talent density and, 131 transparency and, 131 decision-making approvals, eliminating, 129–61 bet-taking analogy in, 138–40, 153–57, 225–27 Informed Captain model in, 140, 149–52, 216, 223, 224, 231, 248 and picking the best people, 165–66 readiness for, 133–35 signing contracts, 149–51 Del Castillo, Kate, 138 Del Deo, Adam, 207–9, 232–33 Disney, 144, 221, 222, 226, 227 dissent, farming for, 140–44, 158 diversity, 241 Dora the Explorer, 145 Dormen, Yasemin, 157–59 dot-com bubble, 4 dots, see connecting the dots downloading, 146–48 dream teams, 76 DreamWorks, 145, 221, 226 driver feedback, 22 Dutch, Netherlands, 242, 243, 246, 248, 251, 261–63 DVDs, 3–4, 5, 129 Qwikster and, 140–42 shift to streaming from, xii, xvii, 140–41, 236 E Edmondson, Amy, xv Eichenwald, Kurt, 176 Eisner, Michael, 195 elephants, penguins versus, 174 Elite, xvii Emmy Awards, xvii, 145 “Emperor’s New Clothes” syndrome, 23–29 empowerment, 109, 133, 134 see also decision-making; decision-making approvals, eliminating; Freedom and Responsibility Engadget, 158 Enron, xiii entrepreneurship, 138 error prevention, and management style, 213–14, 220, 269–71 Escobar, Pablo, 132 Estaff meetings, 218–19, 243 Evening Standard, 25 Eventbrite, 50 expenses, see travel and expenses; travel and expense approvals, removing experimentation, 138 Explorer project, 154–55, 157 Express, 158 ExxonMobil, 213–14 F Facebook, xiii, 77, 97, 130, 137, 195 failures, 140, 152–59 asking what learning came from the project, 153, 155 not making a big deal about, 153–55 sunshining of, 153, 155–59 family business metaphor, 166–68 moving to sports team metaphor from, 168–70, 173–74 farming for dissent, 140–44, 158 Fast Company, xxiv, 213 fear of losing one’s job, xv, 178–80, 183–84 Fearless Organization, The (Edmondson), xv FedEx, 139 feedback, 14–17, 139, 175, 190, 240 annual performance reviews and, 191 belonging cues and, 24 brain’s response to, 20, 21 circle of (360-degree assessments), 26–27, 189–205 benefits of, 202–3 discussion facilitated by, 194 in Japan, 256 live, 197–203 stepping out of line during, 200–201 tips for, 199–200 written, names used in, 191–97 cultural differences and, 250-57, 260, 261–64 for drivers, 22 “Emperor’s New Clothes” syndrome and, 23–29 failure to speak up with, 18, 27, 141 4A guidelines for, 29–36, 255, 264 accept or discard, 31, 33 actionable, 30, 31, 33, 36, 193, 257 adding 5th A to (adapt), 264 aim to assist, 30, 31, 33, 36 appreciate, 31, 33 cultural differences and, 260 for giving feedback, 30 for receiving feedback, 31 frequency of, 18 Hastings and, 26–29 honesty in, 18; see also candor Japanese culture and, 251–57 loop of, 22–23 Meyer and, 19, 32 negative (criticism), 19–21, 23 belonging cues and, 24 brain and, 20, 21 cultural differences around the world, 251, 261 as disliked but needed, 20–22 language used in, 251–52 responding to, 24, 31 upgraders and downgraders in, 251–52 positive, brain and, 21 responding to, 24, 31 and speaking and reading between the lines, 253 spreadsheet system for gathering, 143–44 survey on, 21–22 teaching employees how to give and receive, 29–32 from teammates, 199 when and where to give, 31–34 see also candor Felps, Will, 8–9 firing, see letting people go Fisher Phillips, 50 five-year plans, 219–20 Flint, Joe, 178 flexibility, and leading with context or control, 220, 221 Fogel, Bryan, 207–8, 233 4K ultra high definition televisions, 65–66 Fowler, Geoffrey, 65–66 Fox, 221 France, 240, 251 Paris, 268–69 Freedom and Responsibility (F&R), xx–xxi, 191, 236, 267, 268 expenses and, 60–62 first steps to, 1–72 Informed Captain model in, 140, 149–52, 216, 223, 224, 231, 248 next steps to, 73–161 techniques to reinforce, 163–236 vacations and, 52–53 weight of responsibility in, 150–52 Friedland, Jonathan, 196 Fuller House, 145 G Game of Thrones, 131–32 Garden Grove, Calif., 22 Gates, Bill, 78 General Electric (GE), 177–78 Germany, 147–48, 250–51 Gizmodo, 178 Gladwell, Malcolm, 142 Glassdoor, xv, 50 global expansion and cultural differences, 237–65, 239–65 adjusting your style for, 257–61 Brazil, 137, 150, 224–26, 243, 247, 249–51, 257, 264 candor and, 250–55, 260, 263–64 culture map, 242–50 feedback and, 250–57, 260, 261–64 Google and, 240–41 Japan, 46–47, 183, 224, 225, 257, 261 in culture map, 243, 247, 248 feedback and criticism in, 251–57 Japanese language, 252–53 360 process and, 256 Netherlands, 242, 243, 246, 248, 251, 261–63 Schlumberger and, 240–41 Singapore, 243, 246, 248, 251, 257–59, 261, 264 trust and, 248, 249 Golden Globe Awards, xvii, 76 Goldman Sachs, 177 Golin, 50 Google, xvii, 77, 94–96, 98, 136 global expansion of, 240–41 gossip, 189 Guillermo, Rob, 207 H Handler, Chelsea, 115–16 happiness, xvii Harvard Business Review, xxii Hastings, Mike, 87 Hastings, Reed: childhood of, 10, 13 at Coherent Software, 101, 104 downloading issue and, 146–48 feedback and, 26–27 interview with, 173–80 in leadership tree, 224–25 marriage of, 13–15 Meyer contacted by, xxii–xxiii Netflix cofounded by, xi, 3–4 in Netflix’s offer to Blockbuster, xi–xii in Peace Corps, xxii, xxiii, 14, 101, 239–40 Pure Software company of, xviii–xix, xxiv, 3, 4, 6, 7, 13–14, 55, 64, 71, 101, 122, 123, 236 Qwikster and, 140–42 HBO, 113–14, 208 Hewlett-Packard (HP), 66–67 hierarchy of picking, 165–66 Hired, xvii hiring: hierarchy of picking and, 165–66 talent density and, see talent density honesty, xvi, xxiii, 178 and spending company money, 58–59 see also candor; transparency hours worked, 39 House of Cards, xvii, 65, 75, 171, 236 HubSpot, xvii, 50 Huffington Post, xxii Hulu, 208, 232 humility, 123 Hunger Games, The, 176 Hunt, Neil, 41, 45, 94, 98, 154, 196 downloads and, 146, 148 and Netflix as team, not family, 173–74 360s and, 197, 198 vacations of, 41 I Icarus, 207–8, 232–33 India, 83, 84, 147–48, 224–26 Mighty Little Bheem in, 228–31 industrial era, 269, 271 industry shifts, xvii–xviii, xix Informed Captain model, 140, 149–52, 216, 223, 224, 231, 248 innovation, xv, xix, xxi, 84, 135–36, 155, 271–72 decision-making and, 130, 131, 135, 136 and leading with context or control, 214–15, 217 Innovation Cycle, 139–40 asking what learning came from the project, 153, 155 celebrating wins, 140, 152 failures and, 140, 152–59 farming for dissent, 140–44, 158 not making a big deal about failures, 153–55 placing your bet as an informed captain, 140, 149–52 socializing the idea, 140, 144–45, 158, 159 spreadsheet system and, 143–44 sunshining failures, 153, 155–59 testing out big ideas, 140, 146–48 International Olympic Committee, 232 internet, 146–48, 154 internet bubble, 4 iPhone, 130 Italy, 131–32 J Jacobson, Daniel, 166–68 Jaffe, Chris, 153–57 Japan, 46–47, 183, 224, 225, 257, 261 in culture map, 243, 247, 248 feedback and criticism in, 251–57 Japanese language, 252–53 360 process and, 256 jerks, 34–36, 200 Jobs, Steve, xxiv, 130 Jones, Rhett, 178 K karoshi, 46 kayaking, 180 Keeper Test, xiv, 165–87, 240, 242 Keeper Test Prompt, 180–83 Key Performance Indicators (KPIs), 81, 191, 209 Kilgore, Leslie, 14–15, 81, 94, 171 expense reports and, 61–62 on hiring and recruiters, 95–96 “lead with context, not control” coined by, 48, 208–9 new customers and, 81–82 signing contracts and, 149–50 360s and, 192, 193, 197, 198 King, Rochelle, 27–29 Kodak, xviii, 236 Korea, 224, 225 Kung Fu Panda, 221 L Lanusse, Adrien, 148 Latin America, 136, 241, 249 Brazil, 137, 150, 224–26, 243, 247, 249–51, 257, 264 Lawrence, Jennifer, 176 lawsuits, 175 layoffs at Netflix, 4–7, 10, 77, 168 leading with context, not control, 48, 207–36 alignment in, 217–18, 231 on a North Star, 218–21 as tree, 221–31 control versus context, 209–12 decision-making in, 210, 216, 217 Downton Abbey-type cook example, 211–12, 218 error prevention and, 213–14, 220, 269–71 ExxonMobil example, 213–14 Icarus example, 207–8, 232–33 innovation and, 214–15, 217 Kilgore’s coining of phrase, 48, 208–9 and loose versus tight coupling, 215–17 Mighty Little Bheem example, 228–31 parenting example, 210–11 spending and, 59–62 talent density and, 212, 213 Target example, 213–15 lean workforce, 79 letting people go, 173–76 “adequate performance gets a generous severance,” xv, xxii, 171, 175–76, 242 employee fears about, xv, 178–80, 183–84 employee turnover, 184–85 in Japan, 183 Keeper Test, xiv, 165–87, 240, 242 Keeper Test Prompt, 180–83 lawsuits and, 175 at Netflix, 185 Netflix layoffs in 2001, 4–7, 10, 77, 168 post-exit communications, 117–20, 183–84 quotas for, 178 LinkedIn, 50, 51, 137 Little Prince, The (Saint-Exupéry), 215 loose versus tight coupling, 215–17 Lorenzoni, Paolo, 131–33, 135, 138 loss aversion, xv–xvi Low, Christopher, 258–60 M Mammoth, 51 Management by Objectives, 209 Man of the House, 222 Massachusetts Institute of Technology, 83 McCarthy, Barry, 14–15, 56 McCord, Patty, 4–7, 9, 10, 15, 27–28, 41, 53, 71, 173 all-hands meetings and, 108 departure from Netflix, 171 expense policy and, 55, 60–61 financial data and, 110 salary policy and, 78, 81, 94, 96 team metaphor and, 169 360s and, 197–99 vacation policy and, 40, 43, 45, 52–53 Memento project, 156, 157 Mexico, 136–38 Meyer, Erin, xxii The Culture Map, xxii, 19, 242–50 Hastings’ message to, xxii–xxiii keynote address of, 19, 32 Netflix employees interviewed by, xxiii, 19–20 in Peace Corps, xxii micromanaging, 130, 133, 134 Microsoft, 78, 122, 176–78 Mighty Little Bheem, 228–31 Mirer, Scott, 200–201 mistakes, 121–25, 271–72 distancing yourself from, 157 management style and, 213–14, 220, 270 sunshining of, 157 see also failures Morgan Stanley, 123 Moss, Trenton, 50–51 Mr.

…

., 22 Gates, Bill, 78 General Electric (GE), 177–78 Germany, 147–48, 250–51 Gizmodo, 178 Gladwell, Malcolm, 142 Glassdoor, xv, 50 global expansion and cultural differences, 237–65, 239–65 adjusting your style for, 257–61 Brazil, 137, 150, 224–26, 243, 247, 249–51, 257, 264 candor and, 250–55, 260, 263–64 culture map, 242–50 feedback and, 250–57, 260, 261–64 Google and, 240–41 Japan, 46–47, 183, 224, 225, 257, 261 in culture map, 243, 247, 248 feedback and criticism in, 251–57 Japanese language, 252–53 360 process and, 256 Netherlands, 242, 243, 246, 248, 251, 261–63 Schlumberger and, 240–41 Singapore, 243, 246, 248, 251, 257–59, 261, 264 trust and, 248, 249 Golden Globe Awards, xvii, 76 Goldman Sachs, 177 Golin, 50 Google, xvii, 77, 94–96, 98, 136 global expansion of, 240–41 gossip, 189 Guillermo, Rob, 207 H Handler, Chelsea, 115–16 happiness, xvii Harvard Business Review, xxii Hastings, Mike, 87 Hastings, Reed: childhood of, 10, 13 at Coherent Software, 101, 104 downloading issue and, 146–48 feedback and, 26–27 interview with, 173–80 in leadership tree, 224–25 marriage of, 13–15 Meyer contacted by, xxii–xxiii Netflix cofounded by, xi, 3–4 in Netflix’s offer to Blockbuster, xi–xii in Peace Corps, xxii, xxiii, 14, 101, 239–40 Pure Software company of, xviii–xix, xxiv, 3, 4, 6, 7, 13–14, 55, 64, 71, 101, 122, 123, 236 Qwikster and, 140–42 HBO, 113–14, 208 Hewlett-Packard (HP), 66–67 hierarchy of picking, 165–66 Hired, xvii hiring: hierarchy of picking and, 165–66 talent density and, see talent density honesty, xvi, xxiii, 178 and spending company money, 58–59 see also candor; transparency hours worked, 39 House of Cards, xvii, 65, 75, 171, 236 HubSpot, xvii, 50 Huffington Post, xxii Hulu, 208, 232 humility, 123 Hunger Games, The, 176 Hunt, Neil, 41, 45, 94, 98, 154, 196 downloads and, 146, 148 and Netflix as team, not family, 173–74 360s and, 197, 198 vacations of, 41 I Icarus, 207–8, 232–33 India, 83, 84, 147–48, 224–26 Mighty Little Bheem in, 228–31 industrial era, 269, 271 industry shifts, xvii–xviii, xix Informed Captain model, 140, 149–52, 216, 223, 224, 231, 248 innovation, xv, xix, xxi, 84, 135–36, 155, 271–72 decision-making and, 130, 131, 135, 136 and leading with context or control, 214–15, 217 Innovation Cycle, 139–40 asking what learning came from the project, 153, 155 celebrating wins, 140, 152 failures and, 140, 152–59 farming for dissent, 140–44, 158 not making a big deal about failures, 153–55 placing your bet as an informed captain, 140, 149–52 socializing the idea, 140, 144–45, 158, 159 spreadsheet system and, 143–44 sunshining failures, 153, 155–59 testing out big ideas, 140, 146–48 International Olympic Committee, 232 internet, 146–48, 154 internet bubble, 4 iPhone, 130 Italy, 131–32 J Jacobson, Daniel, 166–68 Jaffe, Chris, 153–57 Japan, 46–47, 183, 224, 225, 257, 261 in culture map, 243, 247, 248 feedback and criticism in, 251–57 Japanese language, 252–53 360 process and, 256 jerks, 34–36, 200 Jobs, Steve, xxiv, 130 Jones, Rhett, 178 K karoshi, 46 kayaking, 180 Keeper Test, xiv, 165–87, 240, 242 Keeper Test Prompt, 180–83 Key Performance Indicators (KPIs), 81, 191, 209 Kilgore, Leslie, 14–15, 81, 94, 171 expense reports and, 61–62 on hiring and recruiters, 95–96 “lead with context, not control” coined by, 48, 208–9 new customers and, 81–82 signing contracts and, 149–50 360s and, 192, 193, 197, 198 King, Rochelle, 27–29 Kodak, xviii, 236 Korea, 224, 225 Kung Fu Panda, 221 L Lanusse, Adrien, 148 Latin America, 136, 241, 249 Brazil, 137, 150, 224–26, 243, 247, 249–51, 257, 264 Lawrence, Jennifer, 176 lawsuits, 175 layoffs at Netflix, 4–7, 10, 77, 168 leading with context, not control, 48, 207–36 alignment in, 217–18, 231 on a North Star, 218–21 as tree, 221–31 control versus context, 209–12 decision-making in, 210, 216, 217 Downton Abbey-type cook example, 211–12, 218 error prevention and, 213–14, 220, 269–71 ExxonMobil example, 213–14 Icarus example, 207–8, 232–33 innovation and, 214–15, 217 Kilgore’s coining of phrase, 48, 208–9 and loose versus tight coupling, 215–17 Mighty Little Bheem example, 228–31 parenting example, 210–11 spending and, 59–62 talent density and, 212, 213 Target example, 213–15 lean workforce, 79 letting people go, 173–76 “adequate performance gets a generous severance,” xv, xxii, 171, 175–76, 242 employee fears about, xv, 178–80, 183–84 employee turnover, 184–85 in Japan, 183 Keeper Test, xiv, 165–87, 240, 242 Keeper Test Prompt, 180–83 lawsuits and, 175 at Netflix, 185 Netflix layoffs in 2001, 4–7, 10, 77, 168 post-exit communications, 117–20, 183–84 quotas for, 178 LinkedIn, 50, 51, 137 Little Prince, The (Saint-Exupéry), 215 loose versus tight coupling, 215–17 Lorenzoni, Paolo, 131–33, 135, 138 loss aversion, xv–xvi Low, Christopher, 258–60 M Mammoth, 51 Management by Objectives, 209 Man of the House, 222 Massachusetts Institute of Technology, 83 McCarthy, Barry, 14–15, 56 McCord, Patty, 4–7, 9, 10, 15, 27–28, 41, 53, 71, 173 all-hands meetings and, 108 departure from Netflix, 171 expense policy and, 55, 60–61 financial data and, 110 salary policy and, 78, 81, 94, 96 team metaphor and, 169 360s and, 197–99 vacation policy and, 40, 43, 45, 52–53 Memento project, 156, 157 Mexico, 136–38 Meyer, Erin, xxii The Culture Map, xxii, 19, 242–50 Hastings’ message to, xxii–xxiii keynote address of, 19, 32 Netflix employees interviewed by, xxiii, 19–20 in Peace Corps, xxii micromanaging, 130, 133, 134 Microsoft, 78, 122, 176–78 Mighty Little Bheem, 228–31 Mirer, Scott, 200–201 mistakes, 121–25, 271–72 distancing yourself from, 157 management style and, 213–14, 220, 270 sunshining of, 157 see also failures Morgan Stanley, 123 Moss, Trenton, 50–51 Mr.

The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors by Spencer Jakab

4chan, activist fund / activist shareholder / activist investor, barriers to entry, behavioural economics, Bernie Madoff, Bernie Sanders, Big Tech, bitcoin, Black Swan, book value, buy and hold, classic study, cloud computing, coronavirus, COVID-19, crowdsourcing, cryptocurrency, data science, deal flow, democratizing finance, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Everybody Ought to Be Rich, fake news, family office, financial innovation, gamification, global macro, global pandemic, Google Glasses, Google Hangouts, Gordon Gekko, Hacker News, income inequality, index fund, invisible hand, Jeff Bezos, Jim Simons, John Bogle, lockdown, Long Term Capital Management, loss aversion, Marc Andreessen, margin call, Mark Zuckerberg, market bubble, Masayoshi Son, meme stock, Menlo Park, move fast and break things, Myron Scholes, PalmPilot, passive investing, payment for order flow, Pershing Square Capital Management, pets.com, plutocrats, profit maximization, profit motive, race to the bottom, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robinhood: mobile stock trading app, Saturday Night Live, short selling, short squeeze, Silicon Valley, Silicon Valley billionaire, SoftBank, Steve Jobs, TikTok, Tony Hsieh, trickle-down economics, Vanguard fund, Vision Fund, WeWork, zero-sum game

He also showed uncommon sophistication—not to mention politesse—on a board known for crude insults and little regard for spelling and punctuation. “Pigs get fat. Hogs get slaughtered,” wrote another poster about DeepFuckingValue’s insistence on hanging on to a small fortune that could shrivel to nothing. “Again that’s not the way to maximize returns over the long-term. That’s trading in fear—loss aversion, a common emotional bias,” he replied. “RemindMe! if this stupid fuck lost it all in 1 week,” wrote another in response. As one former skeptic put it in a much later update to an old comment to Gill in the middle of the GameStop squeeze, his original post “aged like a tall glass of milk on a July afternoon in the Mojave Desert.”

…

Michaela Pagel of Columbia Business School came up with a psychological explanation: losing money pains us more than making money pleases us—a well-known effect in behavioral finance. Because the stock market is more likely to rise over longer periods than shorter ones, more frequent observations cause us to see more losses and nudge us to trade at inopportune times. This phenomenon is known as “myopic loss aversion.”[2] It is a psychological foible that has enriched brokers for years. Smartphone-based ones catering to a generation that grew up constantly checking the devices have supercharged this tendency to their benefit and customers’ detriment. An April 2021 study by Futu, a Chinese brokerage firm with a US subsidiary, found that members of Generation Z opened their trading app 8.2 times a day and traded 147 times a year on average.[3] Where do the forgone gains of frequent traders go?

…

., 179 Klarman, Seth, 184 Koss, 132, 169, 188, 224 Kruger, Justin, 28 Kynikos Associates, 77 L Ladies’ Home Journal, 150 Lamberton, Cait, 54, 62 Lamont, Owen, 80 Langer, Ellen, 27 Langlois, Shawn, 45 Laufer, Henry, 237 Lay, Kenneth, 85 Lebed, Jonathan, 163 Leder, Michelle, 239 Ledger, Heath, 138 Left, Andrew, 39, 116–26, 148, 191, 214, 217 GameStop and, 120–24, 129, 130, 133, 146 harassment of, 122 WallStreetBets and, 121–23, 126, 129, 130, 133, 136, 238 Lehman Brothers, 80, 117 Lending Tree, 162 Levie, Aaron, 26 Lewis, Michael, 16, 88 Lindzon, Howard, 24, 49, 176 LinkedIn, 239 Livermore, Jesse, 78–79 locating a borrow, 72–73, 80 Loeb, Dan, 111 Lombardi, Vince, 8 Long-Term Capital Management, 260 Loop Capital, 128 Los Angeles Times, 215 loss aversion, myopic, 236 lotteries, 62, 239, 241, 242 Lowenstein, Roger, 260 Lucid Motors, 164 M Mad Money, 254 Madoff, Bernie, 117, 206 MagnifyMoney, 162 Mahoney, Seth, 19, 31, 176–77 Malaysia, 75 Malkiel, Burton, 253 Manias, Panics, and Crashes (Kindleberger), 179 Manning, Peyton, 64 Man Who Solved the Market, The (Zuckerman), 237 Maplelane Capital, 217 March Madness, 57 Marcus, 257 margin calls, 203–5 margin debt, 58–59, 62, 67, 138, 188 Markets Insider, 103 MarketWatch, 45, 180 MassMutual, 87, 131, 171 Mavrck, 142 Mayday, 48–50, 66 McCabe, Caitlin, 128–29 McCormick, Packy, 23, 35, 104, 202 McDonald, Larry, 99 McDonald’s, 154 McHenry, Patrick, 239 McLean, Bethany, 85 Medallion Fund, 237 MedBox, 117 Melvin Capital Management, 6–8, 56, 72, 94–96, 110–12, 114, 119, 121, 123, 128–30, 132, 135, 136, 146, 189, 190, 202, 205, 217, 218, 222, 227 meme stocks, xii–xiv, 5, 7–9, 11, 12, 14, 22, 30, 32–34, 36, 39, 40, 47, 54, 63, 67, 72, 73, 76, 100, 108, 123, 125, 127, 129, 132–33, 135, 137–40, 146, 147, 153–55, 157, 159, 160, 162, 164, 169, 170, 178, 179, 181, 183, 185, 191, 193, 194, 198–99, 204–5, 208, 219, 220, 222, 227, 229, 230, 237, 238, 240, 246 AMC, 39, 93, 125, 127, 132, 169, 188, 220–21, 224–26 Bed Bath & Beyond, 115, 133, 188 BlackBerry, 93, 115, 133, 169, 178, 188, 224 bot activity and, 165, 166 GameStop, see GameStop, GameStop short squeeze insiders of, 224 Koss, 132, 169, 188, 224 margin debt and, 58 Naked, 132, 188 Nokia, 169, 178, 188 payment for order flow and, 207 Robinhood’s trading restrictions on, 187–89, 194, 195–200, 203, 206 Merton, Robert, 101, 102, 108 Microsoft, 46, 93 Mihm, Stephen, 48 millennials, 21, 26, 27, 56, 71, 88, 142, 143, 148, 162, 242, 246, 255 Minnis, Chad, 126, 157, 242 MoneyWatch, 59 monthly subscription services, 32 Morgan Stanley, 28, 55, 178, 219 Morningstar, 216, 244, 245, 254, 255 Motherboard, 131–32 Motter, John, 215–17, 226 Mudrick, Jason, 220–21 Mudrick Capital Management, 220 Mulligan, Finley, 230 Mulligan, Quinn, 142, 214 Munger, Charlie, 183–84, 241 Murphy, Paul, 78 Musk, Elon, 19, 75, 82–83, 92, 124, 143, 149, 152–53, 155–57, 160, 161, 167, 212, 216 tweets of, x, 60, 82, 83, 124, 144, 152–54, 161, 170 Must Asset Management, 221 mutual funds, 139, 151, 221, 234, 244, 245, 254–56 myopic loss aversion, 236 N Naked Brand, 132, 188 Nasdaq, 60, 92, 98, 104 Nasdaq Whale, 98, 104–6, 108, 109, 227 Nathan, Dan, 192 National Council on Problem Gambling, 31, 57 National Futures Association, 118 Nations, Scott, 99 Nations Indexes, 99 NCAA Basketball, 57 Netflix, x–xi, 15, 50, 98, 133, 208 Netscape, 24 Neumann, Adam, 105 New Yorker, 143 New York Mets, 8, 161 New York Post, 124, 172 New York Stock Exchange, 49 New York University, 20, 82, 177 Nikola, 64 NIO, 120 Nobel Prize, 101, 260 Nokia, 169, 178, 188 nudges, 31–32, 235–36 Nvidia, 98 O Obama, Barack, 13, 38 Ocasio-Cortez, Alexandria, 160, 197 Occupy Wall Street movement, 12, 125 Odean, Terrance, 235, 238, 243 Odey, Crispin, 126 Ohanian, Alexis, 12, 37–38, 125 O’Mara, Margaret, 38, 156, 157 Omega Family Office, 191 O’Neal, Shaquille, 64 Oppenheimer, Robert, 83 options, 34–35, 99–107, 217 call, see call options delta and, 107, 108 losses and quick approval processes for, 103 put, 46, 99, 106, 111–12, 148 Robinhood and, 34–35, 102–4, 106, 108–9 Options Clearing Corporation, 102 P Pagel, Michaela, 235 Palantir Technologies, 120 Palihapitiya, Chamath, 143, 144, 152–53, 155, 157–58, 160, 164, 212, 234, 246, 253 Palm, 84 PalmPilot, 84 Pao, Ellen, 38 Paperwork Crisis, 49 Parker, Sean, 38 payment for order flow, 10, 33, 153, 196, 206–9 Penn National, 57 penny stocks, 60, 120, 133, 166, 167 Permit Capital, 223 Pershing Square Holdings, 56 Pets.com, 90 PetSmart, 89 Pew Research, 71 Physical Impossibility of Death in the Mind of Someone Living, The (Hirst), 7 Piggly Wiggly, 78–79 PiiQ Media, 166 PIMCO, 216 Plotkin, Gabriel, 41, 56, 67, 73, 80, 85, 86, 95–96, 110–12, 114–15, 116, 122, 123, 129, 130, 133, 140, 146, 148, 157, 158, 161, 191, 197, 213–14, 217, 218, 227, 240, 246, 250, 253 at congressional hearing, 6–11 Porsche, 77 Portnoy, Dave, 57, 152–55, 158–59, 161, 181, 188–89, 212 Povilanskas, Kaspar, 195 Pruzan, Jonathan, 219 Psaki, Jen, 192 Public.com, 196, 207, 209 pump and dump, 163 put options, 46, 99, 106, 111–12, 148 Q Qualcomm, 46 R RagingBull, 163 Random Walk Down Wall Street, A (Malkiel), 253 Raskob, John J., 150–52, 154, 156 Raytheon, 153–54 RC Ventures LLC, 114 Reagan, Ronald, 156, 234 Reddit, xi, xii, 11–12, 19, 22, 23, 25, 36–39, 41, 42, 107, 122, 125, 162, 164, 199 founding of, 37–38 Gill’s influence on, 141–42; see also Gill, Keith; WallStreetBets karma on, 47, 141–42 mechanics and demographics of, and GameStop, 37 offensive subreddits on, 38 r/ClassActionRobinHood, 196 r/GMEbagholders, 140 r/investing, ix, 46 r/wallstreetbets, see WallStreetBets Super Bowl ad of, 12 Volkswagen squeeze and, 78 Reddit Revolution, xv, 41, 42, 75, 99, 152, 170, 192, 206, 211, 219, 220, 230, 246, 261 see also GameStop, GameStop short squeeze; WallStreetBets rehypothecation, 80, 92 reinforcement learning, 35 Reminiscences of a Stock Operator (Lefèvre), 78 Renaissance Technologies, 237 retail trading, xiii, xiv, xvi, 4, 7, 9–14, 49, 56–59, 63–64, 66, 67, 81, 98, 140–41, 143, 169–70, 178, 181, 183, 186, 194, 218, 237, 238, 244, 247 retirement accounts and pension funds, 5, 13, 27, 31–32, 41, 69, 76, 77, 81, 171, 182, 234, 235, 245, 252, 255, 256 Rise of the Planet of the Apes, 135–36 RiskReversal Advisors, 192 Ritter, Jay, 63, 65 Roaring Kitty (Gill’s YouTube persona), 2, 18, 45, 48–49, 92, 130, 133, 144, 171, 174–75, 191, 211, 213 Roaring Kitty LLC, 171 Robinhood, xi, xiii, xv, 4–6, 13–14, 19, 22–35, 41–42, 50, 53, 55, 57, 61, 66, 70, 81, 98, 139, 141, 153, 154, 157, 158, 161, 176, 178, 183, 184, 187–90, 193, 194, 195–210, 212–13, 219, 237–38, 243, 245, 246, 259 account transfer fees of, 54 average revenue per user of, 66–67 Buffett on, 240–41 call options and, 97–98 Citadel and, 10, 11 clearinghouse of, 187 commissions and, 49, 50 customer loan write-offs of, 205 daily average revenue trades of, 59 daily deposit requirement of, 205 former regulators hired by, 239–40 founding of, 3, 23–25, 90 funding crisis of, 187–88, 193, 198, 203, 205–6 gamification and, 29–31 Gold accounts, 32, 58, 97, 202 growth of, 25–26, 50 herding events and, 238 Hertz and, 61 hyperactive traders and, 193, 202, 207, 236 initial public offering of, 200–201, 219 Instant accounts, 32 Kearns and, 103–4 lawsuits against, 196 margin loans of, 58–59, 205 median account balances with, 50, 54 options and, 34–35, 102–4, 106, 108–9 payment for order flow and, 10, 33, 196, 206–9 revenue from securities lending, 73 risky behavior encouraged by, 202–3 Robintrack and, 53, 61 SPACs and, 64 stimulus checks and, 56 Super Bowl ad of, 28, 30, 200 technical snafus by, 53–54 Top 100 Fund and, 61 trading restricted by, 187–89, 194, 195–200, 203, 206, 209 valuation of, 49 WallStreetBets and, 22–23 wholesalers and, 33–35, 49, 104, 106 Robin Hood (charitable foundation), 196–97 robo-advisers, xv, 27, 257–58 Betterment, 27, 54, 183, 193, 242, 257, 258, 261 SoFi, 27, 56, 57, 158 Rockefeller, John D., 9 Rodriguez, Alex, 64 Rogers, Will, 163 Rogozinski, Jaime, 23, 39, 46, 50, 53, 55, 70–71, 97, 122, 138, 144, 190, 231 Roper, Barbara, 29–30, 35, 54, 185, 241 Rozanski, Jeffrey, 46 Rukeyser, Louis, 156 Russell 2000 Value Index, 125, 191 S S3 Partners, 76, 81, 130, 133, 170, 217 SAC Capital Advisors, 7, 110 Sanders, Bernie, 65–66, 198 S&P (Standard & Poor’s), 83 S&P Dow Jones Indices, 70, 254 S&P 500, 76 Sanford C.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, book value, Brownian motion, business continuity plan, buy and hold, classic study, compound rate of return, Edward Thorp, Elliott wave, endowment effect, financial engineering, fixed income, general-purpose programming language, index fund, Jim Simons, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk free rate, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

Fortunately, there is a field of financial research called “behavioral finance” (Thaler, 1994) that studies irrational financial decision making. I will try to highlight a few of the common irrational behaviors that affect trading. The first behavioral bias is known variously as the endowment effect, status quo bias, or loss aversion. The first two effects cause some traders to hold on to a losing position for too long, because traders (and people in general) give too much preference to the status quo (the status quo bias), or because they demand much more P1: JYS c06 JWBK321-Chan September 24, 2008 Money and Risk Management 13:57 Printer: Yet to come 109 to give up the stock than what they would pay to acquire it (the endowment effect).

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As I argued in the risk management section, there are rational reasons to hold on to a losing position (e.g., when you expect mean-reverting behavior); however, these behavioral biases cause traders to hold on to losing positions even when there is no rational reason (e.g., when you expect trending behavior, and the trend is such that your positions will lose even more). At the same time, the loss aversion bias causes some traders to exit their profitable positions too soon, even if holding longer will lead to a larger profit on average. Why do they exit the profitable positions so soon? Because the pain from possibly losing some of the current profits outweighs the pleasure from gaining higher profits.

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See Sharpe ratio Information, slow diffusion of, 117–118 Interactive Brokers, 15, 73, 82, 83 Investors, herdlike behavior of, 118–119 J January effect, 143–146 backtesting, 144–146 Java, 80, 85 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 178 K Kalman filter, 116 Kavanaugh, Paul, 149 Kelly formula, 95, 97, 100–103, 105, 107, 153, 161 calculating the optimal allocation based on, 100–102 calculating the optimal leverage based on, 99 simple derivation of, when return distribution is Gaussian, 112–113 Kerviel, Jérôme, 160 Khandani, Amir, 104 Kirk Report, 10 L LeSage, James, 168 Leverage, 5, 95–103 Liquidnet, 73 Lo, Andrew, 104 Logical Information Machines, 35, 36 Long-only versus market-neutral strategies, calculating Sharpe ratio for, 45–47 Long-Term Capital Management, 110, 157 Long-term wealth, maximizing, 96 Look-ahead bias, 51–52 Loss aversion, 108–109 M Market impact, 22 MarketQA (Quantitative Analytics), 35 Markov models, hidden, 116, 121 Printer: Yet to come INDEX R , 21, 32–34, MATLAB 137–139 calculating optimal allocation using Kelly formula, 100–102 a quick survey of, 163–168 using in automated trading systems, 80, 81, 83, 85 using to avoid look-ahead bias, 51–52 using to backtest January effect, 144–146 mean-reverting strategy with and without transaction costs, 61–65 year-on-year seasonal trending strategy, 146–148 using to calculate maximum drawdown and its duration, 48–50 using to calculate Sharpe ratio for long-only strategies, 46–47 using for pair trading, 56–58, 59–60 using to scrape web pages for financial data, 34 MCSI Barra, 35, 136 Mean-reverting versus momentum strategies, 116–119 Mean-reverting time series, calculation of the half-life of, 141–142 Millennium Partners, 12 Model risk, 107 ModelStation (Clarifi), 35 Momentum strategies, mean-reverting versus, 116–119 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 Index Money and risk management, 95–113 optimal capital allocation and leverage, 95–103 psychological preparedness, 108–111 risk management, 103–108 Murphy, Kevin, 168 N National Association of Securities Dealers (NASD) Series 7 examination, 70 National Bureau of Economic Research, 10 Neural networks, 116 New York Mercantile Exchange (NYMEX), 16, 149 Northfield Information Services, 136 O Oanda, 37, 73 Octave, 33 O-Matrix, 33 Ornstein-Uhlenbeck formula, 140–141, 142 Out-of-sample testing, 53–55 P Pair trading of GLD and GDX, 55 Paper trading, 55 testing your system by, 89–90 Parameterless trading models, 54–55 PFG Futures, 73 Plus-tick rule, elimination of, 92, 120 Posit (ITG), 73 Position risk, 107 Printer: Yet to come 179 Post earnings announcement drift (PEAD), 118 Principal component analysis (PCA), 136–139 Profit and loss (P&L), 6, 89 curve, 20 Programming consultant, hiring a, 86–87 Psychological preparedness, 108–111 Q Qian, Edward, 154 Quantitative Analytics, 35 Quantitative Services Group, 136 Quantitative trading, 1–8 business case for, 4–8 demand on time, 5–7 marketing, nonnecessity of, 7–8 scalability, 5 the way forward, 8 special topics in, 115–156 exit strategy, 140–143 factor models, 133–139 high-frequency trading strategies, 151–153 high-leverage versus high-beta portfolio, 153–154 mean-reverting versus momentum strategies, 116–119 regime switching, 119–126 seasonal trading strategies, 143–151 stationarity and cointegration, 126–133 who can become a quantitative trader, 2–4 Quotes-plus.com, 37 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 180 R Random walking, 116 REDIPlus trading platform (Goldman Sachs), 73, 82, 83, 84 Regime shifts, 25, 91–92 Regime switching, 119–126 academic attempts to model, 120–121 Markov, 121 using a machine learning tool to profit from, 122–126 Regulation T (SEC), 5, 14, 69–70 Renaissance Technologies Corporation, 104 Representativeness bias, 109 Reverse split, 38 Risk management, 103–108.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

Most investors suffer from the tendency to hold on to losers for too long because they are loss-averse and do not wish to realize a loss. Investors are also overconfident and do not believe that they made a bad decision. They hope that the stock will turn around. By the time they accept an error in judgment, it is too late. Investors also make a sharp distinction between paper losses or gains and realized losses or gains, fooling themselves into believing that a paper loss/gain is not a real loss/gain. Similarly and based on loss aversion, there is a tendency to realize profits quickly before the investment becomes a loss.

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Consequently, the first worker is likely to be happier than the second. In the same vein, investors look at each stock individually, not as part of a portfolio as traditional economists assume. As a result, investors engage in mental accounting. They tend to value stocks that pay dividends more than stocks that pay capital gains. They tend to be loss-averse rather than risk averse. Some experiments find that investor behavior is consistent with frame dependence. For example, investors are known to hold losers for too long because they are averse to realizing a loss. On the other hand, investors sell winners too quickly because they don’t want to see the winner become a loser.

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Journal of Finance 54(6), 2143–84. Kadlec, Gregory B., and John J. McConnell. 1994. The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings. Journal of Finance 49(2), 611–36. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1991. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives 5(1), 193–206. Kahneman, Daniel, and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision Under Risk. Econometrica 47(2), 263–92. Mackenzie, Craig. 1997. Where Are the Motives? A Problem with Evidence in the Work of Richard Thaler.

Irresistible: The Rise of Addictive Technology and the Business of Keeping Us Hooked by Adam L. Alter

"World Economic Forum" Davos, Alexey Pajitnov wrote Tetris, augmented reality, barriers to entry, Bluma Zeigarnik, call centre, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, David Sedaris, death from overwork, drug harm reduction, easy for humans, difficult for computers, en.wikipedia.org, experimental subject, game design, gamification, Google Glasses, Great Leap Forward, Ian Bogost, IKEA effect, Inbox Zero, karōshi / gwarosa / guolaosi, Kickstarter, language acquisition, loss aversion, Mark Zuckerberg, Menlo Park, mental accounting, meta-analysis, Oculus Rift, Richard Thaler, Robert Durst, side project, Skype, Snapchat, Steve Jobs, telemarketer, three-martini lunch

Back, and Stanley Schacter, Social Pressures in Informal Groups: A Study of Human Factors in Housing (Stanford, CA: Stanford University Press, 1950). Rewards are a: On the power of loss aversion and motivation: Thomas C. Schelling, “Self-Command in Practice, in Policy, and in a Theory of Rational Choice, American Economic Review 74, no. 2 (1984): 1–11; Jan Kubanek, Lawrence H. Snyder, and Richard A. Abrams, “Reward and Punishment Act as Distinct Factors in Guiding Behavior,” Cognition 139 (June 2015): 154–67; Ronald G. Fryer, Steven D. Levitt, John List, and Sally Sadoff, “Enhancing the Efficacy of Teacher Incentives Through Loss Aversion: A Field Experiment,” Working Paper 18237, National Bureau of Economic Research, Cambridge, MA, 2012; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 263–92.

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For the two students bidding up to $60 in my classroom, the motivation isn’t the thrill of winning $20—it’s the threat of losing to the other bidder. As neuroscientist Kent Berridge suggested, their facial expressions show that they want to keep bidding, but they’re certainly not liking the experience at all. You can see the same loss aversion even more clearly in so-called penny auction websites like Quibids.com, HappyBidDay.com, and Beezid.com. To begin using Beezid, for example, you buy a pack of bids. Packs range in size from forty bids (for $36, or 90 cents per bid) to one thousand bids (for $550, or 55 cents per bid). The Beezid site features hundreds of ongoing auctions for products like laptops, TVs, and headphones.

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(IGN column), 178 Italian Job, The (movie), 191–92, 204 Jarecki, Andrew, 199 Jeong, Ken, 279–80 Jinx, The (real-life crime documentary), 199–200 Jobs, Steve, 1, 2, 4 John, Daymond, 279–80 Johnson, Eric, 209 Journey, 202 juice, 137–39 Just Press Play program, 304–5 Kagan, Jerome, 19–20 Kahneman, Daniel, 282 Kaiser Foundation, 245–46 Kappes, Heather, 161 Kardashian, Kim, 158 “Karma Police” (Radiohead), 195 karoshi (death from overworking), 186–87 Keas, 300–302 Kennedy, Joe, 279–80 khat leaf, 31 King, 137 Klosterman, Chuck, 109–10 Koenig, Sarah, 196, 197, 203 Kondo, Marie, 207–8 KonMari, 207–8 Kotler, Steven, 142 Kraft, Robert, 116 Krieger, Mike, 216–17 Kulagin, Mikhail, 172–73 Lancet, 296 Lantz, Frank, 164–65, 188–89, 300 Larson, Michael, 100–106 Larson, Teresa, 106 Lawrence, Andrew, 82–85 laziness, 305–6 leaderboards, 298 League of Legends (game), 228 learning, gamification of, 302–5 Lee, Hae Min, 196, 198, 200, 203 Lego, 174 Lewis, Michael, 119 Liar’s Poker (Lewis), 119 Life-Changing Magic of Tidying Up, The (Kondo), 207–8 likes/like button, 127–29, 217 Lindner, Emilee, 159 LinkedIn, 128 Litras, Janie, 103 Little Mister Cricket (game), 138–39 LiveOps, 306–7 Long, Ed, 103 Lord of the Rings (Tolkien), 305 loss aversion, 152–54 losses disguised as wins, 133–34 love, 75–78 Love and Addiction (Peele), 76 “Love Is Like Cocaine” (Fisher), 75–76 Lovematically, 128–29 Love (TV show), 212 Luckey, Palmer, 141–42 Lucky Larry’s Lobstermania (slot machine), 133–34 ludic loops, 177–79 Lumos Labs, 313 MacInnis, Cara, 265 Mad Men (TV show), 290 Making a Murderer (real-life crime documentary), 199–200 mapping, 139 marathon runners, and goal-setting, 95–97 Marks, Isaac, 76–77 Massachusetts Institute of Technology, 275 Matheus, Kayla, 282–83 Medalia, Hilla, 252 medical benefits, of gamification, 309–12 Meier, Darleen, 206–7 melatonin, 69–70 memory, and addiction, 57–60 micro-cliffhangers, 205–8 microfeedback, 136–37 Microsoft, 28–29 Milner, Peter, 52–57, 67 Miyamoto, Shigeru, 147–49, 155, 166 Mochon, Daniel, 173 Moment (app), 13–15 Morrissey, Tracie, 159 Moti, 282–83 motivated perception, 144–45 motivational interviewing, 258–62 MUDs (multiuser dungeons), 227–28 Murphy, Morgan, 48 Muscat, Luke, 164 Myst, 3 Myst (game), 178 nail-biting, 267–69 Nanya, 186 National Public Radio, 196 Nature, 312 NBC News Online, 197 Neanderthals, 30 near wins, 145–46, 181–83 negative reinforcement, 21 Netflix, 3, 199, 208, 210–12, 287–89, 291 NeuroRacer, 312 New York Times, 48, 141, 215–16 Nguyen, Dong, 42–43 nicotine, 31 nicotine gum, 267 Nintendo, 148, 171 Nixon, Richard, 47–48 no. 3 heroin, 46 no. 4 heroin, 47 nomophobia, 15 Norton, Michael, 173 O’Brien, Conan, 84, 243 obsession, 20–21 obsessive passion, 21–22 Oculus VR, 140–42 Olds, James, 52–57, 58, 67 O’Neill, Essena, 220–21 online shopping, 4 on-the-job training, gamification of, 308–9 opium, 31 optimal distinctiveness, 226 origami, 173–74 overcoming addictive behaviors, 263–92 behavioral architecture and, 273–92 distraction and, 267–73 habits and, 268–73 replacing bad routines with good, 268–71 subconscious attraction to ideas railed against and, 264–65 willpower, role of, 265–66 overworking, 186–88 pain, and gamification, 309–10 Pajitnov, Alexey, 170, 171, 172, 173 Parkinson’s disease patients behavioral addictions as side effect of drug treatments for, 82–85 overcoming small hurdles and, 93–95 Paskin, Willa, 212 passion, 21 Patrick, Vanessa, 272 Pavlok, 279–81 Peele, Stanton, 76, 77–79, 88 Pelling, Nick, 298, 306 Pemberton, John, 36–38, 273 Penfield, Wilder, 19 Penn, Hugh, 46 penny auction websites, 152–55 Peretz, Jeff, 194–94 perfectionism, 107–9 Perry, Steve, 202, 203 Petrie, Ryan, 226–27 Pettijohn, Adrienne, 103 Pfizer, 301–2 Phelps, Andy, 305 Philips Sonicare, 300 pineal gland, 69–70 Pinterest, 122 pituri plant, 31 planning fallacy, 289–90 “pleasure center” of brain, 55 points, 298, 299 Pokémon (game), 155 Pokhilko, Vladimir, 170 Polk, Sam, 118–19 Polkus, Laura, 216 Pommerening, Katherine, 41–42 Popular Science, 17 pornography, 4, 265–66 post-play, 208, 210–12 post traumatic stress disorder (PTSD), gamification as intervention for, 311–12 Powell, Mike, 100 Power of Habit, The (Duhigg), 268 Prelec, Dražen, 188 predatory video games, 155–59 Press Your Luck (TV show), 101–5 progress, 147–66 barriers to entry, lack of, 161–64 beginner’s luck and, 159–62 Dollar Auction Game, trap in, 149–52 energy systems, use of, 155–57 hooks in games and, 149–55 penny auction websites and, 152–55 positive feedback and, 158–59 smartphone delivery of games and, 164–66 proximity of temptation, 273–77 psychological response to experience of addiction, 73–75, 77–79 Pullen, John Patrick, 8 punding behaviors, 81–82 punishment, in breaking habits, 278–81 PurseForum, 207 Quest to Learn (Q2L), 302–4 Quibids.com, 152 Radiohead, 195 Rae, Cosette, 178–79, 249, 274 Raising Men Lawn Care, 307–8 rat experiments, of Olds and Milner, 52–57 readiness ruler, 259 Realism, 269–70 real-life crime documentaries, 196–201 Reddit, 122–25 red light, 69 regrams, 217 reinforcing good behaviors, 282–84 relational spending, 284 repression, 264 reSTART, 17–18, 62–63, 178, 228, 248–50, 255 reward, of habits, 268–69 Ricciardi, Laura, 199 Rift (game), 140–42 Robins, Lee, 50–52, 60, 67 Rochester School of Technology Just Press Play program, 304–5 Rolling Stone, 196 routine, of habits, 268–69 Routtenberg, Aryeh, 56–59 Rustichini, Aldo, 315 Ryan, Maureen, 203 Rylander, Gösta, 81, 84 Sacca, Chris, 140 Sales, Nancy Jo, 41–42 Saltsman, Adam, 155–56, 163–64 SAT vocabulary learning, gamification of, 296–97 Schachter, Stanley, 275–76 Schreiber, Katherine, 112–13, 115, 185 Schüll, Natasha Dow, 130, 134–35, 155, 183 Science, 168 Sedaris, David, 113–14 Self-Determination Theory (SDT), 260–62 “September” (Earth, Wind & Fire), 194–95, 196 Serial (podcast), 196–99, 200, 203, 204 Sesame Street (TV show), 247 Sethi, Maneesh, 279, 280–81 sexuality, 264–65 Shlam, Shosh, 252 shopping, compulsive, 205–8 Shubik, Martin, 149–51 Sign of the Zodiac (game), 130, 131 Sim, Leslie, 112–13, 114–15, 185–86 Simester, Duncan, 188 Simmons, Bill, 140 Simpsons, The (TV show), 145–46 Singer, Robert, 264 SiteJabber.com, 154 Sitzmann, Traci, 308–9 sleep deprivation, 68–70 Sleep Revolution, The (Huffington), 68–69 slot machines, 130–36, 183 smartphone addiction, 22 disruptive nature of, 15–16 overuse of, 13–15 Realism as treatment for, 269–70 scope of, 27–28 video games and, 164–66 smart watches, 113 Smith, Rodney, Jr., 307 Smith, Sandra, 112 SnowWorld, 309–10 SnŪzNLŪz, 278 social comparison, 118–19 social confirmation, 224–25 social interaction, 214–33 extensive online interactions at young ages, long-term effect of, 228–33 Hot or Not website and, 221–26 Instagram and, 216–17, 218 in multiuser games, 227–28 negative feedback in, 219–21 optimal distinctiveness and, 226 positive feedback in, 218–19 social confirmation and, 224–25 Sopranos, The (TV show), 201–3, 204 Space Invaders (game), 148 Spark Joy (Kondo), 208 Sperry, Roger, 19 SpongeBob SquarePants (TV show), 247 Steele, Robert, 48 Steiner-Adair, Catherine, 39, 41, 250–51 Stephen, Christian, 141 stereotypies, 84 Stern, Rick, 103 stopping rules, disruption of, 184–90 butt-brush effect and, 184 credit cards and, 188 exercise and, 185–86 overworking and, 186–88 video games and, 188–89 streaks, 115–16, 117 Strumsky, Dawn, 115 Strumsky, John, 115, 116 substance addiction, 8–9, 29–39 blurring of line behavioral addiction and, 81, 82–85 brain patterns and, 70–71 in early civilizations, 30–31 Freud’s research and experiments with cocaine and, 33–36 manufacturing process and, 31–32 Pemberton’s French Wine Coca (Coca-Cola) and, 37–38 punding behaviors and, 81–82 trial and error, discovery of drug effects by, 32 of Vietnam War veterans, 46–52 Sullivan, Roy, 111 Super Hexagon (game), 179–81 Super Mario Bros.

Effective Programming: More Than Writing Code by Jeff Atwood

AltaVista, Amazon Web Services, barriers to entry, cloud computing, endowment effect, fail fast, Firefox, fizzbuzz, Ford Model T, future of work, game design, gamification, Google Chrome, gravity well, Hacker News, job satisfaction, Khan Academy, Kickstarter, loss aversion, Marc Andreessen, Mark Zuckerberg, Merlin Mann, Minecraft, Paul Buchheit, Paul Graham, price anchoring, race to the bottom, recommendation engine, science of happiness, Skype, social software, Steve Jobs, systems thinking, TED Talk, Tragedy of the Commons, web application, Y Combinator, zero-sum game

According to standard economic theory, the price reduction shouldn’t have led to any behavior change, but it did. Ariely’s theory is that for normal transactions, we consider both upside and downside. But when something is free, we forget about the downside. “Free” makes us perceive what is being offered as immensely more valuable than it really is. Humans are loss-averse; when considering a normal purchase, loss-aversion comes into play. But when an item is free, there is no visible possibility of loss. You will tend to overestimate the value of items you get for free. Resist this by viewing free stuff skeptically rather than welcoming it with open arms. If it was really that great, why would it be free?

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When it comes to happiness, frequency is more important than intensity. Embrace the idea that lots of small, pleasurable purchases are actually more effective than a single giant one. 4. Buy less insurance Humans adapt readily to both positive and negative change. Extended warranties and insurance prey on your impulse for loss aversion, but because we are so adaptable, people experience far less regret than they anticipate when their purchases don’t work out. Furthermore, having the easy “out” of insurance or a generous return policy can paradoxically lead to even more angst and unhappiness because people deprived themselves of the emotional benefit of full commitment.

The Art of Execution: How the World's Best Investors Get It Wrong and Still Make Millions by Lee Freeman-Shor

Alan Greenspan, behavioural economics, Black Swan, buy and hold, Carl Icahn, cognitive bias, collapse of Lehman Brothers, credit crunch, Daniel Kahneman / Amos Tversky, diversified portfolio, family office, I think there is a world market for maybe five computers, index fund, Isaac Newton, Jeff Bezos, Long Term Capital Management, loss aversion, Market Wizards by Jack D. Schwager, Pershing Square Capital Management, Richard Thaler, Robert Shiller, rolodex, Skype, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, technology bubble, The Wisdom of Crowds, too big to fail, tulip mania, world market for maybe five computers, zero-sum game

That night we stay out until 3:00am, have two helpings of chocolate decadence, and a variety of Aquavit at a Norwegian restaurant.”37 4. Fear The research of Shlomo Benartzi and Richard Thaler also showed that the pain of a short-term loss overpowers the pleasure of a long-term gain. This myopic (short-term) focus and a hatred of losing they called myopic loss aversion.38 This produces a fear which turns many investors into Raiders when a share starts doing well. The findings of Terrance Odean suggest that this problem has grown thanks to the unprecedented immediacy of the internet. He discovered that people who traded via telephone from 1991 to 1996 outperformed the market by 2.4% per year on average.

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Choices in Repeated Gambles and Retirement Investments’, Management Science, by Shlomo Benartzi and Richard Thaler (1999). They showed that the pain of a short-term loss overpowers the pleasure of a long-term gain. This myopic (short-term) focus and a hatred of losing is what Thaler and Benartzi called myopic loss aversion. 39 ‘Online Investors: Do the Slow Die First?, EFA, by Brad Barber and Terrance Odean (1999). 40 ‘Trading is hazardous to your wealth: the common stock investment performance of individual investors’, The Journal of Finance, by Brad Barber and Terrance Odean (2000). 41 Kahneman and Tversky (1979). 42 ‘Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers’, Journal of Consumer Research, by Ziv Carmon and Dan Ariely (2000). 43 The Psychology of Finance, by Lars Tvede (1999). 44 More Than You Know, by Michael Mauboussin (2006). 45 Mauboussin (2006). 46 Mean Genes, by Terry Burnham and Jay Phelan (2001). 47 Lynch (2000). 48 Thaler and Johnson (1990). 49 ‘Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency’, Journal of Finance, by Narasimhan Jegadeesh and Sheridan Titman (1993). 50 ‘Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?’

Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell

accelerated depreciation, Alan Greenspan, barriers to entry, behavioural economics, Berlin Wall, big-box store, bread and circuses, business cycle, cognitive dissonance, computer age, cotton gin, creative destruction, Daniel Kahneman / Amos Tversky, delayed gratification, deskilling, Donald Trump, Edward Glaeser, fear of failure, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, George Akerlof, global supply chain, global village, Howard Zinn, income inequality, interchangeable parts, inventory management, invisible hand, James Watt: steam engine, Joseph Schumpeter, Just-in-time delivery, knowledge economy, Lewis Mumford, loss aversion, market design, means of production, mental accounting, Monkeys Reject Unequal Pay, Pearl River Delta, planned obsolescence, Ponzi scheme, price anchoring, price discrimination, race to the bottom, Richard Thaler, Ronald Reagan, Salesforce, scientific management, side project, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, traveling salesman, Triangle Shirtwaist Factory, ultimatum game, Victor Gruen, washing machines reduced drudgery, working poor, yield management, zero-sum game

But in the modern world these cognitive shortcuts sometimes lead us astray. When it comes to money, focusing too hard on scowls and growls can cause us to act in a way that seems irrational and can ultimately harm rather than help us. As illustration of this, Kahneman and Tversky evoked the universal phenomenon of loss aversion, the tendency of most people to strongly prefer avoiding losses rather than acquiring gains. At first blush this sounds counterintuitive. Doesn’t everyone want to win? The answer, of course, is yes, but not as much as we don’t want to lose. If you don’t play, you can’t win, but you also can’t lose.

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Not playing results in lost opportunities, but scientists have shown that humans are not wired to spontaneously factor in missed opportunities, particularly when those opportunities are projected far into the future. We are wired, however, to worry a good deal about losing. And when it comes to feelings of loss, it is not necessarily the actual loss but the perception of loss that keeps us from acting in what would seem to be a rational manner. Loss aversion is what spurs a scorned lover to cling to a bad relationship, an unhappy worker to cling to a bad job, and unhappy stockholders to cling to a plummeting stock rather than sell the loser and invest the proceeds in something more promising. In the latter case, the only logical reason to hold a stock is that you believe it is likely to grow in value.

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Kresge Company Kristof, Nicholas Kroger Supermarkets Krummeck, Elsie labor arbitrage labor exploitation in China, worldwide effects of labor movement labor unions Landsman, Janet Lasch, Christopher Lawrence, Robert Lawrie, George lean-retailing techniques Leonhardt, David Les Halles Levi Strauss Levitt, Alfred Levitt, William Levitt and Sons Levy, Leon Lichtenstein, Donald Lichtenstein, Nelson The Limited Lindell, Jens Lindgren, Charlotte Linnaeus, Carl livestock industry Locke, Richard Long, Huey P. Lord & Taylor Los Angeles Times loss aversion loss leaders Lowenstein, George Lowe’s Lundgren, Gillis luxury goods LVMH Macy’s Madoff, Michael mail-in rebates mail-order business mainstream retailers discount sections in markdowns by, growth of malls Gruen’s architectural designs improving patron satisfaction with mall attributes outlet (See outlet malls) Malmendier, Ulrike Mammoth Mart mangrove forest, shrimp farming’s impact on Mankiw, Gregory Mansfield, Jayne manual labor manufacturer’s suggested price (MSP) markdown money markdowns free of imported goods by mainstream retailers optimization of seasonal variations setting amount of types of market value Marshall Field’s mass production adoption of European-style techniques and clothing market cotton gin Ford’s assembly line gun manufacture home construction Matlock, Larry Mattel mattress industry maximum price regulations, during World War II, Maxwell, Sarah May Department Stores McDonald, David McDonald’s McGovern, Charles McKinley, William McNair, Malcolm P.

The Age of the Infovore: Succeeding in the Information Economy by Tyler Cowen

Albert Einstein, Asperger Syndrome, autism spectrum disorder, behavioural economics, business cycle, Cass Sunstein, cognitive bias, David Brooks, en.wikipedia.org, endowment effect, Flynn Effect, folksonomy, framing effect, Google Earth, Gregor Mendel, impulse control, informal economy, Isaac Newton, loss aversion, Marshall McLuhan, Naomi Klein, neurotypical, new economy, Nicholas Carr, pattern recognition, phenotype, placebo effect, Richard Thaler, selection bias, Silicon Valley, social intelligence, the medium is the message, The Wealth of Nations by Adam Smith, theory of mind, Tyler Cowen

But in the laboratory subjects typically are more averse to the prospect framed in terms of a loss (“loss aversion”). More specifically, once the outcome is framed in terms of a loss, people will accept greater gambles to try to avoid any loss at all, compared to the risks they will take when the position is framed in terms of gains. In the study, the autistic subjects did significantly better at seeing that the talk of “loss” and “gain” was mere framing and that the two options should be treated the same, although they too showed some degree of loss aversion. Skin conductance tests run during the experiment indicated that the autistics reacted less emotionally to framing the one option in terms of loss rather than gain.

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., 195 Joyce, James, 166 Kant, Immanuel, 203–4 Keillor, Frank, 103 Kendall, Joshua, 29 Kidmondo, 9 Kindle, 43, 62 Klein, Naomi, 198 Knecht, Joseph (fictional character), 160–66 Krugman, Paul, 111–12 Lamoureux, Hugo, 190 late-talking children, 26 Laurie, Hugh, 154 least-common-denominator effect, 134 libraries, 43 Lil’Grams, 9 LinkedIn, 83 literature, 139, 146, 147–48, 170–71. See also Holmes, Sherlock LiveJournal discussion group, 35 Living to Tell the Tale (Márquez), 120 local processing or perception, 18, 19, 36 Locke, John, 177, 204 The Lord of the Rings (Tolkien), 127 loss aversion, 196 lunch, duration of, 43 Mackenzie, Henry, 168 macroeconomics, 138 magazines, 44 manipulation, 139–41 Mankiw, Greg, 111–12, 114 mantras, 95 The Man Who Made Lists (Kendall), 29 Marginal Revolution blog, 1 market economy, 201 Márquez, Gabriel García, 120 marriage, 217–18 Marx, Karl, 216 mathematics, 19, 24, 153 Maxim, 44 McLuhan, Marshall, 65–66 media coverage, 34, 135–36 meditation, 94–95, 96 meetways.com, 131 Mehrling, Perry, 96–97 Melville, Herman, 166 memory, 18, 130, 195 Mendel, Gregor, 25, 166 mental ordering.

How Democracy Ends by David Runciman

barriers to entry, basic income, Bernie Sanders, Big Tech, bitcoin, blockchain, Brexit referendum, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, centre right, crowdsourcing, cuban missile crisis, disinformation, Dominic Cummings, Donald Trump, Dr. Strangelove, Edward Snowden, fake news, first-past-the-post, Francis Fukuyama: the end of history, full employment, Internet of things, Jeremy Corbyn, Jon Ronson, Joseph Schumpeter, Kickstarter, Large Hadron Collider, loss aversion, Mahatma Gandhi, Mark Zuckerberg, money: store of value / unit of account / medium of exchange, mutually assured destruction, Network effects, Nick Bostrom, Norman Mailer, opioid epidemic / opioid crisis, Panopticon Jeremy Bentham, Paris climate accords, Peter Thiel, post-truth, power law, precautionary principle, quantitative easing, Russell Brand, self-driving car, Sheryl Sandberg, Silicon Valley, Steve Bannon, Steven Pinker, the long tail, The Wisdom of Crowds, Travis Kalanick, universal basic income, Yogi Berra

When flooding or air pollution or water scarcity have become an acute threat, pragmatic authoritarianism has delivered on its promise to prioritise immediate results over long-term gains. It has much less to worry about when it comes to respecting the views of dissenters. But that is not enough to tip the balance in mature democracies. There the trade-off works the other way. Human beings tend to suffer from loss aversion: we don’t like to give up what we think is ours by right, regardless of the compensations on offer. It is very hard to imagine the citizens of Western democracies acquiescing in the loss of the personal dignity that comes with being able to kick the bastards out, even if it means bearing a collective material cost.

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The only thing worse than letting everyone vote is telling some people that they no longer qualify. Never mind who sets the exam, who is going to tell us that we’ve failed? Mill was right: democracy comes after epistocracy, not before. You can’t run the experiment in reverse. The cognitive biases that epistocracy is meant to rescue us from are what will ultimately scupper it. Loss aversion makes it more painful to be deprived of something we have that doesn’t always work than something we don’t have that might. It’s like the old joke. Q: ‘Do you know the way to Dublin?’ A: ‘Well, I wouldn’t start from here.’ How do we get to a better politics? Well, maybe we shouldn’t start from here.

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., 87–8, 108 Khrushchev, President Nikita, 108 Kimera Systems (digital technology company), 189 Kissinger, Henry, 56, 95, 96 knowledge acquisition of, 153 and discrimination, 180 internet and, 153 political, 188–9 and power, 186–7, 204 social, 196 social scientific, 183 Krugman, Paul, 90 Kubrick, Stanley: Dr Strangelove or: How I Learned to Stop Worrying and Love the Bomb (film), 95–6, 109 L Land, Nick, 165–7 Le Pen, marine, 149 Lenin, Vladimir Ilych: The State and Revolution, 171 libertarianism, 194 Lilla, mark, 150 Limbaugh, Rush, 20 Lincoln, President Abraham, 14 Lloyd George, David, 71 Long, Huey, 49 loss aversion, 175, 188 Luttwak, Edward: Coup D’État: A Practical Handbook, 41, 44 M McCarthy, Cormac: The Road, 113, 118–19 McGinnis, Joe: The Selling of the President, 158 machines, 121–2, 125–6, 127, 196, 197, 199, 200–201, 202, 205, 219; see also artificial intelligence; computers; robots; technocracy; technology McKinley, President William, 74 Macron, President Emanuel, 148, 149–50 Man on Wire (film), 117–18 Marx, Karl: ‘The Fragment on machines’, 196–7 Marxism-Leninism, 171 Mason, Paul: Postcapitalism, 196, 197, 199, 205 Mélenchon, Jean-Luc, 58 Mencius Moldbug see Yarvin, Curtis metadata, 154 Mill, John Stuart, 182–3, 185 Miller, Stephen, 13 mindlessness, 84, 86–8 Mitchell, David: The Bone Clocks, 113 Modi, Narendra, 65–6, 149 monarchs, 167 Monsanto (company): ‘The Desolate Year’, 88 Mugabe, President Robert, 48 Mullin, Chris: A Very British Coup, 58 N NATO, 59 Nazis, 85, 97, 99 Netherlands, 148 networks and anarchism, 193 and change, 196 interconnectedness, 112–15 political movements, 149 social 136, 151, 160, 177; see also Facebook; social media; Twitter utopian, 200 see also internet New York crime, 211 World Trade Center, 117–18 New York Times, 159–60 New Yorker (magazine), 82–3, 84, 106 news, fake, 64, 75, 98, 156, 157 Nixon, President Richard, 56, 90, 158 North Korea, 213 Nozick, Robert: Anarchy, State, and Utopia, 193–4, 195 nuclear disarmament, 107 Campaign for Nuclear Disarmament (CND), 94–5 nuclear weapons, 56, 83–4, 86, 94, 95, 96–7, 102, 103–104, 106, 107 Nunn, Sam, 95 O Obama, President Barack and climate change, 92 and conspiracy theory, 64 executive initiatives, 55 and inequality, 79 and Trump’s election, 13, 14, 15, 16, 18 oil companies, 131 Orban, Viktor, 175 Osborne, George, 208 Oxford and Cambridge Review, 120 P Papademos, Lucas, 39 Papandreou, Andreas, 27 Papandreou, George, 39 paranoia, 67, 74 Parent, Joe, 62 Parfit, Derek, 100, 202–3 Paul, Rand, 154 Perry, William, 95 pesticides, 87–9 Petit, Philippe, 117–18 Piergiacomi, Alessio, 167–8 Piketty, Thomas: Capital in the Twenty-First Century, 78 Pinker, Steven: The Better Angels of our Nature, 211 Plato, 179 Poland, 65, 66 police, 171 political parties, 214 artificiality, 145–6 charisma, 147 and identity politics, 150 as machines, 127 membership, 146, 147–8 ‘Net’, 162 partisan nature, 146 ‘Pirate’, 162 United States, 146–7, 221 politicians: and trust, 144–5, 164, 214 pollution, 89, 90 populism, 13, 175 and banality, 98–9 causes of, 67 and conspiracy theory, 65–7, 72, 168 and disconnect, 141 and economic growth, 192 and inequality, 77–8 and movement politics, 148–9 United States, 67–70, 73 and war, 75 precautionary principle, 100–101 pressure groups, 89 prisons, 151, 152, 212 Putin, President Vladimir, 157 R racism, 143 Rand, Ayn, 194 rational choice theory, 108–9 referendums, 47–8, 179, 183 France, 70 Turkey, 52 United Kingdom, 48 reform, 70, 71, 78, 79, 185; see also social change revolutions, 41, 78, 196; see also digital revolution risk, 101–5, 110–12, 116 robots, 7, 103, 111, 128–9, 130, 168, 210 Rockefeller, John D., 131–2 Roosevelt, President Theodore, 70, 71, 131 Russia ‘competitive authoritarianism’, 175 Cuban missile Crisis (1962), 107–8 data harvesting, 156 foreign policy, 30 S Sacco, Justine, 143 San Francisco, 162, 163 Sandberg, Cheryl, 137 Sanders, Bernie, 58, 149 Sarandon, Susan, 198 Scarry, Elaine: Thermonuclear Monarchy: Choosing between Democracy and Doom, 104 Scheidel, Walter: The Great Leveler, 78 Schlesinger, James, 56 Schultz, George, 95 Shita, Mouna, 189–90 Simon, Herbert, 153 el-Sisi, General Abdul Fatah, 48–9 slavery, 23, 35, 73, 123–4 sleepwalking, 115, 116, 117 Snowden, Edward, 151–2 Snyder, Timothy: On Tyranny: Twenty Lessons from the Twentieth Century, 97–8, 99 social change, 192, 219; see also reform social media, 149; see also Facebook; networks: social; Twitter socialism 171 Socrates, 38 Spain, 162 Stalinism, 99, 169, 171 suffrage, universal, 187–8 Sulzberger, Cyrus, 27, 28 surveillance, 152–5 Sweden, 162, 163 T taxation, 70, 72, 193 technocracy, 180–81, 191–2, 198, 205, 214 technology, 125, 126 corporations, 131 digital, 144, 151, 154, 161, 162–3; see also internet and dignity, 203 information, 7–8 and mortality, 24–5 and risk management, 105 and ‘the shock of the old’, 122 threat of, 103, 120–21 see also machines terrorism, 74 terrorists, 97, 212 Texas, 163 Thiel, Peter, 198 tightrope-walking, 117–18 totalitarianism, 98; see also tyrannies tribalism, 163–4 Truman, President Harry S., 84–5 Trump, Melania, 13 Trump, President Donald, 49 behaviour, 20–21, 22–3, 159, 173 and change, 198 and Charlottesville demonstrations, 4 and climate change, 93 and conspiracy theory, 64–5 and dignity, 173 election of, 1–2, 5, 13, 16–18, 19, 20, 25, 118, 149, 156 and executive aggrandisement, 92 and fake news, 157 inaugural speech, 11–14, 74 military’s influence on, 59 novels inspired by, 57 and nuclear war, 86 and political violence, 212 presidency, 213 and Silicon Valley firms, 137 supporters of, 98 on surveillance, 154 use of Twitter, 143 Tsipras, Alexis, 33–4, 209 Turkey, 50–3 conspiracy theories, 65, 66 coups, 50–2, 53, 66 and Cyprus, 38 elections, 51 Justice and Development Party (AKP), 51 movement politics, 149 referendum (2017), 52 Twitter, 65, 137, 142, 143, 156 tyrannies 61; see also totalitarianism U United Kingdom austerity, 208 Boer War, 75 Brexit, 48, 156, 179 Campaign for Nuclear Disarmament (CND), 94–5 Conservative Party, 146, 209 general election (2017), 95 Labour Party, 58, 70, 94–5, 148–9, 150 metadata, 154 political enfranchisement, 76 reform, 185 welfare state, 76 United States, 23–4, 25, 49–50 CIA, 28, 30 climate change, 92 Congress, 19 conspiracy theories, 62, 67 corporations, 132 Cuban missile Crisis (1962), 107–8 democratic failure, 2, 14 demonstrations, 4 direct democracy, 163 economic growth, 175 and Egypt compared, 49–50 environment, 87–90 and Greece, 30 immigration, 183 inequality, 79 judiciary, 19 McCarthyism, 67 metadata, 154 military, 17, 18 National Security Agency (NSA), 152 New Deal, 76, 78 and nuclear war, 86, 95 ‘pax Americana’, 198 pesticides, 87–9 political enfranchisement, 76 political parties Democrats, 15, 62, 64, 108, 146–7, 221 Republicans, 62, 146–7, 221 politicians, 164 populism, 67–70, 73 presidential elections, 14, 16, 54–5, 58, 68, 220–24 Kennedy, John F., 108 Trump, Donald, 1–2, 5, 13, 19, 20, 25, 118, 149 prisons, 212 reform, 70 rights, 72 road accidents, 211–12 Silicon Valley, 137, 204 ‘tyranny of the majority’, 142 violence, 73–4, 211–12 war with Spain (1890s), 75 see also Chicago; New York; San Francisco; Texas Uscinski, Joe, 62 utopias, 126, 194, 195, 201 V Varoufakis, Yanis, 32–4, 116–17, 209 Venezuela, 154–5, 208 violence, 6, 73–5 ancient Athens, 38 decline of, 13 and environmental disaster, 93 Greece, 31, 210 and inequality, 78–80 Japan, 210 online, 142–4 political, 16–17, 18 United States, 73–4, 211–12 voting AI and, 189–90 right to, 76, 183–4 systems, 182–3 see also elections W wars, 74–7 citizens’ experience of, 77 and conspiracy theory, 77 First World War, 76, 115 of national survival, 75 nuclear, 83–4, 84–5, 87, 93–7, 109, 213 and populism, 75 total, 76–7 United States and North Korea, 115 see also Cold War wealth: and death, 204; see also elites Weber, Max, 127, 131, 147, 164, 187–8 welfare states, 70, 76, 109–10 whistleblowers see Snowden, Edward Wilson, President Woodrow, 69, 71, 75–6 Y Yarvin, Curtis, 167 Z Zimbabwe, 48 Zuckerberg, Mark, 131, 133, 135, 137, 138, 140, 157–8, 215; see also Facebook ALSO FROM PROFILE BOOKS Political Order and Political Decay: From the Industrial Revolution to the Globalisation of Democracy Francis Fukuyama The most important book about the history and future of politics since The End of History.

Cultish: The Language of Fanaticism by Amanda Montell

barriers to entry, behavioural economics, BIPOC, Black Lives Matter, classic study, cognitive dissonance, coronavirus, COVID-19, Donald Trump, en.wikipedia.org, epigenetics, fake news, financial independence, Girl Boss, growth hacking, hive mind, Jeff Bezos, Jeffrey Epstein, Keith Raniere, Kickstarter, late capitalism, lockdown, loss aversion, LuLaRoe, Lyft, multilevel marketing, off-the-grid, passive income, Peoples Temple, Phoebe Waller-Bridge, Ponzi scheme, prosperity theology / prosperity gospel / gospel of success, QAnon, Ronald Reagan, Russell Brand, Sapir-Whorf hypothesis, Search for Extraterrestrial Intelligence, side hustle, Silicon Valley, Skype, Social Justice Warrior, Stanford prison experiment, Steve Jobs, sunk-cost fallacy, tech bro, the scientific method, TikTok, uber lyft, women in the workforce, Y2K

They’re the same reasons you might put off a necessary breakup: denial, listlessness, social stresses, fear they might seek revenge, lack of money, lack of outside support, doubt that you’ll be able to find something better, and the sheer hope that your current situation will improve—go back to how it was at the start—if only you hold on a few more months, commit a fraction more. The behavioral economic theory of loss aversion says that human beings generally feel losses (of time, money, pride, etc.) much more acutely than gains; so psychologically, we’re willing to do a lot of work to avoid looking defeats in the eye. Irrationally, we tend to stay in negative situations, from crappy relationships to lousy investments to cults, telling ourselves that a win is just around the corner, so we don’t have to admit to ourselves that things just didn’t work out and we should cut our losses.

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Irrationally, we tend to stay in negative situations, from crappy relationships to lousy investments to cults, telling ourselves that a win is just around the corner, so we don’t have to admit to ourselves that things just didn’t work out and we should cut our losses. It’s an emotional example of the sunk cost fallacy, or people’s tendency to think that resources already spent justify spending even more. We’ve been in it this long, we might as well keep going. As with confirmation bias, not even the smartest, most judicious people are immune to loss aversion. It’s deeply embedded. I’ve been in my fair share of toxic one-on-one relationships, and noticing the similarities between abusive partners and cultish leaders has been, to say the least, humbling. So while power abuse can look like poisoned punch and purple shrouds, the linchpin is what it sounds like.

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As I continued to traverse Scientology’s Bridge to Total Freedom (the path to going clear), I’d come to learn about supernatural concepts like Xenu the galactic overlord and invisible “body thetans” (spirits of ancient aliens that cling to humans and cause destruction). It would have been lunacy. But I’d have to keep going. The sunk cost fallacy and loss aversion would tell me I can’t quit. Not this far in. Plus, my superiors would insist, if I leave right now in the middle of an upper level of auditing, I could pull in misfortune. I could pull in disease, even death. One ex-Scientologist named Margery Wakefield, a longtime officer in the OSA (Office of Special Affairs, Scientology’s “intelligence agency”), wrote about how she was off-loaded (kicked out) in the early ’80s for her perceived decline in mental state.

The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis

Albert Einstein, availability heuristic, behavioural economics, Cass Sunstein, choice architecture, complexity theory, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Hofstadter, endowment effect, feminist movement, framing effect, hindsight bias, John von Neumann, Kenneth Arrow, Linda problem, loss aversion, medical residency, Menlo Park, Murray Gell-Mann, Nate Silver, New Journalism, Paul Samuelson, peak-end rule, Richard Thaler, Saturday Night Live, Skinner box, Stanford marshmallow experiment, statistical model, systematic bias, the new new thing, Thomas Bayes, Walter Mischel, Yom Kippur War

In the second case, with the choice framed as a loss, they did the reverse, and ran the risk that they’d kill everyone. People did not choose between things. They chose between descriptions of things. Economists, and anyone else who wanted to believe that human beings were rational, could rationalize, or try to rationalize, loss aversion. But how did you rationalize this? Economists assumed that you could simply measure what people wanted from what they chose. But what if what you want changes with the context in which the options are offered to you? “It was a funny point to make because the point within psychology would have been banal,” the psychologist Richard Nisbett later said.

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“Science is a conversation and you have to compete for the right to be heard. And the competition has its rules. And the rules, oddly enough, are that you are tested on formal theory.” After they finally sent a draft of their paper to the economics journal Econometrica, Danny was perplexed by the editor’s response. “I was kind of hoping he’d say, ‘Loss aversion is a really cool idea.’ He said, ‘No, I like the math.’ I was sort of shattered.” By 1976, purely for marketing purposes, they changed their title to “Prospect Theory.” “The idea was to give the theory a completely distinct name that would have no associations whatsoever,” said Danny. “When you say ‘prospect theory,’ no one knows what you’re talking about.

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But by then it was clear that no matter how often people trained in statistics affirmed the truth of Danny and Amos’s work, people who weren’t would insist that they knew better. * * * Upon their arrival in North America, Amos and Danny had published a flurry of papers together. Mostly it was stuff they’d had in the works when they’d left Israel. But in the early 1980s what they wrote together was not done in the same way as before. Amos wrote a piece on loss aversion under both their names, to which Danny added a few stray paragraphs. Danny wrote up on his own what Amos had called “The Undoing Project,” titled it “The Simulation Heuristic,” and published it with both their names on top, in a book that collected their articles, along with others by students and colleagues.

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

agricultural Revolution, airport security, An Inconvenient Truth, Andrei Shleifer, Atul Gawande, barriers to entry, behavioural economics, Bernie Madoff, Boris Johnson, call centre, clean water, cognitive bias, collateralized debt obligation, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, Did the Death of Australian Inheritance Taxes Affect Deaths, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), John Nash: game theory, Joseph Schumpeter, Joshua Gans and Andrew Leigh, longitudinal study, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, Neal Stephenson, ocean acidification, oil shale / tar sands, patent troll, power law, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Thaler, selection bias, South China Sea, Stanford prison experiment, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, William Langewiesche, women in the workforce, young professional

Once the monkeys figured out that the two-grape researcher sometimes withheld the second grape and that the one-grape researcher sometimes added a bonus grape, the monkeys strongly preferred the one-grape researcher. A rational monkey wouldn’t have cared, but these irrational monkeys suffered from what psychologists call “loss aversion.” They behaved as if the pain from losing a grape was greater than the pleasure from gaining one. Up to now, the monkeys appeared to be as rational as humans in their use of money. But surely this last experiment showed the vast gulf that lay between monkey and man. Or did it? The fact is that similar experiments with human beings—day traders, for instance—had found that people make the same kind of irrational decisions at a nearly identical rate.

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Paul Glimcher, Colin Camerer, Ernst Fehr, and Russell Poldrack (Academic Press, Elsevier, 2009). / 212 “Nobody ever saw a dog”: see Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin Cannon (University of Chicago Press, 1976; originally published in 1776). / 214 Day traders are also loss-averse: see Terrance Odean, “Are Investors Reluctant to Realize Their Losses?” Journal of Finance 53, no. 5 (October 1998). SEARCHABLE TERMS Note: Entries in this index, carried over verbatim from the print edition of this title, are unlikely to correspond to the pagination of any given e-book reader.

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See Genovese, Kitty, murder of Krueger, Alan, 62, 63–64 Kyoto Protocol, 115 laboratory experiments artificiality of, 123 and crash-test data, 153–55 games as, 108–11 See also specific researcher or experiment Lake Toba (Sumatra), volcanic eruption at, 189 Lakshminarayanan, Venkat, 212 LaSheena (prostitute), 19–20, 26, 27, 30, 54 Latham, John, 201, 202 Latham, Mike, 201 law of unintended consequences, 138–41 Leave It to Beaver (TV program), 102 LeMay, Curtis, 147 Lenin, Vladimir, 63 leverage, 193 Levitt, Steven D., 17 life expectancy, 20 life insurance, 94, 200 life span, extending the, 82–87 List, John, 113–20, 121, 123, 125 locavore movement, 166 LoJack (anti-theft device), 173–75 London, England, terrorism in, 92 loss aversion, 214 Lovelock, James, 166, 170, 177 Lowell, Mike, 92 macroeconomics, 16–17, 211 Madison, Wisconsin, home-sales data in, 39 Maintenance of Parents Act, Singapore, 106 Major League Baseball, birthdays among players of, 61, 62 malaria, experiment about, 177, 180, 181 manipulation, and altruism, 125 March of Dimes, 145 marijuana, 66 Martinelli, César, 27–28 Masters, Will, 142 Matthews, H.

Bootstrapped: Liberating Ourselves From the American Dream by Alissa Quart

2021 United States Capitol attack, 3D printing, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Bernie Sanders, Black Lives Matter, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, carried interest, coronavirus, COVID-19, critical race theory, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, defund the police, Donald Trump, Elon Musk, financial independence, fixed income, George Floyd, gig economy, glass ceiling, high net worth, housing justice, hustle culture, illegal immigration, impact investing, income inequality, independent contractor, invisible hand, Jeff Bezos, lockdown, longitudinal study, loss aversion, Lyft, Marc Benioff, Mark Zuckerberg, meta-analysis, microaggression, Milgram experiment, minimum wage unemployment, multilevel marketing, obamacare, Overton Window, payday loans, post-work, Ralph Waldo Emerson, ride hailing / ride sharing, Ronald Reagan, Salesforce, Scientific racism, sharing economy, Sheryl Sandberg, side hustle, Silicon Valley, Silicon Valley ideology, Snapchat, social distancing, Steve Jobs, Steve Wozniak, tech worker, TED Talk, Travis Kalanick, trickle-down economics, Uber and Lyft, uber lyft, union organizing, W. E. B. Du Bois, wealth creators, women in the workforce, working poor, Works Progress Administration

Even though on paper many were relatively affluent, their limited educations and the fact that they were older meant that they would be almost unhirable in their communities if they were laid off. Before many of the steel plants started to shut down, said Kemper, these men “sat high, the head of your table, the family member who makes all this fucking money.” Scholars have called this a state of “loss aversion.” Studies by cognitive psychologists, including landmark scholarship in 1992 by Amos Tversky and Daniel Kahneman, have found that losing—money, status, or anything of value—is twice as powerful as the joy resulting from gaining something beneficial. This creates a bias against loss. And that fear of disappearance explains why some choose to avoid losing ground over making gains and why Trump supporters who earned an average of $72,000 a year in 2016—a middle-class income—still had a fear of evaporating social status.

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“Now you have lost this status within your social structure. Look, people my age, the last thing we want to do is go out there and find another job.” This antagonism to even the appearance of diminishment is not the province of Trump supporters alone. In reporting my last book, I met progressive, loss-averse middle-class people, so I’d been thinking about this condition in its various forms for nearly a decade. Some were riven with anxiety about their futures and saw themselves as existing in a self-interested society. Kemper also saw why some of his men had felt disregarded by the Democratic Party and gone over to Trump.

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a hearty number of union members also went for Trump in 2020: While Biden won 57 percent of union households nationwide, still 40 percent supported Trump. Ian Kullgren, “Union Workers Weren’t a Lock for Biden. Here’s Why That Matters,” Bloomberg Law, November 10, 2020, https://news.bloomberglaw.com/daily-labor-report/union-workers-werent-a-lock-for-biden-heres-why-that-matters. evaporating social status: “Loss aversion” was also present, I think, along with white nationalism and all sort of other terrible impulses on dark day of January 6, when rioters stormed the US Capitol: violent, mostly white crowds gathered to falsely claim Trump’s presidential win. While some conspirators looked like stills from a hooligan version of a Wes Anderson movie, covered in Daniel Boone pelts, lost-cause-true-believers fighting “for our beloved President Donald J.

Innovation and Its Enemies by Calestous Juma

3D printing, additive manufacturing, agricultural Revolution, Asilomar, Asilomar Conference on Recombinant DNA, autonomous vehicles, behavioural economics, big-box store, biodiversity loss, business cycle, Cass Sunstein, classic study, clean water, collective bargaining, colonial rule, computer age, creative destruction, CRISPR, Daniel Kahneman / Amos Tversky, deskilling, disruptive innovation, driverless car, electricity market, energy transition, Erik Brynjolfsson, fail fast, financial innovation, global value chain, Honoré de Balzac, illegal immigration, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, invention of the printing press, Joseph Schumpeter, knowledge economy, loss aversion, Marc Andreessen, means of production, Menlo Park, mobile money, New Urbanism, Nicholas Carr, pensions crisis, phenotype, precautionary principle, Ray Kurzweil, Recombinant DNA, refrigerator car, Second Machine Age, self-driving car, smart grid, smart meter, stem cell, Steve Jobs, synthetic biology, systems thinking, tacit knowledge, technological singularity, The Future of Employment, Thomas Kuhn: the structure of scientific revolutions, Travis Kalanick

The first is “status quo bias” and the second is “omission bias.”93 The former describes the disproportionate tendency to stick with the status quo when choosing between alternatives.94 For example, when asked to decide whether or not to participate in an organ donation program, offering the default option “yes” on the relevant insurance forms produces much higher participation rates than offering “no” as the default option and asking people to take action through opting into the program.95 New technologies that alter not only social habits but also what is perceived to be the status quo lead to negative responses because they threaten the customs that people have grown comfortable with. Loss aversion also causes people to underestimate the risks of doing nothing and sticking with the status quo. The tendency to favor inaction over action is called omission bias. This bias prevails even when people know the outcomes of omission and commission. For example, people tend to think that it is worse to vaccinate a child when the vaccination could cause harm than not to vaccinate, even though delivering the vaccination could significantly reduce the risk of harm through disease to the overall population and probably to the individual child as well.

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Thus, communication that encourages a positive cognitive approach to new technologies—for example, through emphasizing benefits of specific aspects of the technology—can increase the likelihood that people will accept the technology.100 It follows that challenges to innovation can be reduced by three psychological factors. First, new ideas are more easily adopted if they work through existing or entirely new habits rather than attempt to break existing ones. Second, framing the potential outcomes of new technologies in terms of gains or losses has a significant impact on whether loss aversion will produce risk-seeking or risk-avoiding behavior.101 Third, people are more likely to adopt a new technology when communication encourages positive attitudes toward it—for example, by emphasizing the concrete benefits of specific aspects of the technology. An equally important psychological factor in defining the challenge to new technologies is political empathy.

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Bauer, Andrew Jordan, Christoffer Green-Pedersen, and Adrienne Héritier, Dismantling Public Policy: Preferences, Strategies, and Effects (Oxford: Oxford University Press, 2012); Stegmaier, Kuhlmann, and Visser, “Discontinuation.” Chapter 1 1. Eyal Ert and Ido Erev, “On the Descriptive Value of Loss Aversion in Decisions under Risk: Six Clarifications,” Judgment and Decision Making 8, no. 3 (2013): 214–235. 2. National Academy of Engineering, Grand Challenges for Engineering (Washington, DC: NAE, 2008). 3. Graeme Laurie, Shawn Harmon, and Fabiana Arzuaga, “Foresighting Futures: Law, New Technologies, and the Challenges of Regulating for Uncertainty,” Law, Innovation and Technology 4, no. 1 (2012): 1–33. 4.

Finance and the Good Society by Robert J. Shiller

Alan Greenspan, Alvin Roth, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, benefit corporation, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, democratizing finance, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial engineering, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, Great Leap Forward, Ida Tarbell, income inequality, information asymmetry, invisible hand, John Bogle, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, social contagion, Steven Pinker, tail risk, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

Ine cient Markets: An Introduction to Behavioral Finance. Oxford: Oxford University Press. Shubik, Martin. 2009. A Proposal for a Federal Employment Reserve Authority. Economics Policy Note 09-5. New York: Levy Economics Institute. Simmons, Joseph P., and Nathan Novemsky. 2009. “From Loss Aversion to Loss Acceptance: Context E ects on Loss Aversion in Risky Choice.” Working Paper. New Haven, CT: Yale School of Management. Small, Deborah A., George Loewenstein, and Paul Slovic. 2007. “Sympathy and Callousness: The Impact of Deliberative Thought on Donations to Identi able and Statistical Victims.” Organizational Behavior and Human Decision Processes 102(2):143– 53.

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Certainly it is that, but it is unique among entertainment forms in that it cultivates and ampli es to a considerable extent human risk-taking impulses, sometimes with disastrous consequences. The puzzle comes down to why one would be willing to place even one single bet at a casino. Research by psychologists Daniel Kahneman and Amos Tversky has shown that people exhibit a tendency toward loss aversion.1 They are pathologically avoidant of even small losses. If o ered an asymmetrical bet on a coin toss—to win $20 if it comes up heads, to lose $10 if it comes up tails—most people will turn down the bet, even though it has a positive expected return of $5. How then are gambling casinos able to induce people to place bets with a negative expected return, and to do so again and again despite having experienced repeated losses?

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See also debt; mortgages Lobbying Disclosure Act of 1995, 90 lobbyists: for accountants’ groups, 102; for financial industry, 87, 88–89, 90, 92; former members of Congress, 88; gifts, 90; motives, 91; power, 87–88, 89–90, 92; public perceptions, 91; reforms, 92–93; regulation of, 88, 89–90, 92–93; roles, 87–89, 90–91 Locke, John, 145 Lorenz, Konrad, 226, 229 loss aversion, 160 lotteries, 140. See also gambling lottery-linked savings, 177 loyalty, 215 Lummis, Cynthia, 193 Luther, Martin, 141 Macmillan, Harold, 212 MacroMarkets LLC, 98 MacroShares, 98 Madoff, Bernard, 17, 95–96, 98 manics, 173 Mao Zedong, 174, 182, 233 market designers, 69–71, 73–74. See also financial engineers; financial innovations market makers, 57, 61–62.

Rationality: What It Is, Why It Seems Scarce, Why It Matters by Steven Pinker

affirmative action, Albert Einstein, autonomous vehicles, availability heuristic, Ayatollah Khomeini, backpropagation, basic income, behavioural economics, belling the cat, Black Lives Matter, butterfly effect, carbon tax, Cass Sunstein, choice architecture, classic study, clean water, Comet Ping Pong, coronavirus, correlation coefficient, correlation does not imply causation, COVID-19, critical race theory, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, David Attenborough, deep learning, defund the police, delayed gratification, disinformation, Donald Trump, Dr. Strangelove, Easter island, effective altruism, en.wikipedia.org, Erdős number, Estimating the Reproducibility of Psychological Science, fake news, feminist movement, framing effect, George Akerlof, George Floyd, germ theory of disease, high batting average, if you see hoof prints, think horses—not zebras, index card, Jeff Bezos, job automation, John Nash: game theory, John von Neumann, libertarian paternalism, Linda problem, longitudinal study, loss aversion, Mahatma Gandhi, meta-analysis, microaggression, Monty Hall problem, Nash equilibrium, New Journalism, Paul Erdős, Paul Samuelson, Peter Singer: altruism, Pierre-Simon Laplace, placebo effect, post-truth, power law, QAnon, QWERTY keyboard, Ralph Waldo Emerson, randomized controlled trial, replication crisis, Richard Thaler, scientific worldview, selection bias, social discount rate, social distancing, Social Justice Warrior, Stanford marshmallow experiment, Steve Bannon, Steven Pinker, sunk-cost fallacy, TED Talk, the scientific method, Thomas Bayes, Tragedy of the Commons, trolley problem, twin studies, universal basic income, Upton Sinclair, urban planning, Walter Mischel, yellow journalism, zero-sum game

The only difference is the starting point, which frames the outcomes as a “gain” with the first choice and a “loss” with the second. With this shift in framing, people’s risk aversion goes out the window: now they seek a risk if it offers the hope of avoiding a loss. Kahneman and Tversky conclude that people are not risk-averse across the board, though they are loss-averse: they seek risk if it may avoid a loss.29 Once again, it’s not just in contrived gambles. Suppose you have been diagnosed with a life-threatening cancer and can have it treated either with surgery, which incurs some risk of dying on the operating table, or with radiation.30 Experimental participants are told that out of every 100 patients who chose surgery, 90 survived the operation, 68 were alive after a year, and 34 were alive after five years.

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See active open-mindedness, lack of cluster illusion, 146–48 cognitive reflection, lack of, 8–10, 311 collider fallacy, 261, 262–63 confirmation bias, 13–14, 142–43, 216, 290, 342n26 conjunction fallacy (Linda problem), 26–29, 115, 116, 156 correlation implies causation, 245–47, 251–52, 312, 321, 323–24, 329–30 data snooping, 145–46, 160 denying the antecedent, 83, 294 dieter’s fallacy, 101 discounting the future too steeply, 320 dread risk, 122 exponential growth bias, 10–12, 320–21 expressive rationality, 297–98 false dichotomy, 100 forbidden base rates, 62, 163–66 framing effects, 117–18, 168–70, 178, 188–92, 192–96, 321, 323, 349–50n27 garden of forking paths, 145, 185, 348n60 genetic fallacy, 91, 92–93, 291 guilt by association, 91 heretical counterfactuals, 64–65 hot hand fallacy, 131 hot hand fallacy fallacy, 131–32 hyperbolic discounting. See myopic temporal discounting illusory correlation, 245–46, 251–52, 321 imaginability. See availability heuristic intransitivity, 176, 185–88 irrelevant alternatives, sensitivity to, 177–78, 188–92, 350n8 loss aversion, 192–94 mañana fallacy, 101 Meadow’s fallacy (multiplying probabilities of interdependent events), 129–30, 131 money pump, 176, 180, 185, 187–88 monocausal fallacy, 260, 272–73 motte-and-bailey tactic (moving the goalposts), 88 moving the goalposts (motte-and-bailey), 88 myopic temporal discounting, 52–56, 54 myside bias, 294–96, 297, 312–13, 316, 317, 357n73 mythology mindset, 301–9 no true Scotsman fallacy, 88 openness to evidence, lack of, 310–11, 356–57n67 outrage, communal, 123–27 overconfidence, 20, 29–30, 33, 115, 216, 255, 323 paradoxical tactics, 58–62 paradox of the heap, 101 post hoc probability, 141–48, 160, 321 preference reversal, 52–53, 55 probability neglect, 11, 28, 321 propensity confused with probability, 21–22, 118, 139–40, 198, 216 prosecutor’s fallacy, 140–41 questionable research practices, 145–46, 160 regression to the mean, unawareness of, 254–56, 320, 353n13 regret avoidance, 17, 190 representativeness heuristic, 27, 155–56 resistance to evidence.

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See Bayesian reasoning evolution, 69, 173, 288, 308–9 excludability, 265 exclusive or (xor), 104–5, 133 expected utility Beccaria’s argument against cruel punishment and, 332–33 calculation of, 179–80 and certainty, 182–83, 188–90, 192 definition, 179 diminishing marginal utility and, 181–84, 181 emotions and, 179, 181–83, 190–92 Erasmus’s argument against war and, 331–32 intuitive calculation of, 180 lives and, 183–84 loss-aversion and, 192–94 maximization of, as rational choice, 174, 179 money and, 181–83 possibility, certainty and, 190–92, 195–96 risk-aversion and, 182–83, 192 as term, 179 See also rational choice exponential future discounting, 50–52, 53, 54 exponential growth bias, 10–12, 320–21 expressive rationality, 297–98 extraterrestrials, 286 Facebook, 127 fact-checking, 41, 300–301, 314, 316, 317–18 Fail Safe (film), 61 fairness, 164, 165, 217 fake news ease of spreading, 6 as entertainment, 306–7 fictionalized history as, 303 historical, 287–88 the irrationality crisis and, 284–85 openness to evidence vs., 311 religious miracles as, 287 rumor and, 308 false dichotomy, 100 family resemblance categories classical logic vs., 98–101, 346n28 definition, 99 informal fallacies arising from, 100–101 the representativeness heuristic and, 155 true/false values and, 100 See also deep learning famine, reduction of, 326 Farley, Tim, 321–23 Fauci, Anthony, 283–84 feminism, Enlightenment and, 336–37 finances, 237–38, 320–21 financial industry, 142–43, 165–66, 188, 327 Fischer, Bobby, 144 Fischhoff, Baruch, 323–24 Floyd, George, 123, 124–25 focal points, 124, 234–35 Forbes magazine, 313 forbidden base rates, 62, 163–66 forecasting accuracy of regression equations vs. human experts, 278–80 the conjunction rule and, 22–29 importance of, 22–23 superforecasters, 162–63 unpredictability of human behavior, 280–81 weather, 114, 127, 133, 220 Fore people, 153 formal fallacies affirming the consequent, 83, 85, 139 definition, 74, 83 denying the antecedent, 83, 294 detecting, 84 formal reconstruction exposes, 85–87 fortuitous randomization, 267 Foucault, Michel, 90 Fox News, 267–68 framing effects, 178, 188–96, 321, 323 Frank and Ernest (cartoon), 255 Franklin, Benjamin, 196 Freakonomics (Levitt and Dubner), 266 Frederick, Shane, 9–10, 50, 342nn17,19 freedom of speech, 41, 313–14 French Revolution, 337 frequency as factor in memory recall, 119 probability reframed as, 28–29, 117–18, 168–70, 349–50n27 frequentist interpretation of probability, 116, 117, 118, 128 Freud, Sigmund, 80, 90 full moon, and hospital ERs, 251–52 future, discounting of, 47–56, 320 See also goals—time-frame conflicts fuzzy categories.

Capital Allocators: How the World’s Elite Money Managers Lead and Invest by Ted Seides

Albert Einstein, asset allocation, behavioural economics, business cycle, coronavirus, COVID-19, crowdsourcing, data science, deliberate practice, diversification, Everything should be made as simple as possible, fake news, family office, fixed income, high net worth, hindsight bias, impact investing, implied volatility, impulse control, index fund, Kaizen: continuous improvement, Lean Startup, loss aversion, Paradox of Choice, passive investing, Ralph Waldo Emerson, risk tolerance, Sharpe ratio, sovereign wealth fund, tail risk, The Wisdom of Crowds, Toyota Production System, zero-sum game

Competitive advantage Successful investing requires capturing an elusive “edge.” Michael Mauboussin uses the acronym “BAIT” to describe the competitive advantage a manager may have, and which allocators seek to identify.43 B: Behavioral – managing around behavioral biases, including overconfidence, confirmation bias, anchoring, loss aversion and recency bias. A: Analytical – processing the same information better than other investors, including raw intellectual horsepower or skill in portfolio construction. I: Informational – possessing better information than other participants, such as computational power over short time horizons.

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If you can’t calm yourself or slow yourself down, your fears will run away with you.” – Michael Mervosh Positivity “We are always plagued with our fears, doubts and insecurities. It doesn’t matter who you are in the world.” – Chatri Sityodtong “People generally put much more emphasis on bad things than good things. That emanates from this concept of loss aversion.” – Michael Mauboussin “Take yourself seriously, but not too seriously.” – Seth Masters “Private optimism and public despair are an interesting conflict. On one side people are quite optimistic about themselves, but at the same time are pessimistic about the rest of the world.” – Tali Sharot “There is only so much that fits into a basket of worries.

Actionable Gamification: Beyond Points, Badges and Leaderboards by Yu-Kai Chou

Apple's 1984 Super Bowl advert, barriers to entry, behavioural economics, bitcoin, Burning Man, Cass Sunstein, crowdsourcing, Daniel Kahneman / Amos Tversky, delayed gratification, Do you want to sell sugared water for the rest of your life?, don't be evil, en.wikipedia.org, endowment effect, Firefox, functional fixedness, game design, gamification, growth hacking, IKEA effect, Internet of things, Kickstarter, late fees, lifelogging, loss aversion, Maui Hawaii, Minecraft, pattern recognition, peer-to-peer, performance metric, QR code, recommendation engine, Richard Thaler, Silicon Valley, Skinner box, Skype, software as a service, Stanford prison experiment, Steve Jobs, TED Talk, The Wealth of Nations by Adam Smith, transaction costs

That was quite an impressive figure, mainly motivated by Core Drive 4: Ownership & Possession as well as Core Drive 8: Loss & Avoidance. In fact, in higher-level Octalysis studies, you will see that building Core Drive 4 often reinforces the power of Core Drive 8, and that the Endowment Effect connects directly to our irrational sense of Loss Aversion). Monopolizing Billions Another great example of Collection Sets is seen in McDonald’s Monopoly Game28. McDonald’s wants people to buy more fast food from them - the Desired Action, so it created the McDonald’s Monopoly game where every time you hit the Win-State of “buying more burgers and fries” you will get a piece of property on the Monopoly Board.

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This is because gaining something and preventing a loss is incredibly different from the standpoint of motivation. Studies234 have shown over and over that we are much more likely to change our behavior to avoid a loss than to make a gain. It forces us to act differently and plays by different mental rules. In fact, Nobel Prize winner Daniel Kahneman indicates that on average, we are twice as loss-averse compared to seeking a gain5. This means that we have a tendency to only take on a risk if we believed the potential gain would be double the potential loss if the risk were realized. Through using the Octalysis Framework, this differentiation improves behavioral design by specifically identifying opportunities to integrate proactive loss-avoidance mechanics that generate a more suble set of motivational dynamics.

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Have you ever been on a website, where you click around before you stumble upon the conversion page (“sign-up” or “purchase”), and then see some offer that reads, “Purchase now and instantly get a 20% discount!” or “Sign-up now to receive 3000 free credits”? Often, we dismiss these offers as gimmicky, and a poor appeal to Core Drive 4: Ownership & Possession, so we ignore them. However, some sites integrate game techniques into the experience by harnessing our loss aversion tendencies. Imagine as you click around a website, there is a little popup widget that says, “Great! Your actions have earned you 500 credits!” As you click on more places, it will continue to say, “Great! Your actions have earned you 1500 credits!” Finally, when you get onto the landing page, the text reads, “You now have 3000 credits.

The End of Jobs: Money, Meaning and Freedom Without the 9-To-5 by Taylor Pearson

Airbnb, barriers to entry, Ben Horowitz, Black Swan, call centre, cloud computing, commoditize, content marketing, creative destruction, David Heinemeier Hansson, drop ship, Elon Musk, en.wikipedia.org, Frederick Winslow Taylor, future of work, Google Hangouts, Hacker Conference 1984, Kaizen: continuous improvement, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, loss aversion, low skilled workers, Lyft, Marc Andreessen, Mark Zuckerberg, market fragmentation, means of production, Oculus Rift, passive income, passive investing, Peter Thiel, power law, remote working, Ronald Reagan: Tear down this wall, scientific management, sharing economy, side hustle, side project, Silicon Valley, Skype, software as a service, software is eating the world, Startup school, Steve Jobs, Steve Wozniak, Stewart Brand, systems thinking, TED Talk, telemarketer, the long tail, Thomas Malthus, Uber and Lyft, uber lyft, unpaid internship, Watson beat the top human players on Jeopardy!, web application, Whole Earth Catalog

Your status was lowered in the tribe for the rest of your life; you might never find a mate, reproduce, and pass on your genes. This principle is called loss aversion: when directly compared to each other, losses loom larger than gains. Consider: You are offered a gamble on the toss of a coin. Heads, you win $150. Tails, you lose $100. How do you feel about it? Although the expected value is obviously positive (if you repeated the bet 100 times, you’d almost certainly come out on top), most people decline the bet. When asked: “What is the smallest gain that you need to balance an equal chance to lose $100?” most people answer $200—twice as much as the loss.28 The ratio of loss aversion has been measured at between 1.5 and 2.5, meaning people typically want to see a 150–250% expected return to make the bet.

Bold: How to Go Big, Create Wealth and Impact the World by Peter H. Diamandis, Steven Kotler

3D printing, additive manufacturing, adjacent possible, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Apollo 11, augmented reality, autonomous vehicles, Boston Dynamics, Charles Lindbergh, cloud computing, company town, creative destruction, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, deal flow, deep learning, dematerialisation, deskilling, disruptive innovation, driverless car, Elon Musk, en.wikipedia.org, Exxon Valdez, fail fast, Fairchild Semiconductor, fear of failure, Firefox, Galaxy Zoo, Geoffrey Hinton, Google Glasses, Google Hangouts, gravity well, hype cycle, ImageNet competition, industrial robot, information security, Internet of things, Jeff Bezos, John Harrison: Longitude, John Markoff, Jono Bacon, Just-in-time delivery, Kickstarter, Kodak vs Instagram, Law of Accelerating Returns, Lean Startup, life extension, loss aversion, Louis Pasteur, low earth orbit, Mahatma Gandhi, Marc Andreessen, Mark Zuckerberg, Mars Rover, meta-analysis, microbiome, minimum viable product, move fast and break things, Narrative Science, Netflix Prize, Network effects, Oculus Rift, OpenAI, optical character recognition, packet switching, PageRank, pattern recognition, performance metric, Peter H. Diamandis: Planetary Resources, Peter Thiel, pre–internet, Ray Kurzweil, recommendation engine, Richard Feynman, ride hailing / ride sharing, risk tolerance, rolodex, Scaled Composites, self-driving car, sentiment analysis, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart grid, SpaceShipOne, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Stewart Brand, Stuart Kauffman, superconnector, Susan Wojcicki, synthetic biology, technoutopianism, TED Talk, telepresence, telepresence robot, Turing test, urban renewal, Virgin Galactic, Wayback Machine, web application, X Prize, Y Combinator, zero-sum game

Thinking in first principles protects you from these errors.” When it comes to scale, these aren’t the only errors one must guard against. Daniel Kahneman and Amos Tversky won the Nobel Prize for their work on human irrationality. One great example of this is what happens when two of the most common cognitive biases—loss aversion and narrow framing—begin to overlap. Loss aversion is the idea that humans are more sensitive to losses—even small losses—than gains, while narrow framing is our tendency to treat every risk we encounter as an isolated incident. In combination, what this means is when we go to assess risk, we tend not to look at the entire picture.

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., 27 LIDAR, 43–44, 44 life-extension projects, 66, 81 Li’l Abner (comic strip), 71 Lincoln, Abraham, 109, 194 Lindbergh, Charles, 112, 244, 245, 259–60 linear growth, 7, 9 linear industries, 38, 116 exponential technologies in disrupting of, 17, 18–22 linear organizations, 15, 17, 18, 19, 20, 21, 76, 85, 116 LinkedIn, 77, 213, 231 Lintott, Chris, 220 Linux, 11, 163 Littler Workplace Policy Institute, 60 live-streaming, in crowdsourcing campaigns, 207 Lloyd, Gareth, 4 Local Motors, 33, 217, 223–25, 231, 238, 240, 241 Locke, Edwin, 23, 74, 75, 103 Lockheed, 71–72, 75 Lockheed Martin, 249 Longitude Prize, 245, 247, 267 long-term thinking, 116, 128, 130–31, 132–33, 138 Los Angeles, Calif., 258 loss aversion, 121 Louis Pasteur Université, 104 Lovins, Amory, 222 MacCready, Paul, 263 McDowell, Mike, 291n machine learning, 54–55, 58, 66, 85, 137, 167, 216 see also artificial intelligence (AI) Macintosh computer, 72 McKinsey & Company, 245 McLucas, John, 102 Macondo Prospect, 250 macrotasks, crowdsourcing of, 156, 157–58 Made in Space, 36–37 Made to Stick: Why Some Ideas Survive and Others Die (Heath and Heath), 248 MakerBot printers, 39 Makers (Doctorow), 38 MakieLabs, 39 manufacturing, 33, 41 biological, 63–64 digital, 33 in DIY communities, 223–25 robotics in, 62 subtractive vs. additive, 29–30, 31 3–D printing’s impact on, 30, 31, 34–35 Marines, US, 222 Markoff, John, 56 Mars missions, 99, 118–19, 128 Mars Oasis project, 118 Maryland, University of, 74 Maryniak, Gregg, 244 Mashable, 238 massively transformative purpose (MTP), 215, 221, 230, 231, 233, 240, 242, 274 in incentive competitions, 249, 255, 263, 265, 270 mastery, 79, 80, 85, 87, 92 materials, in crowdfunding campaigns, 195 Maven Research, 145 Maxwell, John, 114n Mead, Margaret, 247 Mechanical Turk, 157 meet-ups, 237 Menlo Ventures, 174 message boards, 164 Mexican entrepreneurs, 257–58 Michigan, University of, 135, 136 microfactories, 224, 225 microlending, 172 microprocessors, 49, 49 Microsoft, 47, 50, 99 Microsoft Windows, 27 Microsoft Word, 11 microtasks, crowdsourcing of, 156–57, 166 Mightybell, 217, 233 Migicovsky, Eric, 175–78, 186, 191, 193, 198, 199, 200, 206, 209 Millington, Richard, 233 Mims, Christopher, 290n MIT, 27, 60, 100, 101, 103, 291n mobile devices, 14, 42, 42, 46, 46, 47, 49, 124, 125, 135, 146, 163, 176 see also smartphones Modernizing Medicine, 57 monetization: in incentive competitions, 263 of online communities, 241–42 Montessori education, 89 moonshot goals, 81–83, 93, 98, 103, 104, 110, 245, 248 Moore, Gordon, 7 Moore’s Law, 6–7, 9, 12, 31, 64 Mophie, 18 moral leadership, 274–76 Morgan Stanley, 122, 132 Mosaic, 27, 32, 33, 57 motivation, science of, 78–80, 85, 87, 92, 103 incentive competitions and, 148, 254, 255, 262–63 Murphy’s Law, 107–8 Museum of Flight (Seattle), 205 music industry, 11, 20, 124, 125, 127, 161 Musk, Elon, xiii, 73, 97, 111, 115, 117–23, 128, 134, 138, 139, 167, 223 thinking-at-scale strategies of, 119–23, 127 Mycoskie, Blake, 80 Mycroft, Frank, 180 MySQL, 163 Napoléon I, Emperor of France, 245 Napster, 11 Narrative Science, 56 narrow framing, 121 NASA, 96, 97, 100, 102, 110, 123, 221, 228, 244 Ames Research Center of, 58 Jet Propulsion Laboratory (JPL) of, 99 Mars missions of, 99, 118 National Collegiate Athletic Association (NCAA), 226 National Institutes of Health, 64, 227 National Press Club, 251 navigation, in online communities, 232 Navteq, 47 Navy Department, US, 72 NEAR Shoemaker mission, 97 Netflix, 254, 255 Netflix Prize, 254–56 Netscape, 117, 143 networks and sensors, x, 14, 21, 24, 41–48, 42, 45, 46, 66, 275 information garnered by, 42–43, 44, 47, 256 in robotics, 60, 61 newcomer rituals, 234 Newman, Tom, 268 New York Times, xii, 56, 108, 133, 145, 150, 155, 220 Nickell, Jake, 143, 144 99designs, 145, 158, 166, 195 Nivi, Babak, 174 Nokia, 47 Nordstrom, 72 Nye, Bill, 180, 200, 207 “Oatmeal, the” (web comic), 178, 179, 193, 196, 200 Oculus Rift, 182 O’Dell, Jolie, 238–39 oil-cleanup projects, 247, 250–53, 262, 263, 264 Olguin, Carlos, 65 1Qbit, 59 operational assets, crowdsourcing of, 158–60 Orteig Prize, 244, 245, 259, 260, 263 Oxford Martin School, 62 Page, Carl, 135 Page, Gloria, 135 Page, Larry, xiii, 53, 74, 81, 84, 99, 100, 115, 126, 128, 134–39, 146 thinking-at-scale strategies of, 136–38 PageRank algorithm, 135 parabolic flights, 110–12, 123 Paramount Pictures, 151 Parliament, British, 245 passion, importance of, 106–7, 113, 116, 119–20, 122, 125, 134, 174, 180, 183, 184, 248, 249 in online communities, 224, 225, 228, 231, 258 PayPal, 97, 117–18, 167, 201 PC Tools, 150 Pebble Watch campaign, 174, 175–78, 179, 182, 186, 187, 191, 200, 206, 208, 209, 210 pitch video in, 177, 198, 199 peer-to-peer (P2P) lending, 172 Pelton, Joseph, 102 personal computers (PCs), 26, 76 Peter’s Laws, 108–14 PHD Comics, 200 philanthropic prizes, 267 photography, 3–6, 10, 15 demonetization of, 12, 15 see also digital cameras; Kodak Corporation Pink, Daniel, 79 Pishevar, Shervin, 174 pitch videos, 177, 180, 192, 193, 195, 198–99, 203, 212 Pivot Power, 19 Pixar, 89, 111 Planetary Resources, Inc., 34, 95, 96, 99, 109, 172, 175, 179, 180, 186, 189–90, 193, 195, 201–3, 221, 228, 230 Planetary Society, 190, 200 Planetary Vanguards, 180, 201–3, 212, 230 PlanetLabs, 286n +Pool, 171 Polaroid, 5 Polymath Project, 145 Potter, Gavin, 255–56 premium memberships, 242 PricewaterhouseCoopers, 146 Prime Movers, The (Locke), 23 Princeton University, 128–29, 222 Prius, 221 probabilistic thinking, 116, 121–22, 129 process optimization, 48 Project Cyborg, 65 psychological tools, of entrepreneurs, 67, 115, 274 goal setting in, 74–75, 78, 79, 80, 82–83, 84, 85, 87, 89–90, 92, 93, 103–4, 112, 137, 185–87 importance of, 73 line of super-credibility and, 96, 98–99, 98, 100, 101–2, 107, 190, 203, 266, 272 passion as important in, 106–7, 113, 116, 119–20, 122, 125, 134, 174, 249, 258 Peter’s Laws in, 108–14 and power of constraints, 248–49 rapid iteration and, 76, 77, 78, 79–80, 83–84, 85, 86, 120, 126, 133–34, 236 risk management and, see risk management science of motivation and, 78–80, 85, 87, 92, 103, 254, 255 in skunk methodology, 71–87, 88; see also skunk methodology staging of bold ideas and, 103–4, 107 for thinking at scale, see scale, thinking at triggering flow and, 85–94, 109 public relations managers, in crowdfunding campaigns, 193–94 purpose, 79, 85, 87, 116, 119–20 in DIY communities, see massively transformative purpose (MTP) Qualcomm Tricorder XPRIZE, 253 Quirky, 18–20, 21, 66, 161 Rackspace, 50, 257 Rally Fighter, 224, 225 rapid iteration, 76, 77, 78, 79–80, 83–84, 85, 86, 236 feedback loops in, 77, 83, 84, 86, 87, 90–91, 92, 120 in thinking at scale, 116, 126, 133–34 rating systems, 226, 232, 236–37, 240 rationally optimistic thinking, 116, 136–37 Ravikant, Naval, 174 Raytheon, 72 re:Invent 2012, 76–77 reCAPTCHA, 154–55, 156, 157 registration, in online communities, 232 Reichental, Avi, 30–32, 35 Rensselaer Polytechnic Institute, 4 reputation economics, 217–19, 230, 232, 236–37 Ressi, Adeo, 118 ReverbNation, 161 reward-based crowdfunding, 173, 174–80, 183, 185, 186–87, 195, 205, 207 case studies in, 174–80 designing right incentives for affiliates in, 200 early donor engagement in, 203–5 fundraising targets in, 186–87, 191 setting of incentives in, 189–91, 189 telling meaningful story in, 196–98 trend surfing in, 208 upselling in, 207, 208–9 see also crowdfunding, crowdfunding campaigns rewards, extrinsic vs. intrinsic, 78–79 Rhodin, Michael, 56 Richards, Bob, 100, 101–2, 103, 104 Ridley, Matt, 137 risk management, 76–77, 82, 83, 84, 86, 103, 109, 116, 121 Branson’s strategies for, 126–27 flow and, 87, 88, 92, 93 incentive competitions and, 247, 248–49, 261, 270 in thinking at scale, 116, 121–22, 126–27, 137 Robinson, Mark, 144 Robot Garden, 62 robotics, x, 22, 24, 35, 41, 59–62, 63, 66, 81, 135, 139 entrepreneurial opportunities in, 60, 61, 62 user interfaces in, 60–61 Robot Launchpad, 62 RocketHub, 173, 175, 184 Rogers, John “Jay,” 33, 38, 222–25, 231, 238, 240 Roomba, 60, 66 Rose, Geordie, 58 Rose, Kevin, 120 Rosedale, Philip, 144 Russian Federal Space Agency, 102 Rutan, Burt, 76, 96, 112, 127, 269 San Antonio Mix Challenge, 257–58 Sandberg, Sheryl, 217, 237 Santo Domingo, Dominican Republic, 3 Sasson, Steven, 4–5, 5, 6, 9 satellite technology, 14, 36–37, 44, 100, 127, 275, 286n scale, thinking at, xiii, 20–21, 116, 119, 125–28, 148, 225, 228, 243, 257 Bezos’s strategies for, 128, 129, 130–33 Branson’s strategies for, 125–27 in building online communities, 232–33 customer-centric approach in, 116, 126, 128, 130, 131–32, 133 first principles in, 116, 120–21, 122, 126, 138 long-term thinking and, 116, 128, 130–31, 132–33, 138 Musk’s strategies for, 119–23, 127 Page’s strategies for, 136–38 passion and purpose in, 116, 119–20, 122, 125, 134 probabilistic thinking and, 116, 121–22, 129 rapid iteration in, 116, 126, 133–34 rationally optimistic thinking and, 116, 136–37 risk management in, 116, 121–22, 126–27, 137 Scaled Composites, 262 Schawinski, Kevin, 219–21 Schmidt, Eric, 99, 128, 251 Schmidt, Wendy, 251, 253 Schmidt Family Foundation, 251 science of motivation, 78–80, 85, 87, 92, 103 incentive competitions and, 148, 254, 255, 262–63 Screw It, Let’s Do It (Branson), 125 Scriptlance, 149 Sealed Air Corporation, 30–31 Second Life, 144 SecondMarket, 174 “secrets of skunk,” see skunk methodology Securities and Exchange Commission (SEC), US, 172 security-related sensors, 43 sensors, see networks and sensors Shapeways.com, 38 Shingles, Marcus, 159, 245, 274–75 Shirky, Clay, 215 ShotSpotter, 43 Simply Music, 258 Singh, Narinder, 228 Singularity University (SU), xi, xii, xiv, 15, 35, 37, 53, 61, 73, 81, 85, 136, 169, 278, 279 Six Ds of Exponentials, 7–15, 8, 17, 20, 25 deception phase in, 8, 9, 10, 24, 25–26, 29, 30, 31, 41, 59, 60 dematerialization in, 8, 10, 11–13, 14, 15, 20–21, 66 democratization in, 8, 10, 13–15, 21, 33, 51–52, 59, 64–65, 276 demonetization in, 8, 10–11, 14, 15, 52, 64–65, 138, 163, 167, 223 digitalization in, 8–9, 10 disruption phase in, 8, 9–10, 20, 24, 25, 29, 32, 33–35, 37, 38, 39, 256; see also disruption, exponential Skonk Works, 71, 72 skunk methodology, 71–87, 88 goal setting in, 74–75, 78, 79, 80, 82–83, 84, 85, 87, 103 Google’s use of, 81–84 isolation in, 72, 76, 78, 79, 81–82, 257 “Kelly’s rules” in, 74, 75–76, 77, 81, 84, 247 rapid iteration approach in, 76, 77, 78, 79–80, 83–84, 85, 86 risk management in, 76–77, 82, 83, 84, 86, 87, 88 science of motivation and, 78–80, 85, 87, 92 triggering flow with, 86, 87 Skunk Works, 72, 75 Skybox, 286n Skype, 11, 13, 167 Sloan Digital Sky Survey, 219–20 Small Business Association, US, 169 smartphones, x, 7, 12, 14, 15, 42, 135, 283n apps for, 13, 13, 15, 16, 28, 47, 176 information gathering with, 47 SmartThings, 48 smartwatches, 176–77, 178, 191, 208 software development, 77, 144, 158, 159, 161, 236 in exponential communities, 225–28 SolarCity, 111, 117, 119, 120, 122 Space Adventures Limited, 96, 291n space exploration, 81, 96, 97–100, 115, 118, 119, 122, 123, 134, 139, 230, 244 asteroid mining in, 95–96, 97–99, 107, 109, 179, 221, 276 classifying of galaxies and, 219–21, 228 commercial tourism projects in, 96–97, 109, 115, 119, 125, 127, 244, 246, 261, 268 crowdfunding campaigns for, see ARKYD Space Telescope campaign incentive competitions in, 76, 96, 109, 112, 115, 127, 134, 139, 246, 248–49, 260, 261, 262, 263, 264, 265, 266, 267, 268, 269 International Space University and, 96, 100–104, 107–8 Mars missions in, 99, 118–19, 128 see also aerospace industry Space Fair, 291n “space selfie,” 180, 189–90, 196, 208 SpaceShipOne, 96, 97, 127, 269 SpaceShipTwo, 96–97 SpaceX, 34, 111, 117, 119, 122, 123 Speed Stick, 152, 154 Spiner, Brent, 180, 200, 207 Spirit of St.

Ghost Road: Beyond the Driverless Car by Anthony M. Townsend

A Pattern Language, active measures, AI winter, algorithmic trading, Alvin Toffler, Amazon Robotics, asset-backed security, augmented reality, autonomous vehicles, backpropagation, big-box store, bike sharing, Blitzscaling, Boston Dynamics, business process, Captain Sullenberger Hudson, car-free, carbon footprint, carbon tax, circular economy, company town, computer vision, conceptual framework, congestion charging, congestion pricing, connected car, creative destruction, crew resource management, crowdsourcing, DARPA: Urban Challenge, data is the new oil, Dean Kamen, deep learning, deepfake, deindustrialization, delayed gratification, deliberate practice, dematerialisation, deskilling, Didi Chuxing, drive until you qualify, driverless car, drop ship, Edward Glaeser, Elaine Herzberg, Elon Musk, en.wikipedia.org, extreme commuting, financial engineering, financial innovation, Flash crash, food desert, Ford Model T, fulfillment center, Future Shock, General Motors Futurama, gig economy, Google bus, Greyball, haute couture, helicopter parent, independent contractor, inventory management, invisible hand, Jane Jacobs, Jeff Bezos, Jevons paradox, jitney, job automation, John Markoff, John von Neumann, Joseph Schumpeter, Kickstarter, Kiva Systems, Lewis Mumford, loss aversion, Lyft, Masayoshi Son, megacity, microapartment, minimum viable product, mortgage debt, New Urbanism, Nick Bostrom, North Sea oil, Ocado, openstreetmap, pattern recognition, Peter Calthorpe, random walk, Ray Kurzweil, Ray Oldenburg, rent-seeking, ride hailing / ride sharing, Rodney Brooks, self-driving car, sharing economy, Shoshana Zuboff, Sidewalk Labs, Silicon Valley, Silicon Valley startup, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, SoftBank, software as a service, sovereign wealth fund, Stephen Hawking, Steve Jobs, surveillance capitalism, technological singularity, TED Talk, Tesla Model S, The Coming Technological Singularity, The Death and Life of Great American Cities, The future is already here, The Future of Employment, The Great Good Place, too big to fail, traffic fines, transit-oriented development, Travis Kalanick, Uber and Lyft, uber lyft, urban planning, urban sprawl, US Airways Flight 1549, Vernor Vinge, vertical integration, Vision Fund, warehouse automation, warehouse robotics

But give us that same choice and tick one option as the default—and we’re highly likely to go with the flow. One reason why we abhor change is fear, a related phenomenon behavioral economists call loss aversion. Sometime long ago in our evolutionary history, it seems that natural selection favored those individuals inclined to weigh the risk of future losses more heavily than the possibility of future gains. Loss aversion is what keeps us from pursuing our dreams, confessing a crush, or trying a new flavor. We simply find it hard to imagine the world getting any better—or more precisely, we can’t imagine it being any different—than it is now.

…

., 84–85, 94 Keolis, 104 Khashoggi, Jamal Ahmad, 178 Khosrowshahi, Dara, 98, 179 Kia, 31 Kim, Sangbae, 46 King, David, 132, 247 King, Steven, 42 kipple, defined, 142–43 Kitchen United, 139 Kiva Systems, 136, 137 Kiwibots, 57 Knightley’s (Wichita, KS), 192 Koch, Charles and David, 40 Kohlhase, Janet, 130, 206 Kohn Pedersen Fox, 209, 211 Koolhaas, Rem, 206 KPMG, 117, 218 Kurzweil, Ray, 234 Ladd, Brian, 80 last mile continuous delivery and, 121–29 conveyors and, 124–25 cost savings, 130 driverless shuttles, 60, 123n falling costs and demand, 130–32, 131 in food delivery, 140, 147 freight AVs, 125–26, 130 Hannah school buses, 127 nighttime delivery, 128–29, 130, 217 origin of term, 122 package lockers and, 127, 130, 219, 221 piggybacking deliveries, 126–27 term use in shipping, 123n legibility, 229–30, 231 Legible London, 230 Leonhardt, David, 8–9 Les Vergers Ecoquartier (Switzerland), 202 Levandowski, Anthony, 40, 68 Levy, Frank, 150, 151, 152 lidar, 34–35 Ligier Group, 103 Lime Bike, 67 “Living Machine, The” (Keller), 83–85, 94, 237 loss aversion, 50 Lowe’s, 116 Lufa Farms, 147 Luks, George, 174 Lyft competition with Uber, 177–78, 179 initial public offering, 97, 177 market cap, 97 number of vehicles, 10 relationship with transit, 215 specialization and variety of rides, 95, 96 subscriptions, 244 taxibots, 97 traffic congestion and, 168 Lynch, Kevin, 228–30 MaaS.

The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

"World Economic Forum" Davos, Abraham Maslow, Albert Einstein, asset allocation, assortative mating, Atul Gawande, behavioural economics, Bernie Madoff, business process, Cass Sunstein, choice architecture, classic study, clean water, cognitive load, creative destruction, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fake it until you make it, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Jeff Hawkins, Joseph Schumpeter, labor-force participation, language acquisition, longitudinal study, loss aversion, medical residency, meta-analysis, mirror neurons, Monroe Doctrine, Paul Samuelson, power law, Richard Thaler, risk tolerance, Robert Shiller, school vouchers, six sigma, social intelligence, Stanford marshmallow experiment, Steve Jobs, Steven Pinker, tacit knowledge, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Walter Mischel, young professional

In the nonaroused state, 20 percent said they would try to have sex with their date after she said no. In the aroused state, 45 percent said they would keep trying. Finally, there is loss aversion. Losing money brings more pain than winning money brings pleasure. Daniel Kahneman and Amos Tversky asked people if they would accept certain bets. They found that people needed the chance of winning $40 if they were going to undergo a bet that might cost them $20. Because of loss aversion investors are quicker to sell stocks that have made them money than they are to sell stocks that have been declining. They’re making self-destructive decisions because they don’t want to admit their losses.

…

Ornstein, Multimind: A New Way of Looking at Human Behavior (New York: Houghton Mifflin, 1996), 86. 21 high Social Security numbers Dan Ariely, “The Fallacy of Supply and Demand,” Huffington Post, March 20, 2008, http://www.huffingtonpost.com/dan-ariely/the-fallacy-of-supply-and_b_92590.html. 22 People who are given Hallinan, 50. 23 “Their predictions became” Jonah Lehrer, How We Decide (New York: Houghton Mifflin Co., 2009), 146. 24 They just stick with Thaler and Sunstein, 34. 25 The picture of the smiling Hallinan, 101. 26 In the aroused state Ariely, 96 and 106. 27 Daniel Kahneman and Amos Tversky Jonah Lehrer, “Loss Aversion,” The Frontal Cortex, February 10, 2010, http://scienceblogs.com/cortex/2010/02/loss_aversion.php. CHAPTER 12: FREEDOM AND COMMITMENT 1 In Guess culture Oliver Burkerman, “This Column Will Change Your Life,” The Guardian, May 8, 2010, http://www.guardian.co.uk/lifeandstyle/2010/may/08/change-life-asker-guesser. 2 Thirty-eight percent of young Americans “Pew Report on Community Satisfaction,” Pew Research Center (January 29, 2009): 10, http://pewsocialtrends.org/assets/pdf/Community-Satisfaction.pdf. 3 In Western Europe William A.

The Fissured Workplace by David Weil

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, behavioural economics, business cycle, business process, buy and hold, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, company town, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, independent contractor, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, long term incentive plan, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, seminal paper, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Triangle Shirtwaist Factory, ultimatum game, union organizing, vertical integration, women in the workforce, yield management

If the pay of the group just above me is too high—or if the gap widens over time—I may be less and less happy with the pay I receive, regardless of its absolute level. Psychologists have long known that people care more about a small loss in income than about an equal gain in income.25 This effect—called loss aversion—means that perceptions of being adversely affected by a change in a current situation will make people feel worse than a comparable improvement in position makes them feel better. In a workplace context, loss aversion means that if a worker’s pay situation changes in a way that is judged unfair, it will have larger effects than if the situation changes in a way that is judged as improving fairness. Wage comparisons across different occupations or jobs can have this effect.

…

In so doing, “a predictable salary progress schedule not only should help to reduce uncertainty about future pay but also should prevent the development of false expectations. In addition it should minimize dysfunctional competition between individuals for favored treatment.” Quoted in Foulkes (1980, 186). 25. Fehr, Goette, and Zehnder (2009, 378). The literature on loss aversion and “framing” in psychology is extensive. The seminal papers are Tversky and Kahneman (1974) and Kahneman and Tversky (1984). Kahneman (2011) provides an overview of the extensive research in the field in the decades following those landmark works. 26. Slichter, Healy, and Livernash (1960) explained the common practice of uniform pay increases with job grades with minimal performance evaluation in union and nonunion facilities as an outgrowth of union avoidance and the constant problems of defending merit-based evaluations in the minds of workers.

…

Yensavage, 347n50 Lenny, Richard, 115 Lettire Construction, 233–234 Liability: as issue in fissuring, 78; tests to assess, 186, 190; vicarious liability defined, 189; and subcontracting, 190–192; and multiemployer settings, 192–195, 233–234; and franchising, 195–201; and supply chain relationships, 201–203 Lilly Ledbetter Fair Pay Act, 209 Litton Industries, 36 Locke, Richard, 174, 264, 365n39, 366n41 Logistics industry: and outsourcing, 57–58, 63; and fissuring, 96, 117–118, 160–167 Loss aversion, 85–86 LRSolutions, 275–276 Lyons and Sons, 115–117, 321n55 Maintenance services, and outsourcing, 55–56 Markets. See Capital markets; Financial markets; Internal labor markets; Labor market; Stock market Marriott, 2–3, 146, 150; and branding, 331n54 Massachusetts: and franchising, 198–199; and presumption of employee status, 204–205 Massey Doctrine, 102–103, 107, 369n17 Massey Upper Big Branch (mine disaster), 238 McDonald’s, 127, 259, 261, 323n4, 325n14; Miller v.

#Republic: Divided Democracy in the Age of Social Media by Cass R. Sunstein

A Declaration of the Independence of Cyberspace, affirmative action, Affordable Care Act / Obamacare, Alvin Toffler, behavioural economics, Bernie Sanders, Black Lives Matter, Cass Sunstein, choice architecture, digital divide, Donald Trump, drone strike, Erik Brynjolfsson, fake news, Filter Bubble, friendly fire, global village, illegal immigration, immigration reform, income inequality, Jane Jacobs, John Perry Barlow, loss aversion, Mark Zuckerberg, obamacare, Oklahoma City bombing, prediction markets, road to serfdom, Ronald Reagan, Silicon Valley, Skype, Snapchat, stem cell, The Chicago School, The Death and Life of Great American Cities, the long tail, The Wisdom of Crowds, Twitter Arab Spring, WikiLeaks, Yochai Benkler

But there is narrowing as well, in the form of communities of niches. One of my own fields is behavioral science, and with the help of Twitter, those of us who are interested in that field can easily find each other. If you want to learn about the latest developments, Twitter is a great help. For example, behavioral scientists are interested in “loss aversion,” which means that people dislike losses more than they like corresponding gains. If you’re interested in new examples, exceptions, or elaborations of the behavioral finding, Twitter is terrific. And yes, there is a #lossaversion. That’s great, but for academics in any particular field, there’s a risk that Twitter will contain echo chambers just for them.

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Kelly, 114–15 Gates, Bill, 52–53, 134, 196 general-interest intermediaries: bias and, 148; citizens and, 166; Daily Me and, 20; as default, 25; improving, 230; judgment and, 43; mass media and, 18–19; newspapers and, 13 (see also newspapers); polarization and, 84; power of, 18; republicanism and, 253, 257, 260–61; self-insulation and, 13; shared experiences and, 152; social clarity and, 142–43; spreading information and, 140–43, 148, 151–52, 156; television and, 13 (see also television); as unacknowledged public forums, 41–44, 58 genetically modified organisms (GMOs), 59, 100, 130–32, 217 Gentzkow, Matthew, 115–16, 120–21 Gerken, Heather, 85 Germany, ix, 6, 17, 19, 25, 32, 34, 73, 203, 237 global warming, 68–69, 88, 217 Goodman, Jack, 197–98 Google, 3, 28, 37, 53, 118, 229, 265n2 greenhouse gases, 9, 127, 130–32, 218 group identity, 75–78, 81 Guess, Andrew, 116–17 Habermas, Jürgen, 46–47 Haberstam, Yosh, 120 hacking, 109, 178, 184, 186, 188, 201 Hale, Scott, 105–6, 108 Hamilton, Alexander, 49, 54 Hand, Learned, 249–50 Hardball (TV show), 120 Hardin, Russell, 240 Harvard University, 160 hashtags, 3, 43, 119, 245, 271n23; Congress and, 82; Democrats and, 80–81; entrepreneurs and, 4, 79–82; Internet Relay Chats and, 79; polarization and, 59, 79–82; Republicans and, 80–81; serendipity and, 79–81; Trump and, 83 hate groups, 67–68, 70, 87, 236 HBO, 179 health issues: Affordable Care Act (ACA) and, 81, 129; AIDS/HIV and, 110; bandwagon diseases and, 100; conspiracies and, 125–26; cybercascades and, 99–101; deliberative opinion polls on, 133; democracy and, 23, 29; false information and, 110; famine as metaphor and, 149; GMOs and, 59, 100, 130–32; insurance premiums and, 129; OSHA and, 218–19 Hebrew University, 112 Her (Jonze film), 20–22, 33 heterogeneous society: anti-federalists and, 48; fragmentation and, 51, 135; improving, 216; mass media and, 19; opinion polls and, 134; polarization and, 84, 86, 88–89; public forums and, 38–39, 41, 43; republicanism and, 257, 262; shared experiences and, 140; social problems and, 7; spreading information and, 140, 145, 155; US Constitution and, 48–51 Himelboim, Itai, 118–19 Hitler, Adolf, ix HIV, 110 holidays, 7, 141–42, 242 Holmes, Oliver Wendell, 52–57, 247–48, 250 homogeneous society: Facebook and, 125; polarization and, 69, 86, 92; social media bias and, 135; spreading information and, 151; Twitter and, 119; US Constitution and, 48–51; virtual world and, 13 homophily, 1–2, 5, 117–22 How to Win Friends and Influence People (Carnegie), 160 Huffington Post, 117, 123 Hughes, Chris, 82 human rights, 107 Hurricane Katrina, 19, 139 Hussein, Saddam, 94 Huxley, Aldous, x, 21 ideal speech situation, 47 identity: culture and, 129–35; group, 75–77, 81; judgment and, 129–35; shared, 239 ideologies: cultural cognition and, 129–30; cybercascades and, 115–23, 127, 131; polarization and, 61–62, 65, 81, 94–95; republicanism and, 260; spreading information and, 140; values and, 11, 14–15, 22, 30, 52, 75, 101, 113, 126–32, 142, 145, 163, 165, 169, 227, 232, 235, 253, 258; website choice and, 5, 25 ILOVEYOU virus, 176–78, 186, 191, 207 immigration, 1, 3–4, 11, 19, 39, 66, 129, 159, 235, 246 inert people, ix, 56, 145, 204, 261 information: advertising and, 146, 152–53; algorithms and, 3, 15, 21–22, 28–29, 32, 122–24, 257, 265n2; backfiring corrections and, 93–97, 111; bias and, 151–53 (see also bias); conspiracies and, 124–26; consumer sovereignty and, 52–53 (see also consumer sovereignty); copyright and, 29, 184–85, 195, 200–201, 219; cultural cognition and, 129–30; customized filtering and, 52–53 (see also filtering); cybercascades and, 98–136; Daily Me and, 1–4, 14–15, 19–21, 30–31, 52, 56, 58–59, 114, 153, 253, 255; disclosure policies and, 215, 218–23; easy creation of, 27–28; Emergency Planning and Community Right-to-Know Act and, 218; exposure and, 40–41; false, 11, 23, 109–10, 135, 155, 237, 250; fragmentation and, 140–41, 146, 149–55 (see also fragmentation); general-interest intermediaries and, 140–43, 148, 151–52, 156; hashtags and, 3–4, 43, 59, 79–83, 119, 245, 271n23; Internet and, 31, 138, 143–44, 148–54 (see also Internet); must-carry rules and, 215, 226–29; News Feed and, 2, 14–16, 41, 124, 232–33; preferences and, 58; producers and, 145–46; as product, 149; propaganda and, 109, 160, 236–37, 239, 245, 248–50; public forums and, 142, 156 (see also public forums); as public good, 45, 51, 57–58, 147–48, 260; reinforcement and, 63, 72, 78, 81, 114–15, 132, 148, 260–61; rumors and, 103, 108–11, 125, 236–37; self-imposed echo chambers and, 5–13, 17, 20, 50, 57, 59, 68, 71, 81, 90, 93, 114–18, 122–24, 131–32, 153, 163, 244, 262–64; social glue and, 7, 140, 143, 155, 260; social media and, 138–39, 148, 150, 152, 154–55; solidarity goods and, 58, 141–44; sound bites and, 43, 151, 224, 268n19; tipping points and, 102–4, 108–11; trending petitions and, 106; up/down votes and, 112–13; as wildfire, 102–4 innovation, 5, 133, 183, 243 “Inspire” (online terrorist journal), 236 Instagram, 22; cybercascades and, 114; polarization and, 79, 83, 89; public forums and, 36–37; regulation and, 179; spreading information and, 138, 149; terrorism and, 237–38 Internet: access to, 30; advertising and, 28; algorithms and, 3, 15, 21–22, 28–29, 32, 122–24, 257, 265n2; architecture of, 13; baselines and, 23; beginnings of, 181–86; Berners-Lee and, 183; bomb-making instructions and, 192, 235–37; browsing habits and, 5, 21–22, 116, 124; citizens and, 158, 160, 164, 169, 171–74; commercialization of, 183; consumer effect of, 171–74; conveniences of, 31–32; copyright and, 29; cybercascades and, 102, 108–11, 115–16, 123, 133–35; DARPA and, 182–83; death of mass media and, 19; deliberative domains and, 215–17; filtering and, 25–26 (see also filtering); forms of neutrality and, 207–10; free content and, 28; freedom of speech and, 192, 201–10; hashtags and, 3–4, 43, 59, 79–83, 119, 245, 271n23; ideologies and, 5, 25; ILOVEYOU virus and, 176–78, 186, 191, 207; improving, 215–16, 223, 226, 228–29; information available on, 31; isolation index and, 116, 120; legal issues and, 184–88; most popular sites on, 171–72; music and, 3, 21, 31–34, 64, 102, 104–8, 159, 192; online behavior and, 22–23, 65, 83, 98, 116–17, 130, 234–35; overload and, 63–68; Pariser and, 265n2; partyism and, 10; polarization and, 59–60, 64–68, 70, 72, 76–79, 86, 89; politics and, 116–17; potential of, 24; as public forum, 36; public sphere and, 153; regulation and, 178, 182–90; republicanism and, 253–61; self-insulation and, 13; shared experience and, 143; social media and, 22 (see also social media); sovereignty and, 52, 55; spreading information and, 138, 143–44, 148–54; tabloidization and, 223–24; terrorism and, 234–38, 240–43, 245–47; as threat, ix–x; websites and, 3, 6, 13, 22, 27–28, 32–33, 59–60, 62, 65, 67, 106–12, 146, 154, 166, 179, 185–94, 207–8, 212–17, 222–25, 229, 235, 242, 255, 268n18 Internet Relay Chats, 79 Iraq, 18, 42, 64, 93–94, 98, 242 ISIS, 238, 244 Islamic State of Iraq and Levant (ISIL), 98, 234, 236, 239, 241–48, 283n22 isolation: filtering and, 27, 38, 64, 98, 115–16, 120–22, 234, 242–43, 254, 265n2; index for, 115–16, 120–21; self-imposed echo chambers and, 5–13, 17, 20, 50, 57, 59, 68, 71, 81, 90, 93, 114–18, 122–24, 131–32, 153, 163, 244, 262–64 Israel, 6, 87, 91, 140–41, 245–46, 284n31 Italy, 6, 124, 203 Jacobs, Jane, 12–13, 260 jarring of parties, 49, 54 Jefferson, Thomas, 51–52 Jews, 96, 185 Jiabao, Wen, 139 jihad, 239, 241–42 John, Peter, 105–6, 108 Jonze, Spike, 20–22, 33 judgment: citizens and, 167, 169–70; cybercascades and, 99, 101–2, 127–35; freedom of speech and, 206; general-interest intermediaries and, 43; identity and, 129–35; insulation and, 51; prediction and, 28; republicanism and, 259, 261; sound bites and, 268n19; strengthening preexisting, 34; terrorism and, 235 Kahan, Dan, 129–31 Kahneman, Daniel, 17–18 Kennedy, Anthony, 36–37 King, Gary, 160–61 Knight, Brian, 120 Koran, 239 Kossinets, Gueorgi, 118 Ku Klux Klan, 109 Lazzaro, Stephanie, 127 legal issues: behavior and, 220–21; Brandeis and, 52–56, 145, 203, 220, 228, 247–48, 250–51; child-support and, 133; commercial speech and, 193, 205, 207; communications and, 220, 227; constitutional doctrine and, 192–201, 204 (see also constitutional doctrine); copyright and, 29, 184–85, 195, 200–201, 219; deliberative democracy and, 25, 34, 44, 48, 55–56, 86, 92, 133–35, 169, 195, 215–17, 220, 222, 228; Dewey and, 252; disclosure policies and, 215, 218–23; educational programming for children and, 170, 181, 197–99, 202, 204–5, 210–11, 221, 226; Facebook’s complicity in terrorism and, 246; First Amendment and, 36, 193, 195–207, 212, 227–28, 231; forms of neutrality and, 207–10; Fourteenth Amendment and, 199; fraud and, 2–6, 74, 109, 200–201, 258; freedom of speech and, 55–56, 191–212; Hand and, 249–50; Holmes and, 52–56, 247–48, 250; interference in communications market and, 177–79; Internet and, 184–88; must-carry rules and, 215, 226–29; national security and, 4, 42, 74, 178, 186, 216, 246; Nuremberg Files and, 191–92, 208; President’s Advisory Committee on the Public Interest Obligations of Digital Television Broadcasters and, 196–98; privacy and, 178, 225, 237, 243; property rights and, 179–90, 194, 258; Second Amendment and, 119, 198, 234; self-protection against illegal immigrants and, 235; sexual harassment and, 101; terrorism and, 246–47; unfreedom and, 163; US Constitution and, 247 (see also US Constitution) Lessig, Lawrence, 184 liberals: blogs and, 231; Colorado experiment and, 68–70, 77; confirmation bias and, 123; cybercascades and, 114–23; differing points of view and, 230; Facebook and, 3, 232; foxnews.com and, 228; fragmentation and, 10; polarization and, 61, 64, 68–70, 74, 84–85, 90, 94–95 liberty, 5, 11, 52, 138, 174, 204 limited argument pool, 72, 76 limited options, 164–67, 174 Littleton, Colorado attack, 236 lone-wolf attacks, 241, 244–45 long tails, 149–51, 171 Lorenz, Jan, 113–14 Los Angeles Times, 19, 152 loss aversion, 59 machine learning, 4–5 Madison, James, 45, 51–52, 203, 261 magazines: bias and, 152; choice of, 18; isolation and, 116; free content and, 229; general-interest intermediaries and, 41–42, 257; points of view and, 18, 66, 230; public forums and, 41–42; regulation and, 179, 181–82, 184, 187, 189; Twitter and, 118 majority rule, 53–54, 169–70 Malik, Tashfeen, 241 manipulation, 17, 28–29, 95, 164 Mao Tse-tung, ix Margetts, Helen, 105–6, 108 Marginal Revolution, 22 Martin, Gregory J., 61 martyrdom, 241 mass media: behavior and, 19; bias and, 151–52; death of, 19; echo chambers and, 116; freedom of speech and, 203; as general-interest intermediaries, 18–19; heterogeneous society and, 19; improving, 222; opposing viewpoints and, 71, 84, 207, 215, 231–33, 255; public forums and, 36–37; public sphere and, 153–54.

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., 126–27 MSNBC, 61–62 Muchnik, Lev, 112 murder, 9, 109, 113–14, 192, 249 music, 21; artificial lab for, 102–4; consumption and, 3, 31–34, 64, 159, 192; cybercascades and, 102–8; preferences and, 3, 32–33; Rodriguez and, 103–5 Muslims, 79, 109, 235, 237, 239, 242, 248 must-carry rules, 215, 226–29 nanotechnology, 95–96, 129 National Association of Broadcasters, 197–98, 221 National Public Radio (NPR), 64–65 National Review magazine, 231 National Rifle Association, 198, 236 National Science Foundation, 183 national security, 4, 42, 74, 178, 186, 216, 246 Nation magazine, 230 Nazism, 87 NBC, 61–62, 152, 179–80, 198 Negroponte, Nicholas, 1–2 Netflix, 32–33, 150, 229 net neutrality, 29 Netscape, 171 New England Journal of Medicine, 100 newspapers: bias and, 151–52; curation and, 1; customized, 53; decline of, 20; education and, 20; freedom of speech and, 196; free society and, 18–19; ideological segregation and, 121; improving, 222–23, 227, 229, 233; isolation and, 116; particular histories of, 20; polarization and, 61, 66, 71, 84; public forums and, 13, 41–42; regulation and, 179, 181–82, 187, 189; republicanism and, 257; tabloidization and, 223–24; technology and, 152–53 Newsweek magazine, 18–19, 42 New York Review of Books, 19, 153 New York Times, 18, 22, 94–95, 120, 144, 152–53, 232 niches: cybercascades and, 115, 118; enclaves and, 85–89, 238, 253–56; fragmentation and, 23; markets and, 20, 27, 149–51, 253, 256; polarization and, 59–60; rise of, 8; spreading information and, 149–51 Nineteen Eighty-Four (Orwell), ix, 12, 21 Nobel Prize, 17, 187 Noell-Neumann, Elisabeth, 73 nostalgia, 8, 57–58, 259–61 Nuremberg Files, 191–92, 208 Obama, Barack, 2, 11, 79, 81–83, 87, 100, 104, 109, 113, 168, 246, 263 Occupational Safety and Health Administration (OSHA), 218–19 Oklahoma City bombing, 236 online behavior, 22–23, 65, 83, 98, 116–17, 130, 234–35 Open Government Partnership, 219 open-source software, 79, 184 opinion polls, 126, 133–35, 216, 268n19 opposing viewpoints, 71, 84, 207, 215, 231–33, 255 optimism, 8, 97 organic food, 131 Orkut, 22 Orlando nightclub shootings, 236 Orwell, George, ix, 12, 21 Ostrom, Elinor, 187–88 overload, 63–68 Palestine, 239, 245–46, 284n31 Pandora, 22, 32–33 Pariser, Eli, 265n2 partyism, 9–12, 25 paternalism, 167 PBS, 179, 225–26 penalties, 34–35, 92, 210–12, 246 Perez, Heather, 244 Periscope, 83 pessimism, 8, 16, 259–61 Pew Research Center, 126 Pokémon Go game, 22 polarization: abortion and, 66, 81, 90, 191–92, 208–9; advertising and, 63; appropriately slanted stories and, 62–63; backfiring corrections and, 93–97, 111; balkanization and, 66, 70, 73, 89, 111, 259; behavior and, 59, 61, 65–66, 83; bias and, 63, 92, 97; blogs and, 63, 79; Colorado experiment and, 68–70, 77; communications and, 25, 60, 63–64, 70, 75, 84–86, 89–92; confidence and, 74–75; conservatives and, 61, 64, 68–70, 72–75, 80, 84–85, 90, 94–95; conspiracies and, 124–26; consumer sovereignty and, 89; corroboration and, 74–75; crime and, 64, 92; cybercascades and, 82; cyberpolarization and, 68; Daily Me and, 59; deliberative democracy and, 86, 92; Democrats and, 61, 65, 70, 72, 76, 80–81, 90, 95; depolarization and, 89–92; diversity and, 69, 85–86; echo chambers and, 59, 68, 71, 81, 90, 93; emotion and, 82, 96–97; enclaves and, 85–89; entreprenuers of, 238; extremism and, 7, 67, 69, 72, 74, 76, 78, 86, 88; Facebook and, 64, 71–72, 82–83, 86, 89; fairness doctrine and, 84–85, 207, 221, 227; filtering and, 60–62, 64, 66, 71, 79, 82; fragmentation and, 5, 7, 64, 77, 83–86, 89, 221; general-interest intermediaries and, 84; group, 68, 70–79, 82–91, 93, 97, 118, 133, 146, 155, 234, 240, 253–54, 259, 277n67; groupism and, 63–68; hashtags and, 59, 79–82; heterogeneous society and, 84, 86, 88–89; homogeneous society and, 69, 86, 92; ideologies and, 61–62, 65, 81, 94–95; importance of group identity and, 75–78, 81; improving situation of, 213–14, 221; Instagram and, 79, 83, 89; Internet and, 59–60, 64–68, 70, 72, 76, 78–79, 86, 89; Jon Stewart strategy and, 77; liberals and, 61, 64, 68–70, 74, 84–85, 90, 94–95; limited argument pool and, 72, 76; loss aversion and, 59; newspapers and, 61, 66, 71, 84; niches and, 59–60; online, 76–79; overload and, 63–68; persuasive arguments and, 71–72; preferences and, 65, 68; producers and, 146; public forums and, 84, 88; racism and, 80–81; radicalization and, 45, 74–75, 235, 237, 241–42, 244–46; radio and, 64, 66, 71–73, 75, 83–85; Republicans and, 61–65, 70, 72, 76, 80–81, 83, 90, 95; reputational considerations and, 72–74; social media and, 59, 62–63, 66, 68, 70–71, 73, 75, 78–89, 93, 95; strong convictions and, 63, 66–67, 72, 95–97; television and, 62, 64, 66, 71–73, 75, 77, 83–84; terrorism and, 234, 238, 240; Twitter and, 59, 64, 71–72, 74, 79–83, 87, 89, 95, 278n16; unbalanced views and, 92–93; unfamiliar issues and, 95–96 Political Turbulence (Margetts, John, Hale, and Yasseri), 105–6 politics: activists and, 80, 82, 178, 234, 235, 242; authoritarianism and, x, 11, 38, 73, 98, 108, 160, 165, 254; campaign finance and, 193–94; Citizens United case and, 193–94; Clintons and, 15, 59, 104, 109, 117; Colorado experiment and, 68–70, 77; communications and, 54; communism and, ix, 4, 80, 164, 189, 248; confirmation bias and, 123; conservatives and, 61 (see also conservatives); cybercascades and, 104–8; democracy and, 4 (see also democracy); Democrats and, 10 (see also Democrats); Dennis v.

Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

Then in his early twenties, Samuelson had already made his reputation by having published more papers than he was years old. bern_c03.qxd 40 3/23/07 9:01 AM Page 40 THE THEORETICIANS then he adds, “There is a separate love for the sport of gambling. But that is independent of the way they respond to the more serious business of managing their wealth. There loss aversion prevails.” From Samuelson’s point of view, the existence of a positive alpha somewhere is not an exception to the Efficient Market Hypothesis but a kind of vindication of the logic of it. There are rare occasions when an investor succeeds in earning positive alpha—beating the market after adjustment for risk by gaining access to information earlier than other investors or by discovering mispriced assets other investors ignored.

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“Y * Unless otherwise specif ied, all quotations are from personal interviews or correspondence. 100 bern_c08.qxd 3/23/07 9:05 AM Page 101 Harry Markowitz 101 Today’s Harry Markowitz has no preconceived notions about how “recognizable economic agents” actually make decisions and act, even though he has strong convictions on how they should act. After all, as he points out, you can look at stock prices swinging up and down every day, but what you observe reveals nothing about what is going on under the surface, such as the degree to which investors are succumbing to the overconfidence and loss aversion featured in Behavioral Finance. Markowitz has wanted to explore in detail how stock prices would behave in a market where some investors have behavioral quirks while others are coolly rational. He is also interested in studying the consequences for stock prices when some investors take on risks that differ from the risks other investors are taking.

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The Winner ’s Curse: Paradoxes and Homilies of Economic Life, Princeton, NJ: Princeton University Press. Thaler, Richard, and Eric Johnson, 1990. “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice,” Management Science, Vol. 36, No. 6 ( June), pp. 643– 660. Thaler, Richard, Daniel Kahneman, and J. L. Knetsch, 1992. “The Endowment Effect, Loss Aversion and Status Quo Bias,” in Richard Thaler, The Winner ’s Curse, Princeton, NJ: Princeton University Press. Temin, Peter, and Hans-Joachim Voth, 2003. “Riding the South Sea Bubble,” MIT Economics Department Working Paper No. 04-02 ( December). Treynor, Jack, 1961. “Toward a Theory of Market Value of Risky Assets.”

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

Andrei Shleifer, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, collapse of Lehman Brothers, compensation consultant, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Michael Milken, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, the new new thing, The Predators' Ball, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

Or, in another example, insurance companies played on desires for immortality through advertising that, curiously, portrayed the deceased father in after-death family pictures.21 Social psychologist/marketer Robert Cialdini has written a book full of impressive evidence of psychological biases.22 According to his “list,” we are phishable because we want to reciprocate gifts and favors; because we want to be nice to people we like; because we do not want to disobey authority; because we tend to follow others in deciding how to behave; because we want our decisions to be internally consistent; and because we are averse to taking losses.23 Following Cialdini, each of these respective biases is paired with common salesman’s tricks. One such example concerns how his brother, Richard, paid his way through college. Every week, Richard would purchase two or three cars from the advertisements in the local newspapers. He would clean them up and offer them for sale again. Here, Richard put “loss aversion” to work. Richard did not, as most of us would do, schedule his prospective buyers to come at different times. Instead, intentionally, he scheduled them with overlap. Each buyer, whatever the merits of the prospective car, was then apprehensive that he might lose out: that other guy might get his car.24 Information Phools A great deal of phishing comes from another source: from supplying us with misleading, or erroneous, information.

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Robert B. Cialdini, Influence: The Psychology of Persuasion (New York: HarperCollins, 2007). 23. These correspond to Cialdini’s categories of “reciprocation,” “liking,” “authority: directed deference,” “social proof,” “commitment and consistency,” and “scarcity.” We have referred to “scarcity” as “loss aversion” since Cialdini emphasizes (ibid., p. 204) that “the way to love anything is to realize it might be lost [sic].” Behavioral economists would, we think, have a slightly different classification. 24. Ibid., pp. 229–30. 25. London School of Economics economist Eric Eyster told George that he witnessed this magic trick used in a con game on the Chicago subway.

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It is useful to look at Cialdini’s list of behaviors, since they encompass most of the psychological biases that have formed the basis for behavioral economics. According to Cialdini, the purchasers of his brother Richard’s cars are embedding themselves in a story in which they are thinking of the possibility that they will “lose” the car (they are what Kahneman has called loss averse); what we here call stories, he calls “mental frames.” For the other five items on Cialdini’s list we can again view people as making their decisions from the point of view of a “story.” People want to reciprocate gifts and favors: to do so they must be taking part in a story in which someone gives a gift, and it would be wrong not to reciprocate.

Essentialism: The Disciplined Pursuit of Less by Greg McKeown

90 percent rule, Albert Einstein, Clayton Christensen, Daniel Kahneman / Amos Tversky, David Sedaris, deliberate practice, double helix, en.wikipedia.org, endowment effect, impact investing, Isaac Newton, iterative process, Jeff Bezos, Lao Tzu, lateral thinking, loss aversion, low cost airline, Mahatma Gandhi, microcredit, minimum viable product, Nelson Mandela, North Sea oil, Peter Thiel, power law, Ralph Waldo Emerson, Richard Thaler, Rosa Parks, Salesforce, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, sovereign wealth fund, Stanford prison experiment, Steve Jobs, TED Talk, Vilfredo Pareto

If you’ve already made a casual commitment you’re regretting, find a nice way to worm your way out. Simply apologize and tell the person that when you made the commitment you didn’t fully realize what it would entail. GET OVER THE FEAR OF MISSING OUT We’ve seen ample evidence in this chapter suggesting that the majority of us are naturally very loss-averse. As a result, one of the obstacles to uncommitting ourselves from a present course is the fear of missing out on something great. TO FIGHT THIS FEAR, RUN A REVERSE PILOT One of the ideas that has grown popular in business circles in recent years is “prototyping.” Building a prototype, or large-scale model, allows companies to test-run an idea or product without making a huge investment up front.

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Gillman, “Supersonic Bust.” 4. Michael Rosenfield, “NH Man Loses Life Savings on Carnival Game,” CBS Boston, April 29, 2013, http://boston.cbslocal.com/2013/04/29/nh-man-loses-life-savings-on-carnival-game/. 5. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspective 5, no. 1 (1991): 193–206, http://users.tricity.wsu.edu/~achaudh/kahnemanetal.pdf. 6. Tom Stafford, “Why We Love to Hoard … and How You Can Overcome It,” BBC News, July 17, 2012, www.bbc.com/future/story/20120717-why-we-love-to-hoard. 7. I originally wrote this in a blog post for Harvard Business Review called “The Disciplined Pursuit of Less,” August 8, 2012, http://blogs.hbr.org/2012/08/the-disciplined-pursuit-of-less/. 8.

Traffic: Why We Drive the Way We Do (And What It Says About Us) by Tom Vanderbilt

Albert Einstein, autonomous vehicles, availability heuristic, Berlin Wall, Boeing 747, call centre, cellular automata, Cesare Marchetti: Marchetti’s constant, cognitive dissonance, computer vision, congestion charging, congestion pricing, Daniel Kahneman / Amos Tversky, DARPA: Urban Challenge, Donald Shoup, endowment effect, extreme commuting, fundamental attribution error, Garrett Hardin, Google Earth, hedonic treadmill, Herman Kahn, hindsight bias, hive mind, human-factors engineering, if you build it, they will come, impulse control, income inequality, Induced demand, invisible hand, Isaac Newton, Jane Jacobs, John Nash: game theory, Kenneth Arrow, lake wobegon effect, loss aversion, megacity, Milgram experiment, Nash equilibrium, PalmPilot, power law, Sam Peltzman, Silicon Valley, SimCity, statistical model, the built environment, The Death and Life of Great American Cities, Timothy McVeigh, traffic fines, Tragedy of the Commons, traumatic brain injury, ultimatum game, urban planning, urban sprawl, women in the workforce, working poor

An Exploratory Examination of Eye Movement in High Speed Driving.” Paper 04-2602, Proceedings of the 83rd Annual Meeting of the Transportation Research Board (Washington D.C., January 2004). “loss aversion”: The notion of loss aversion was first hypothesized by Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, vol. 47 (1979), pp. 263–91. sensitive to loss: See Sabrina M. Tom, Craig R. Fox, Christopher Trepel, and Russell A. Poldrack, “The Neural Basis of Loss Aversion in Decision-Making Under Risk,” Science, vol. 315, no. 5811 (26 January 2007), pp. 515–18. See also William J. Gehring and Adrian R. Willoughby, “The Medial Frontal Cortex and the Rapid Processing of Monetary Gains and Losses,” Science, vol. 295, no. 5563 (2002), pp. 2279–82.

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We spend only about 6 percent of our driving time looking in the rearview mirror. In other words, we’re much more aware of what is passing us than what we have passed. The fact that we spend more time seeing losses than gains while driving in congestion plays perfectly into a well-known psychological theory called “loss aversion.” Any number of experiments have shown that humans register losses more powerfully than gains. Our brains even seem rigged to be more sensitive to loss. In what psychologist Daniel Kahneman has called the “endowment affect,” once people have been given something, they are instantly more hesitant to give it up.

Alpha Trader by Brent Donnelly

Abraham Wald, algorithmic trading, Asian financial crisis, Atul Gawande, autonomous vehicles, backtesting, barriers to entry, beat the dealer, behavioural economics, bitcoin, Boeing 747, buy low sell high, Checklist Manifesto, commodity trading advisor, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, currency risk, deep learning, diversification, Edward Thorp, Elliott wave, Elon Musk, endowment effect, eurozone crisis, fail fast, financial engineering, fixed income, Flash crash, full employment, global macro, global pandemic, Gordon Gekko, hedonic treadmill, helicopter parent, high net worth, hindsight bias, implied volatility, impulse control, Inbox Zero, index fund, inflation targeting, information asymmetry, invisible hand, iterative process, junk bonds, Kaizen: continuous improvement, law of one price, loss aversion, low interest rates, margin call, market bubble, market microstructure, Market Wizards by Jack D. Schwager, McMansion, Monty Hall problem, Network effects, nowcasting, PalmPilot, paper trading, pattern recognition, Peter Thiel, prediction markets, price anchoring, price discovery process, price stability, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Robert Shiller, secular stagnation, Sharpe ratio, short selling, side project, Stanford marshmallow experiment, Stanford prison experiment, survivorship bias, tail risk, TED Talk, the scientific method, The Wisdom of Crowds, theory of mind, time dilation, too big to fail, transaction costs, value at risk, very high income, yield curve, you are the product, zero-sum game

Flush your mind and start fresh tomorrow.” That said, when I lose money nine days in a row (which still happens!) I can’t help but get a little itchy and red-faced. In the middle of the ninth consecutive day I still might fantasize about turning my keyboard sideways and smashing it over the front edge of my desk. “Loss Aversion” by Laurenrosenberger, Creative Commons 4.0 (CC BY-SA 4.0) But I don’t do that, because I know it wouldn’t help. If you have ever played poker in a casino, you understand the concept of mental endurance. Sometimes (just like in trading) you have to sit there for hours and fold every hand because there is nothing to play.

…

So even though two cents is meaningless to your P&L, the difference between selling below or above your cost is the difference between winning and losing. Human beings are hard-wired to avoid losses. As discussed earlier, research shows the pain we feel from losses is about double the pleasure we get from gains of equal size. This bias is called loss aversion. A related bias is the disposition effect. This is the strong and consistent tendency for investors to prefer to sell assets that have increased in value while holding onto assets that show a loss. If it goes up, you sell it. If it goes down, you hold on to it and pray for a bounce. These related forms of bias all come down to the same thing: humans don’t like to lose88.

…

See reassessment triggers activity bias, 241 adaptability, trader attribute of, 35, 75, 104, 106-107 See also adaptation, trader adaptation, trader, 439—451 to fast/crisis markets, 440—445 growth mindset and, 451 to major structural market changes, 450—451 to new trading methods, 449 to rangebound markets, 447—448 to trending markets, 448, 449 to volatile markets, 445—447 algorithms, 163, 164, 173 All-Weather portfolio, 87 alpha, definitions of, 21 alpha trader feeling uncomfortable and, 112 formula for success, 72, 75 grit and, 92 having plan, 126 as healthy skeptic, 104 intellectual humility, 184 numeracy, 248 as rational thinker, 34, 76 as risk-seeker, 32 See also trader attributes, positive cognitive; trader attributes, positive miscellaneous; trader attributes, positive non-cognitive “AM/FX” newsletter, 84, 96, 202, 220 Amazon (AMZN) stock, 231, 347, 412 analogs, idea generation and, 402—405 analytical skill, 69 anchoring bias, 67, 225—229, 480, 484 See also disposition effect; loss aversion Anderson, Irina, 69 apophenia, 64, 216—225 See also pattern recognition; Turnaround Tuesday Apple (AAPL) stock, 219, 241, 276, 277, 278, 289, 290, 291, 291, 442 Arcsine Law, 251—254 Art of Currency Trading, The (B. Donnelly), 172 Asch, Solomon, 82 Asch Conformity Experiment, 82, 82, 83 Asian Financial Crisis (1998), 441 “Aspen Trading” (newsletter), 492 asymmetrical information, 156, 160 Axelrod, Bobby, 102 backtesting, 81, 221 curiosity and, 89—90 Bank of America, 42 Global Fund Manager Survey, 345 Bank of Canada, 308 bank traders annual performance and pay, 354 free capital, 356 information asymmetry and, 156 simple indicators and, 166 success rate, 40 bankrupt company, common stock of idea generation and, 406 rallies, 406 typical path followed by, 238 Batnick, Michael, 67—68 Baumeister, Roy, 56—57, 95, 106, 491 Bayes Theorem, 80, 81 Bayesian thinking, 201 Bayesian updating, 80, 81, 84 Beane, Billy, 451, 460—461 beauty contest analogy (Keynes), 311, 325 behavioral bias, 66, 179—180, 198 See also specific types of bias', biased thinking Bernanke, Ben, 208 Bernstein, Jake, 234, 345 bet size, varying, 107, 379 bet sizing, 256 better-than-average effect, 182—183 bias idea generation and, 396 post-trade, 416 See also specific types of bias', apophenia; biased thinking; gambler’s fallacy; herding; hot hand biased thinking, 155 See also specific types of bias; behavioral bias; bias bid/offer spread, 276 finding data on, 278 Big Five Personality Traits, 46—49 agreeableness, 47, 49, 50 conscientiousness, 47—48, 49, 50, 51, 52, 56-58, 71 effect of IQ and on male earnings, 49, 50 extraversion, 47, 49, 50 financial success and, 49—50, 52 lifetime stability of, 48 neuroticism, 47, 49, 50, 51, 52, 58, 71 openness to experience, 47, 49 versus Myers-Briggs (MBTI), 47 See also grit; personality; self-control birthday paradox, 254—255, 255 bitcoin bubble (2017-2018), 185, 239, 370, 405 bleed, slow, 167—168 blogs, 77 “Cheap Convexity,” 492 “Exante,” 492 “Liberty Street Economics,” 280 “No Mercy, No Malice,” 492 Bloomberg, 65, 97, 162, 194, 218, 259, 290, 321, 371, 393, 399, 482 blowups, 117—118 bonds as safe haven, 262 stocks and, 260—261, 261 Borish, Peter, 87, 163 breakout traders, 106 breakout trading, 173 breakouts, 161, 289 Breath (J.

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, equity risk premium, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

My reaction, painful to recall, was, “At these prices I can finally get out of the hole.” I bought more shares even though I knew better. There was apparently a loose connection between my brain and my fingers, which kept clicking the buy button on my Schwab online account in an effort to avoid the losses that loomed. Outside of business, loss aversion plays a role as well. It’s something of a truism that the attempt to cover up a scandal often leads to a much worse scandal. Although most people know this, attempts to cover up are still common, presumably because, here too, people are much more willing to take risks to avoid losses than they are to obtain gains.

…

Kozlowski, Dennis Kraus, Karl Krauthammer, Charles Kudlow, Larry Lakonishok, Josef Landsburg, Steven Lay, Ken LeBaron, Blake Lefevre, Edwin Leibweber, David linguistics, power law and Lo, Andrew logistic curve lognormal distribution Long-Term Capital Management (LTCM) losing through winning loss aversion lotteries present value and as tax on stupidity Lynch, Peter MacKinlay, Craig mad money Malkiel, Burton management, manipulating stock prices Mandelbrot, Benoit margin calls margin investments buying on the margin as investment type margin calls selling on the margin market makers decimalization and World Class Options Market Maker (WCOMM) Markowitz, Harry mathematics, generally Greek movies and plays about outguessing the average guess risk and stock markets and Mathews, Eddie “maximization of expected value” principle mean value. see also expected value arithmetic mean deviation from the mean geometric mean regression to the mean using interchangeably with expected value media celebrities and crisis mentality and impact on market volatility median rate of return Merrill Lynch Merton, Robert mnemonic rules momentum investing money, categorizing into mental accounts Morgenson, Gretchen Motley Fool contrarian investment strategy PEG ratio and moving averages complications with evidence supporting example of generating buy-sell rules from getting the big picture with irrelevant in efficient market phlegmatic nature of mu (m) multifractal forgeries mutual funds expert picks and hedge funds index funds politically incorrect rationale for socially regressive funds mutual knowledge, contrasted with common knowledge Nash equilibrium Nash, John Neff, John negatively correlated stocks as basis of mutual fund selection as basis of stock selection stock portfolios and networks Internet as example of price movements and six degrees of separation and A New Kind of Science (Wolfram) Newcomb, Simon Newcombe, William Newcombe’s paradox Niederhoffer, Victor Nigrini, Mark nominal value A Non-Random Walk Down Wall Street (Lo and MacKinlay) nonlinear systems billiards example “butterfly effect” or sensitive dependence of chaos theory and fractals and investor behavior and normal distribution Nozick, Robert numbers anchoring effect Benford’s Law and Fibonacci numbers and off-shore entities, Enron Once Upon a Number (Paulos) online chatrooms online trading optimal portfolio balancing with risk-free portfolio Markowitz efficient frontier of options. see stock options Ormerod, Paul O’Shaughnessy, James P/B (price-to-book) ratio P/E ratio interpreting measuring future earnings expectations PEG variation on stock valuation and P/S (price to sales) ratio paradoxes Efficient Market Hypothesis and examples of Newcombe’s paradox Parrondo’s paradox St.

Are You Smart Enough to Work at Google?: Trick Questions, Zen-Like Riddles, Insanely Difficult Puzzles, and Other Devious Interviewing Techniques You ... Know to Get a Job Anywhere in the New Economy by William Poundstone

affirmative action, Albert Einstein, big-box store, Buckminster Fuller, car-free, cloud computing, creative destruction, digital rights, en.wikipedia.org, full text search, hiring and firing, How many piano tuners are there in Chicago?, index card, Isaac Newton, Johannes Kepler, John von Neumann, lateral thinking, loss aversion, mental accounting, Monty Hall problem, new economy, off-the-grid, Paul Erdős, RAND corporation, random walk, Richard Feynman, rolodex, Rubik’s Cube, Silicon Valley, Silicon Valley startup, sorting algorithm, Steve Ballmer, Steve Jobs, The Spirit Level, Tony Hsieh, why are manhole covers round?, William Shockley: the traitorous eight

“I would really regret it if I switched and lost. It’s best to stay with your first choice.” These are expressions of loss aversion. It’s universal human nature to recoil from a decision that might leave one worse off, even when the odds are favorable. “Better safe than sorry.” Anyone who invents new products would do well to keep this in mind. The consumer thinking of switching boxes or brands may be motivated by reasons that have nothing to do with logic. Math geniuses are as loss averse as everyone else. It’s said that the famed mathematician Paul Erdös got this puzzle wrong the first time he heard it.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

I’d never heard of them until Kahneman won the Nobel,* and when I first read about their work, it seemed to me to consist of things which were surprising only to economists. One of their interests was “hindsight bias,” the way in which a random sequence of events is given structure and narrative by the false perspective of looking back over it from its outcome. Another was “loss aversion,” the fact that people place a higher value on not losing money than on gaining it; another was on “the law of small numbers,” referring to people’s tendency to draw overconfident conclusions from small amounts of evidence. Their particular interest was in “heuristics,” the patterns of thinking people use to interpret data, and the strong conclusion they reached was that people’s heuristics are often wrong; we are much less accurate and less rational in our thinking than we believe ourselves to be.

…

., 115–17, 157–58 liabilities, 31–35 in balance sheets, 25–28, 31–34, 37 of banks, 25, 32–35, 37, 41, 204 of individuals, 27–28, 35 leverage and, 35, 41, 60 libel law, 93 life expectancies, 17, 213 liquidity, 212 housing and, 28–29, 90, 96–97 investments and, 60–61 Lloyds TSB, 36, 38–40 loans, lending, 74–76, 108–9 in balance sheets, 27, 30, 34 of banks, 22, 24, 27, 33–36, 41–42, 58–60, 67, 69–70, 74, 83–84, 91–94, 102, 117, 127, 129–30, 143, 146, 165, 187, 216–17, 229 credit and, 209, 216–17 derivatives and, 50–51, 55, 66–75, 80, 121–22 Exxon deal and, 67–68 interest rates and, 59–60, 66, 74, 102, 108, 145, 172–73 paying the bill and, 220–21 predatory, 122, 127–32 risk and, 66–67, 69–72, 74–75, 80, 95, 117, 145, 174 securitization in, 69, 74 see also mortgages London, 53, 84 housing in, 88–90 see also City of London Long-Term Capital Management (LTCM): collapse of, 142, 162, 164–65, 230–31 derivatives and, 54–56, 80 loss aversion, 137 Lovelock, James, 231 Lowenstein, Roger, 161 Macmillan, Harold, 216 Madoff, Bernard, 105, 171, 191–92, 195 Mailer, Norman, 172 Manias, Panics, and Crashes (Kindleberger), 104 manufacturing, 4, 13, 58, 109, 229 and financial vs. industrial interests, 197, 199 Marxist analysis of, 15–16 stocks and, 148–49 market discipline, 183–84 Markopolos, Harry, 192 Markowitz, Harry, 147–49, 158 mark to market, 42, 105–6 Marx, Karl, 15–16 Maryland, housing in, 125–31 Masters, Blythe, 68, 121 mathematics, 5, 231 derivatives and, 47–48, 52–54, 115–17, 166 risk and, 46, 55–56, 74, 133, 136, 146–50, 154, 158, 160–67, 202 of share pricing, 147–48 Meriwether, John, 54 Merrill Lynch, 39, 77, 120, 190, 227 Merton, Robert, 54–55 microeconomics, 137 Minsky, Hyman, 104 Monetary Policy Committee, 178–79 money: assumptions based on primacy of, 202–4 cost of, 102–3 flows of, 7–9, 26 inconceivable amounts of, 8 Money Machine, The (Coggan), 25 Moody’s Investors Service, 62, 70, 114, 119, 208, 210 Morgan, John Pierpont, 20, 64 Morgan Stanley, 40, 64, 227 Morris, Charles, 42 mortgages, 38–40, 83–87, 89–95, 97–102, 110–32 in balance sheets, 27–28 balloon payments on, 100 and buy-to-let properties, 177 conforming, 112, 124 credit ratings and, 123–24, 126 of Cutter family, 126–27 defaults on, 159–60, 163, 165, 229 derivatives and, 38, 57–58, 75–76, 112–22, 132, 157–60, 172, 210–12 discriminatory practices and, 99–101, 127 durations of, 95 endowment, 86–87, 89–90, 146 Iceland’s economic crisis and, 10–11 interest and, 8, 58, 86, 89, 91–92, 95, 100, 102, 108, 110, 112–14, 122, 128, 145–46, 174, 176, 212 “liar,” 126, 132 “no doc,” 132 No Income, No Job or Assets (NINJA), 126 piggyback, 132 predatory lending and, 122, 127–32 regulation and, 99–100, 185 risk and, 145, 158–60, 163–65 sizes of, 92–94 subprime, 38, 75, 83, 100, 113–19, 122–25, 127, 132, 157–59, 165, 202, 210 see also houses, housing, home ownership Nasdaq, 104 nationalization, 24, 39–40, 228–30 New York Times, The, 77, 98, 208 “Night in Tunisia, A,” 45 Nikkei 225, 51–52, 54 9/11 terrorist attacks, 2, 107 Northern Rock, 5, 39, 94, 194, 206 Obama, Barack, 77, 205 regulation and, 188, 190, 223–24 Objectivism, 142–43, 173 oil, 3–4, 107–8, 148–49 “On Default Correlation” (Li), 116 options, 50–52, 151, 174, 184 how they work, 46–47, 50–51 Osaka exchange, 54 Pacioli, Luca, 26 panic of 1893, 64 panic of 1907, 20, 64 Parker, Charlie, 45 Paulos, John Allen, 8 pensions, 76–77, 165, 204 in balance sheets, 27–28, 31 Phillips, Julia, 199 politics, politicians, 5–6, 19–21, 23–25, 81, 118–19, 169–70, 176–78, 217–26, 228–32 AIG bailout and, 76–78 banks and, 25, 33, 43, 182, 186, 195, 202, 207, 211, 217, 228–31 bonds and, 29–30, 61–62, 103, 109, 118, 144, 176–77, 208–9 derivatives and, 57, 183–86 financial industry’s ascent and, 19–20 free-market capitalism and, 14–15, 19, 21, 23–24 housing and, 87–89, 91, 96–101, 177–78 Iceland’s economic crisis and, 9–10, 12, 24, 223 interest rates and, 102–3, 107–8, 172–80, 221 paying the bill and, 219–23 regulation and, 15, 19–21, 24, 169, 180–92, 195, 199, 201, 223–26 risk and, 142–43, 164–66, 174, 184 Ponzi, Charles, 105 Ponzi schemes, 191–92 poor, poverty, 3–4, 13, 21, 82, 179, 196 housing and, 100, 113, 118, 121–23, 126–27, 130–31, 163 pork bellies, 48–49 portfolio insurance, 151–52, 162 “Portfolio Selection” (Markowitz), 147 Posner, Richard A., 120, 174, 182, 193 Powell, Anthony, 62 price, prices, 105–11, 203 and banking-and-credit crisis, 216–18, 220 bonds and, 61, 63, 102–3, 108–10, 144 derivatives and, 38, 46–52, 54, 56, 75, 158–59, 166 of houses, 5, 28–29, 37–38, 61, 71, 86–91, 101, 109–11, 113, 115, 125, 157, 160, 164–66, 173–76, 194, 208 of oil, 3–4, 107–8, 148–49 risk and, 145–50, 158–59, 164–66 of stocks, 102, 105–6, 109–10, 147–51, 158, 174 of toxic assets, 37–38, 42 volatility of, 47–48, 148–50 “Pricing of Options and Corporate Liabilities, The” (Black and Scholes), 45, 47–48, 147 probabilities, 46, 55, 74, 115, 141, 145, 153–55, 160–63 profits, 20, 28, 104–6, 110, 192, 226–28, 230 banks and, 33, 35, 67, 78, 227–28 and benefits of debt, 59–60 derivatives and, 50, 54, 57, 63, 65, 106, 114, 121–22 Enron and, 105–6 regulation and, 204, 226 risk and, 150, 226 Protection of Homeowners in Foreclosure Act, 131 “Quiet Coup, The” (Johnson), 19–20, 185–86 Ragtime (Doctorow), 64 Rand, Ayn, 142–43, 173 Reagan, Ronald, 14, 19–20, 24, 142, 185 recessions, 42, 89, 94, 142, 171, 175, 219 regulation, deregulation, 15, 19–22, 24, 169, 180–202 banking and, 21, 33, 180–91, 194–96, 199–200, 202, 204–5, 208, 211, 223–27 bond ratings and, 208–9 derivatives and, 68, 70, 73, 153, 183–86, 200–201 framework and regime of, 189–92 market discipline and, 183–84 mortgages and, 99–100, 185 proposals for, 223–26 risk and, 143, 153, 164, 187–88, 191, 195, 202, 204–5, 212, 224, 226 in U.K., 21–22, 105n, 180–82, 194–96, 199–201, 218 in U.S., 181, 184–92, 195, 199–200, 223–24, 227 Reykjavík, 10, 12, 170 risk, risks, 49–58, 66–76, 133–36, 141–67, 211–12, 219 AIG and, 75–76 assessment of, 46, 55–56, 74, 133, 135–36, 141–43, 145–67, 187–88, 191, 202, 205, 212, 216, 226 banks and, 19, 34–37, 41, 133, 135–36, 143, 150–54, 156–57, 160, 165–66, 174, 187–88, 191–95, 202, 204–7, 216, 224, 226, 228, 230 bonds and, 61–63, 103, 118, 144, 154, 208 derivatives and, 46–47, 49–52, 54–55, 57–58, 66–75, 78–80, 114–15, 117–22, 151, 153, 158–60, 163, 166–67, 184–85, 205, 212 desirability of, 144, 146, 150, 206–7 diversification and, 146–48 Greenspan and, 142–43, 164–66, 174, 184 hedging of, 49–50, 52, 58, 115, 205 historical data and, 163, 166 housing and, 88, 94–97, 112–13, 125, 129, 145, 158–60, 163–65 investing and, 5, 68, 70, 88, 103, 144, 146–53, 158, 165, 184, 190 leverage and, 35–36 LTCM and, 55–56 overconcentration of, 72–73 regulation and, 143, 153, 164, 187–88, 191, 195, 202, 204–5, 212, 224, 226 securitization and, 69–70, 163, 165 of stairs, 134–35 VAR and, 151–57, 162–63 risk-adjusted return on capital (RAROC), 150–51 Ritholtz, Barry, 219–20 Robinson, Phillip, 128–31 Rogers, Jim, 221 Royal Bank of Scotland (RBS), 34–36, 120, 227 bailout of, 32, 40, 204 Russia, 3, 15–16, 18, 53 bond default of, 55–56, 162, 164–65 Salomon Brothers, 63 Sanford, Charles, 150 Santander, 40 savings, 28, 86, 107, 177, 179, 187 savings and loan crisis, 73, 185, 220 Scholes, Myron, 45, 47–48, 54–55, 147 Securities and Exchange Commission (SEC), 195 credit ratings and, 209–10 regulation and, 153, 186, 189–92 securitization, 20, 22, 200 derivatives and, 69–70, 74, 113–14, 117–19, 122, 212 risk and, 69–70, 125, 163, 165, 212, 224 selling, sales, 34, 42, 104, 174, 203 of bonds, 59, 61–63, 144 derivatives and, 46–50, 52, 56, 65, 67–68, 73–74, 120 of equity, 58–59 of houses, 28–29, 71, 89–90 risk and, 151–52, 165, 224 Shiller, Robert, 106, 145n, 194 Simon, David, 83–84 Singapore exchange, 54 Skilling, Jeffrey, 106 small numbers, law of, 137 Sociét Générale, 51, 77 solvency, insolvency, 28–29 of banks, 36–38, 40–43, 64, 74–75, 120 Spain, 15, 40, 177, 214 contracting economy of, 222–23 housing in, 92, 110 special purpose vehicles (SPVs), 70, 120 stairs, deaths caused by, 134–35 Standard & Poor’s (S&P), 62, 114, 151, 209 statistics, 160–62 Stefánsdóttir, Rakel, 9–10, 12 stock market, stocks, 22, 54–55, 61, 76, 80, 101–11, 115, 226 bubbles and implosions in, 3, 42, 103–9, 142, 175–76 derivatives and, 50–52, 54 investing in, 59, 73, 101–7, 111, 146–52, 158, 175, 192 new-economy, 103 1929 crash of, 152, 199, 213 October 1987 crash of, 142, 151–52, 161–62, 164–65 prices of, 102, 105–6, 109–10, 147–51, 158, 174 structured investment vehicles (SIVs), 120 Summa de Arithmetica (Pacioli), 26 Summers, Lawrence, 43, 74, 188 Taleb, Nassim, 53, 155–56 Tax Reform Act of 1986 (TRA), 100 technology, 42, 104, 149, 155, 166 terrorism, 2, 12, 18, 107 Tett, Gillian, 121, 193 Thatcher, Margaret, 199, 217, 222 free-market capitalism and, 14, 21, 24 on housing, 87, 91, 98 regulation and, 21, 195–96 torture, end of ban on, 18 tranching, 117–18, 122 Treasury, British, 181–82 Treasury, U.S., 43, 54, 64, 74, 76–78 AIG bailout and, 76, 78 regulation and, 188–90 Treasury bills (T-bills), 29–30, 62, 103, 118, 144, 208 China’s investment in, 109, 176–77 Trichet, Jean-Claude, 92 Trillion Dollar Meltdown, The (Morris), 42 Troubled Assets Relief Program (TARP), 37, 189 Turner, Adair, 181 Tversky, Amos, 136–38, 141 UBS, 36, 120 uncertainty, 96 fair value theory and, 147–48 risk and, 55–56, 153, 163 United Kingdom, 9, 11–12, 18, 28–29, 61, 122–24, 134, 139, 194–202, 216–18 banking in, 5, 11, 32–36, 38–40, 51–54, 76–77, 89, 94, 120, 146, 180, 194–96, 199, 202, 204–6, 211–12, 217, 227–28 bill of, 220–22, 224 and City of London, 21–22, 32, 195–97, 200, 217–18 credit ratings and, 123–24, 209 derivatives and, 72, 200–201 financial vs. industrial interests in, 196–99 free-market capitalism in, 14–15, 21, 230 GDP of, 32, 214, 220 Goodwin’s pension and, 76–77 housing in, 38, 87–98, 110, 122, 177–78 interest rates in, 102, 177–80 personal debt in, 221–22 prosperity of, 214, 216 regulation in, 21–22, 105n, 180–82, 194–96, 199–201, 218 United Nations, 4 United States, 17–22, 34, 62–71, 120–31, 134n, 165, 199–201 AIG bailout and, 76–78 banks of, 36–37, 39–40, 43, 63–71, 73, 75, 77–78, 84, 116, 120–21, 127, 150, 152, 163, 183, 185, 190, 195, 204, 211–12, 219–20, 225, 227–28 bill of, 219–20 China’s investment in, 109, 176–77 credit and, 109, 123–24, 195, 208–9, 211 free-market capitalism in, 14–15, 230 housing in, 37, 82–86, 95, 97–101, 109–10, 114–15, 122, 125–31, 157–58, 163 interest rates in, 102, 107–8, 173–77 regulation in, 181, 184–92, 195, 199–200, 223–24, 227 urban desolation in, 81–86 value, values, 42, 74–75, 78–80, 103–4, 179, 181, 217–18, 220, 227 bonds and, 61, 103 derivatives and, 38, 48–49, 185, 201 housing and, 28–29, 71, 90, 92–95, 111, 176 investing and, 60–61, 104, 198 LTCM and, 55–56 notional, 38, 48–49, 80 value at risk (VAR), 151–57, 162–63 Vietnam War, 18, 220 Viniar, David, 163 volatility, 20, 158 risk and, 47–48, 148–50, 161 Volcker, Paul, 20 Waldrow, Mary, 127 Wall Street, 22, 53, 64, 129, 188 Washington Post, The, 18 wealth, 4, 10, 19–21, 64, 204, 206 financial industry’s ascent and, 20–21 in free-market capitalism, 15, 19, 230 housing and, 87, 90, 121 Keynes’s predictions on, 214–15 in West, 218–19 Weatherstone, Dennis, 152 Wells Fargo, 84, 127 Wessex Water, 105n West, 14–18, 43, 213, 231 conflict between Communist bloc and, 16–18 free-market capitalism in, 14–15, 17, 21, 23 wealth in, 218–19 wheat, 49n, 52 When Genius Failed (Lowenstein), 161 Williams, John Burr, 147 Wilson, Lashawn, 130–31 Wire, The, 83–84 World Bank, 58, 65, 69 * GDP, which will be mentioned quite a few times in this story, sounds complicated but isn’t: it’s nothing more than the value of all the goods and services produced in an economy.

What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

additive manufacturing, agricultural Revolution, behavioural economics, Black Swan, Bretton Woods, business cycle, carbon tax, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, disruptive innovation, Donald Trump, Dr. Strangelove, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, Phillips curve, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

Think of a newspaper article that claims it can help you imitate Mark Zuckerberg’s morning routine. The obvious implication is that you too could become a billionaire if you just wore grey t-shirts and ate the right breakfast, but this ignores the multitudes of non-billionaires doing just that. 2. Loss aversion It is fairly well established that people hate losing something more than they love gaining it. Dropping a $10 note is more bitter than finding one is sweet. We are hard-wired, to some extent, to hold on to what we’ve got. Students given coffee mugs free from the campus bookstore will not part with them for $6 even though this junk fell out of the sky, and had they desired them they could have got them at the nearby store for the price of $6. 3.

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A bunch of Japanese tourists drove their car into the sea because their satnav told them they were on a road. Airplane crashes have happened because pilots trusted their faulty navigation systems rather than the evidence of their eyes. 6. Sunk cost fallacy This is a combination of anchoring and loss aversion. People will keep on ploughing money into a failed investment, because they can’t face the psychological pain of admitting that it had failed, or carry on waging a war that they should have abandoned long ago, because they cannot bring themselves to admit that it was in vain. 7. Hindsight bias This is central to human thinking and makes the social and economic worlds appear much more predictable and less erratic than they really are.

Cogs and Monsters: What Economics Is, and What It Should Be by Diane Coyle

3D printing, additive manufacturing, Airbnb, Al Roth, Alan Greenspan, algorithmic management, Amazon Web Services, autonomous vehicles, banking crisis, barriers to entry, behavioural economics, Big bang: deregulation of the City of London, biodiversity loss, bitcoin, Black Lives Matter, Boston Dynamics, Bretton Woods, Brexit referendum, business cycle, call centre, Carmen Reinhart, central bank independence, choice architecture, Chuck Templeton: OpenTable:, cloud computing, complexity theory, computer age, conceptual framework, congestion charging, constrained optimization, coronavirus, COVID-19, creative destruction, credit crunch, data science, DeepMind, deglobalization, deindustrialization, Diane Coyle, discounted cash flows, disintermediation, Donald Trump, Edward Glaeser, en.wikipedia.org, endogenous growth, endowment effect, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, Evgeny Morozov, experimental subject, financial deregulation, financial innovation, financial intermediation, Flash crash, framing effect, general purpose technology, George Akerlof, global supply chain, Goodhart's law, Google bus, haute cuisine, High speed trading, hockey-stick growth, Ida Tarbell, information asymmetry, intangible asset, Internet of things, invisible hand, Jaron Lanier, Jean Tirole, job automation, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, knowledge worker, Les Trente Glorieuses, libertarian paternalism, linear programming, lockdown, Long Term Capital Management, loss aversion, low earth orbit, lump of labour, machine readable, market bubble, market design, Menlo Park, millennium bug, Modern Monetary Theory, Mont Pelerin Society, multi-sided market, Myron Scholes, Nash equilibrium, Nate Silver, Network effects, Occupy movement, Pareto efficiency, payday loans, payment for order flow, Phillips curve, post-industrial society, price mechanism, Productivity paradox, quantitative easing, randomized controlled trial, rent control, rent-seeking, ride hailing / ride sharing, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Robinhood: mobile stock trading app, Ronald Coase, Ronald Reagan, San Francisco homelessness, savings glut, school vouchers, sharing economy, Silicon Valley, software is eating the world, spectrum auction, statistical model, Steven Pinker, tacit knowledge, The Chicago School, The Future of Employment, The Great Moderation, the map is not the territory, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, the strength of weak ties, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Uber for X, urban planning, winner-take-all economy, Winter of Discontent, women in the workforce, Y2K

For example, RCTs or econometric evaluations will sometimes produce conclusions that run against politically acceptable ideas. One study by University of Chicago researchers into what incentives produced the largest impact on test scores for Chicago schoolchildren found that by a long way the biggest effect came from paying teachers in advance a large bonus conditional on their pupils’ results; the power of loss aversion meant these teachers were determined to achieve the outcomes so they would be able to keep the money (Fryer et al. 2012). How would advance bonuses in the public sector play politically? This is, of course, a rhetorical question. The findings of RCTs may well conflict with political or cultural beliefs about the right course of action.

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, Technological Forecasting and Social Change, 114, 254–280. Friedman, M., 1966, ‘The Methodology of Positive Economics’, in Essays in Positive Economics, Chicago: University of Chicago Press, 3–16. Fryer, R., S. Levitt, J. List, and S. Sadoff, 2012, ‘Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment’, NBER Working Paper 18237, National Bureau of Economic Research, Cambridge, MA. Furman, Jason et al., 2019, ‘Unlocking Digital Competition’, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf.

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

There is no doubt that it is both real and important. Among other things, it explains part of loss aversion. Losing something you have is more painful than getting something equivalent is pleasurable. This is not inconsistent with utility theory, but it requires that individuals’ utility function change as they acquire or lose goods. The simple version of utility theory that says all risk is bad cannot accommodate that, but sophisticated modern utility theory has no difficulty. Why would evolution allow animals—including humans—to hold inconsistent values? The weight of the evidence is that loss aversion evolved to reduce intraspecies fighting and to allow investment.

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(Livio) Jackknife, the Bootstrap, and Other Resampling Plans, The (Efron) Jackpot Nation (Hoffer) Jessup, Richard John Bogle on Investing (Bogle) Johnson, Barry Johnson, Simon JPMorgan Junk bonds Kahneman, Daniel Kamensky, Jane Kaplan, Michael Kassouf, Sheen Kelly, John Kelly bets/levels of risk Kelly principles/investors Keynes, John Maynard Key performance indicators (KPIs) Key risk indicators (KRIs) King of a Small World (Bennet) Korajczyk, Robert Knetsch, Jack Knight, Frank Kraitchik, Maurice Krüger, Lorenz Laplace, Pierre-Simon Lehman Brothers Leitzes, Adam Lepercq de Neuflize Leverage Levine, David Levinson, Horace Lewis, Michael Limits of Safety, The (Sagan) Liquidity Livio, Mario Logic of Failure, The (Dorner) Long-Run Collaboration on Games with Long-Run Patient Players, A (Fudenberg and Levine) Loss aversion Lowenstein, Roger Mackay, Charles Madoff, Bernie Mallaby, Sebastian Man with the Golden Arm, The (Bennet) Managed futures Managing risk Mandelbrot, Benoit Market: “beating” the efficiency (see also Efficient markets theory) equilibrium (see Equilibrium) portfolio prices return sympathy Mark-to-market accounting Markowitz, Harry.

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

"Friedman doctrine" OR "shareholder theory", affirmative action, Airbnb, Alan Greenspan, Albert Einstein, Andrei Shleifer, behavioural economics, Bernie Sanders, Boeing 737 MAX, Cambridge Analytica, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, disinformation, Donald Trump, en.wikipedia.org, fake news, Garrett Hardin, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, incognito mode, income inequality, income per capita, independent contractor, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta-analysis, Milgram experiment, military-industrial complex, mortgage debt, Network effects, out of africa, Paradox of Choice, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Ronald Reagan, search costs, shareholder value, Sheryl Sandberg, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, sunk-cost fallacy, surveillance capitalism, techlash, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, Tragedy of the Commons, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, vertical integration, winner-take-all economy, Yochai Benkler

Although as we shop for a hotel room we haven’t actually purchased that reservation for $26, some part of us feels like we have and we now feel attached to it. With drip pricing, a former chief economist of the UK competition authority noted, “Consumers feel they’ve already made the decision to purchase [which] creates loss aversion—consumers have committed time and effort to the search before being hit with extra charges.”33 A third weakness is something we often perceive as a strength, namely commitment and consistency. Here, after having invested a lot of time and effort into this purchase, we want to see the purchase through to its end.34 Economists call this the sunk cost fallacy.

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See also CoreCivic Costco and other club stores, 102–3 cream skimming, 169–70, 175, 183–87 credit card industry, 68, 69, 70–71, 75–77 credit default swaps, 128 criminal sentencing, 80–81, 176–77 crony capitalism, 160, 163, 230, 285 Cruz, Ted, 266 cultural conditioning college as route to social mobility, 29–30 competition delivers quality at a low price, 47–48, 49 competition is always good, x, 284 embarrassment for gullibility, 70 and escalation paradigm, 35–36 lifelong superior achievement goal, 32–33 to love competition, 125 to not compete, 122 self-interest, 71, 235–36 and status competition, 28 See also human nature culture, x–xi Dalai Lama, 253 Dale, Stacy, 36–37 D’Angelo, Jonathan, 112–13 Dartmouth College, 25 Darwin, Charles, 39 data for Amazon’s personal recommendations, 105–6, 107 analytical power of, 218–19 children’s data gleaned for advertisers, 193–95 college scorecard data, 300–304, 318n86 on consumers’ behavior, 87–91, 204–5, 207–9 Gamemakers attract bidders/advertisers, 207–9 Gamemakers’ harvesting techniques, 194, 203–7 in Las Vegas, 87–91 dating services, online overview, 108–9 competition levels, 109–12, 111 InterActiveCorp, 109–11, 111, 115–16 and marriage, 114–15 profiting from choice overload, 113–14, 115–16 slow dating, 117 deadbeat customers, 70–71 Dear Genevieve effect, 12–15, 16, 19–20, 38–39 death bonds, 245 decision aids for choice overload, 101–2 de-escalating the arms race colleges and universities, 25–27, 40, 133–34 collegiate sports, 134–38, 140–41 students and parents, 27–34, 40 Deloitte, 277 deregulation of banks, 126–30 derivatives market, 261–63 diaper apps, 197 digital ad market, 210 diminishing returns, 96–97 dissent, noncompliance, and change, 284–87 divergence of individual and collective interests, 12–20, 39–40, 242–43, 263 DOJ (US Department of Justice), 128, 172–73, 174, 232 do not track features on mobile phones, 212–13 Dostoyevsky, Fyodor, 71 drip pricing overview, 147 and anchor value, 80–81 and brain fatigue, 81–82 Caesars opposition to, 84–87 casino lobbyists combat FTC’s plan, 150–52 vs. consumer’s ability to compare prices, 155–57 consumers’ loss aversion, 81 countries with laws against, 148 FTC attempt to legalize, 148–50 in hotels, 78–80, 82–84, 147, 148–54 lobbyists use competition ideology, 150–52 and sunk cost fallacy, 81 Duhigg, Charles, 227 Duke University, 16–17, 24 dynamic ads, 204–5 Easterbrook, Frank H., 234–35 Economist, 197 Eliot, T.

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., 36–37 Krugman, Paul, 128–29 kudzu and kudzu-ing overview, xiii, 146–47 competition ideology for deregulating, 155–57 lack of competition in private prison market, 176–77 with lobbying, money, and competition ideology, 160 politicians fighting legislation to end price dripping in the US, 152–53 by Trump, to financial regulations to protect consumers, 268–69, 285–86 and UK privatizing some health services, 184–87 labor and pressure to lower prices, 54 laptop cameras and data harvesting, 214 Lay, Ken, 246 lemon markets, 63–64, 124 Lepper, Mark, 98–99, 100 life satisfaction levels, 247–49, 252 Little Ivies staying out of collegiate sports arms race, 138–39, 140 lobbyists, 146–61 overview, xiii casino lobbyists oppose ending drip pricing, 150–51 and Citizens United case in US Supreme Court, 155 kudzu and kudzu-ing the competition, 146–47 and money suffocating democratic values, 160 for private prisons, 173–76 local economies, supporting, 289–91 loss aversion, 81 low-value customers, 87 Mactaggart, Alastair, 286 MacTavish, Craig, 4 marginal benefit and marginal cost, 96–97 market economy competition ideologues relying on, 127 derivatives market, 261–63 farmers markets, 287–89 regulation of the market, 260 social capital necessary for, 249–51 social outcome of, 124, 125 trust and fairness as foundation, 244 marketing, 59–60, 67–68 marriage and online dating, 114–15 “Massive-Scale Emotional Contagion” study by FB, 219 Match.com, 108–9, 113–14 matriculation from elite private schools, 31–34, 296–98 McCaskill, Claire, 150, 154 McDonald’s, 52 McNamee, Roger, 199–200 measuring success colleges and universities, 15, 34, 38–39 InterActiveCorp, 109–11, 111, 115–16 public school ranking system, 7–9, 282 Medicaid expansion by states, 286 mental health and stress of superior achievement goal, 34 MGM Grand Hotel, Las Vegas, 154 middle class net worth, 160 Milgram, Stanley, 279–82, 285 Mill, John Stuart, 94 minimum wage increases by states, 286 mobile phones, 107–8, 196–98, 212–13 Moore, Don, 35 morality continuum, 257–58.

The Wisdom of Frugality: Why Less Is More - More or Less by Emrys Westacott

Airbnb, back-to-the-land, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, carbon footprint, carbon tax, clean water, Community Supported Agriculture, corporate raider, critique of consumerism, Daniel Kahneman / Amos Tversky, dark matter, degrowth, Diane Coyle, discovery of DNA, Downton Abbey, dumpster diving, financial independence, full employment, greed is good, happiness index / gross national happiness, haute cuisine, hedonic treadmill, income inequality, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, loss aversion, McMansion, means of production, move fast and break things, negative equity, New Urbanism, off-the-grid, Paradox of Choice, paradox of thrift, Ralph Waldo Emerson, sunk-cost fallacy, Thales and the olive presses, Thales of Miletus, the market place, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, Upton Sinclair, Veblen good, Virgin Galactic, Zipcar

And he won’t allow the second to value or admire anything but wealth and wealthy people or to have any ambition other than the acquisition of wealth or whatever might contribute to getting it.8 The “sunk cost” fallacy: Research by psychologists Daniel Kahneman and Amos Tversky in the 1970s led them to conclude that for most human beings a concern to avoid losses is a more powerful motivator than the desire to realize gains. Many other psychologists have followed in their footsteps and investigated the phenomenon of loss aversion. A study by Hal Arkes and Catherine Blumer is representative and revealing. Participants in their study were asked to imagine that they had bought two nonrefundable tickets, a $100 ticket for a skiing trip to Michigan, and a $50 ticket for a skiing trip to Wisconsin. They were then told that the dates of these trips conflicted, so they could go on only one of them.

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See self-sufficiency individualism, 173, 284 inequality, 151–52, 172–73, 218, 240, 285 Irvine, William, 7 Islam, 31, 78 It’s a Wonderful Life, 97 Jackson, Michael, 169 Jains, 31, 272 Jesus, 44, 45, 63, 103, 104, 141, 201, 283 Johnson, Samuel, 10, 65 Judaism, 31, 78 Kahneman, Daniel, 144, 153, 222 Kant, Immanuel, 35, 273 Kardashian, Kim, 214 karma, 74 Kazez, Jean, 88 Keynes, John Maynard, 80, 166, 241, 242 kibbutzim, 22 Kozlowski, Dennis, 168–69 Krugman, Paul, 226 Kublai Kahn, 147 Lafargue, Paul, 80, 81 Laham, Simon, 114 leisure, 77, 242. See also work Lichtenberg, Judith, 246 Linder, Staffan, 242 living cheaply, 14–18, 21, 37, 276. See also frugality; simple living locavorism, 261–64 loss aversion, 144 Louv, Richard, 132 luxuries: definition of, 177–78. See also luxury luxury, 33, 140, 146–47, 158–59, 171, 216; dangers of, 52, 55, 56, 111–16, 208–10 Lycurgus, 53 magnificence, 193 Mahavira, 32 Mandela, Nelson, 64 Mandeville, Bernard, 158–59, 216 Marcus Aurelius, 7, 24, 50, 57, 75, 98, 103, 117, 120, 148, 275 Marie Antoinette, 169 Marley, Bob, 102–4 Marx, Karl, 83, 87, 212, 281–82 materialism, 68, 99, 167, 173 material security: of modern life, 201–2, 204–5, 253 McCartney, Paul, 161 McCoy, Travie, 161 Mead, Rebecca, 198 Menedemus, 63 mercenariness, 142–44 Mill, John Stuart, 69–71, 74 Minnelli, Liza, 168–69, 177 Les Misérables, 63 miserliness, 143 Mittal, Lakshmi, 197 monasteries, 22, 31, 35, 45, 56 monastic orders, 53.

A Little History of Economics by Niall Kishtainy

Alvin Roth, behavioural economics, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon tax, central bank independence, clean water, Corn Laws, Cornelius Vanderbilt, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Dr. Strangelove, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, Great Leap Forward, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, low interest rates, market clearing, market design, means of production, Minsky moment, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, Phillips curve, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

All economics is about behaviour, of course, but behavioural economics was new because it built its theories around the quirks in people’s actual decision-making, rather than simply assuming that they were completely rational. One quirk is that people weigh up gains and losses differently. Rationally, a gain of $50 should exactly offset a loss of $50. However, people seem to hate losses more than they love gains. When he was still a student, the behavioural economist Richard Thaler (b. 1945) noticed ‘loss aversion’ in one of his own economics professors! The professor, a wine lover, was willing to pay a high price for a bottle of a certain wine to add to his collection. But he really hated giving one up: even if you offered him three times what he’d paid, he wouldn’t sell a bottle to you. Thaler and Kahneman did an experiment on a group of people to see what was going on.

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(i), (ii) Kerala (India) (i) Keynes, John Maynard (i), (ii), (iii), (iv), (v), (vi) Keynesian theory (i), (ii), (iii) Klemperer, Paul (i) Krugman, Paul (i), (ii) Kydland, Finn (i), (ii) labour (i) in ancient Greece (i) and market clearing (i) women as unpaid (i) labour theory of value (i), (ii) laissez-faire (i) landowners (i), (ii), (iii) Lange, Oskar (i) law of demand (i), (ii) leakage of spending (i) Lehman Brothers (i) leisure class (i) leisured, women as (i) Lenin, Vladimir Ilyich (i), (ii) Lerner, Abba (i) Lewis, Arthur (i) Lincoln, Abraham (i) List, Friedrich (i) loss aversion (i) Lucas, Robert (i), (ii) MacKay, Charles (i) Macmillan, Harold (i) macro/microeconomics (i) Malaysia, and speculators (i) Malthus, Thomas (i), (ii), (iii) Malynes, Gerard de (i), (ii) manufacturing (i), (ii) division of labour (i) see also Industrial Revolution margin (i) marginal costs (i), (ii) marginal principle (i), (ii), (iii) marginal revenue (i) marginal utility (i), (ii) market, the (i) market clearing (i) market design (i) market failure (i), (ii), (iii), (iv) ‘Market for Lemons, The’ (Akerlof) (i) market power (i) markets, currency (i), (ii) Marshall, Alfred (i), (ii), (iii), (iv), (v) Marx, Karl (i), (ii), (iii), (iv), (v), (vi), (vii) Marxism (i) mathematics (i), (ii), (iii) means of production (i) mercantilism (i), (ii) Mesopotamia (i) Mexico, pegged currency (i) micro/macroeconomics (i) Microsoft (i) Midas fallacy (i) minimum wage (i) Minsky, Hyman (i) Minsky moment (i), (ii) Mirabeau, Marquis de (i), (ii), (iii) Mises, Ludwig von (i), (ii), (iii), (iv) mixed economies (i), (ii) Mobutu Sese Seko (i) model villages (i) models (economic) (i), (ii), (iii), (iv) modern and traditional economies (i), (ii) monetarism (i) monetary policy (i), (ii) money (i), (ii), (iii), (iv), (v), (vi) see also coins; currency money illusion (i) money wages (i) moneylending see usury monopolies (i), (ii) monopolistic competition (i), (ii) monopoly, theory of (i) monopoly capitalism (i), (ii), (iii) monopsony (i) moral hazard (i), (ii) multiplier (i) Mun, Thomas (i), (ii), (iii) Muth, John (i) Nash, John (i), (ii) Nash equilibrium (i) national income (i), (ii), (iii), (iv), (v) National System of Political Economy (List) (i) Nelson, Julie (i) neoclassical economics (i) net product (i) Neumann, John von (i) New Christianity, The (Saint-Simon) (i) new classical economics (i) New Harmony (Indiana) (i) New Lanark (Scotland) (i) Nkrumah, Kwame (i), (ii) non-rival good (i) Nordhaus, William (i), (ii) normative economics (i), (ii) Obstfeld, Maurice (i) Occupy movement (i) oligopolies (i) opportunity cost (i), (ii) organ transplant (i) output per person (i) Owen, Robert (i) paper money (i), (ii) Pareto, Vilfredo (i) pareto efficiency (i), (ii) pareto improvement (i) Park Chung-hee (i) partial equilibrium (i) pegged exchange rate (i) perfect competition (i), (ii), (iii), (iv), (v) perfect information (i) periphery (i) phalansteries (i) Phillips, Bill (i) Phillips curve (i), (ii), (iii), (iv), (v), (vi), (vii) physiocracy (i), (ii) Pigou, Arthur Cecil (i), (ii), (iii) Piketty, Thomas (i), (ii), (iii) Plato (i), (ii), (iii) policy discretion (i) Ponzi, Charles (i) Ponzi finance (i) population and food supply (i), (ii), (iii) of women (i) positive economics (i) poverty (i), (ii), (iii), (iv), (v) in Cuba (i) Sen on (i) and utopian thinkers (i) Prebisch, Raúl (i) predicting (i) Prescott, Edward (i), (ii) price wars (i), (ii) primary products (i) prisoners’ dilemma (i) private costs and benefits (i) privatisation (i) productivity (i), (ii), (iii) profit (i), (ii), (iii), (iv) and capitalism (i), (ii) proletariat (i), (ii) property (private) (i), (ii), (iii), (iv), (v) and communism (i), (ii), (iii), (iv) protection (i), (ii), (iii) provisioning (i) public choice theory (i) public goods (i) quantity theory of money (i) Quesnay, François (i) Quincey, Thomas de (i), (ii) racism (i) Rand, Ayn (i) RAND Corporation (i), (ii) rate of return (i), (ii) rational economic man (i), (ii), (iii), (iv), (v) rational expectations (i), (ii), (iii), (iv), (v) real wages (i), (ii), (iii) recession (i) and governments (i), (ii), (iii) Great Recession (i) Keynes on (i), (ii) Mexican (i) redistribution of wealth (i) reference points (i) relative poverty (i) rent on land (i), (ii), (iii) rents/rent-seeking (i) resources (i), (ii) revolution (i), (ii), (iii), (iv) Cuban (i) French (i), (ii), (iii), (iv) Russian (i), (ii) Ricardo, David (i), (ii), (iii) risk aversion (i) Road to Serfdom, The (Hayek) (i) robber barons (i) Robbins, Lionel (i) Robinson, Joan (i) Roman Empire (i) Romer, Paul (i) Rosenstein-Rodan, Paul (i) Roth, Alvin (i), (ii) rule by nature (i) rules of the game (i) Sachs, Jeffrey (i) Saint-Simon, Henri de (i) Samuelson, Paul (i), (ii) savings (i), (ii) and Say’s Law (i) Say’s Law (i) scarcity (i), (ii), (iii), (iv), (v), (vi) Schumpeter, Joseph (i), (ii) sealed bid auction (i) second price auction (i) Second World War (i) securitisation (i) self-fulfilling crises (i) self-interest (i) Sen, Amartya (i), (ii) missing women (i), (ii), (iii) services (i) shading bids (i), (ii) shares (i), (ii), (iii), (iv), (v), (vi) see also stock market Shiller, Robert (i), (ii) signalling (i) in auctions (i) Smith, Adam (i), (ii), (iii), (iv), (v) social costs and benefits (i) Social Insurance and Allied Services (Beveridge) (i) social security (i), (ii) socialism (i), (ii), (iii), (iv), (v) socialist commonwealth (i) Socrates (i) Solow, Robert (i) Soros, George (i), (ii), (iii) South Africa, war with Britain (i) South Korea, and the big push (i) Soviet Union and America (i) and communism (i), (ii) speculation (i) speculative lending (i) Spence, Michael (i) spending government (fiscal policy) (i), (ii), (iii), (iv), (v), (vi), (vii) and recessions (i), (ii) and Say’s Law (i) see also investment stagflation (i), (ii) Stalin, Joseph (i) standard economics (i), (ii), (iii), (iv) Standard Oil (i) Stiglitz, Joseph (i) stock (i) stock market (i), (ii), (iii), (iv), (v) stockbrokers (i) Strassmann, Diana (i), (ii) strategic interaction (i), (ii) strikes (i) subprime loans (i) subsidies (i), (ii) subsistence (i) sumptuary laws (i) supply curve (i) supply and demand (i), (ii), (iii), (iv) and currencies (i) and equilibrium (i), (ii) in recession (i), (ii), (iii) supply-side economics (i) surplus value (i), (ii) Swan, Trevor (i) tariff (i) taxes/taxation (i) and budget deficit (i) carbon (i) and carbon emissions (i) and France (i) and public goods (i) redistribution of wealth (i) and rent-seeking (i) technology as endogenous/exogenous (i) and growth (i) and living standards (i) terms of trade (i) Thailand (i) Thaler, Richard (i) theory (i) Theory of the Leisure Class, The (Veblen) (i) Theory of Monopolistic Competition (Chamberlain) (i) Thompson, William Hale ‘Big Bill’ (i) threat (i) time inconsistency (i), (ii) time intensity (i) Tocqueville, Alexis de (i) totalitarianism (i) trade (i), (ii), (iii) and dependency theory (i) free (i), (ii), (iii) trading permit, carbon (i) traditional and modern economies (i), (ii) transplant, organ (i) Treatise of the Canker of England’s Common Wealth, A (Malynes) (i) Tversky, Amos (i), (ii) underdeveloped countries (i) unemployment in Britain (i) and the government (i) and the Great Depression (i) and information economics (i) and Keynes (i) and market clearing (i) and recession (i) unions (i), (ii) United States of America and free trade (i) and growth of government (i) industrialisation (i) and Latin America (i) Microsoft (i) recession (i), (ii) and the Soviet Union (i) and Standard Oil (i) stock market (i) wealth in (i) women in the labour force (i) unpaid labour, and women (i) usury (i), (ii), (iii) utility (i), (ii), (iii), (iv) utopian thinkers (i), (ii) Vanderbilt, Cornelius (i), (ii) Veblen, Thorstein (i), (ii), (iii) velocity of circulation (i), (ii) Vickrey, William (i) wage, minimum (i) Walras, Léon (i) Waring, Marilyn (i) wealth (i) and Aristotle (i), (ii) and Christianity (i) Piketty on (i) and Plato (i) Smith on (i) Wealth of Nations, The (Smith) (i), (ii) welfare benefits (i), (ii), (iii), (iv) welfare economics (i) Who Pays for the Kids?

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, working poor, yield curve

An example is “loss aversion,” in which people are provably more unwilling to take risks that involve losses than to take risks involving gains, even when the outcomes are, in mathematical terms, identical. The fact that people don’t always behave rationally may not come as news in the wider world, but the intellectual challenge provided to conventional economics by behavioral economics is big and important. It’s also a field that offers useful takeaways for the ordinary person, because you can catch yourself doing some of the things described by behavioral economists, such as loss aversion and “hindsight bias,” i.e., the tendency to explain things that happened in terms of how they turned out, rather than how they seemed at the time.

The Better Angels of Our Nature: Why Violence Has Declined by Steven Pinker

1960s counterculture, affirmative action, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, availability heuristic, behavioural economics, Berlin Wall, Boeing 747, Bonfire of the Vanities, book value, bread and circuses, British Empire, Broken windows theory, business cycle, California gold rush, Cass Sunstein, citation needed, classic study, clean water, cognitive dissonance, colonial rule, Columbine, computer age, Computing Machinery and Intelligence, conceptual framework, confounding variable, correlation coefficient, correlation does not imply causation, crack epidemic, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, demographic transition, desegregation, Doomsday Clock, Douglas Hofstadter, Dr. Strangelove, Edward Glaeser, en.wikipedia.org, European colonialism, experimental subject, facts on the ground, failed state, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, fudge factor, full employment, Garrett Hardin, George Santayana, ghettoisation, Gini coefficient, global village, Golden arches theory, Great Leap Forward, Henri Poincaré, Herbert Marcuse, Herman Kahn, high-speed rail, Hobbesian trap, humanitarian revolution, impulse control, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of the printing press, Isaac Newton, lake wobegon effect, libertarian paternalism, long peace, longitudinal study, loss aversion, Marshall McLuhan, mass incarceration, McMansion, means of production, mental accounting, meta-analysis, Mikhail Gorbachev, mirror neurons, moral panic, mutually assured destruction, Nelson Mandela, nuclear taboo, Oklahoma City bombing, open economy, Peace of Westphalia, Peter Singer: altruism, power law, QWERTY keyboard, race to the bottom, Ralph Waldo Emerson, random walk, Republic of Letters, Richard Thaler, Ronald Reagan, Rosa Parks, Saturday Night Live, security theater, Skinner box, Skype, Slavoj Žižek, South China Sea, Stanford marshmallow experiment, Stanford prison experiment, statistical model, stem cell, Steven Levy, Steven Pinker, sunk-cost fallacy, technological determinism, The Bell Curve by Richard Herrnstein and Charles Murray, the long tail, The Wealth of Nations by Adam Smith, theory of mind, Timothy McVeigh, Tragedy of the Commons, transatlantic slave trade, trolley problem, Turing machine, twin studies, ultimatum game, uranium enrichment, Vilfredo Pareto, Walter Mischel, WarGames: Global Thermonuclear War, WikiLeaks, women in the workforce, zero-sum game

(Of course, paying a self-imposed cost would be worthwhile only if the prize is especially valuable to him, or if he had reason to believe that he could prevail over his opponent if the contest escalated.) In the case of a war of attrition, one can imagine a leader who has a changing willingness to suffer a cost over time, increasing as the conflict proceeds and his resolve toughens. His motto would be: “We fight on so that our boys shall not have died in vain.” This mindset, known as loss aversion, the sunk-cost fallacy, and throwing good money after bad, is patently irrational, but it is surprisingly pervasive in human decision-making.65 People stay in an abusive marriage because of the years they have already put into it, or sit through a bad movie because they have already paid for the ticket, or try to reverse a gambling loss by doubling their next bet, or pour money into a boondoggle because they’ve already poured so much money into it.

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Though psychologists don’t fully understand why people are suckers for sunk costs, a common explanation is that it signals a public commitment. The person is announcing: “When I make a decision, I’m not so weak, stupid, or indecisive that I can be easily talked out of it.” In a contest of resolve like an attrition game, loss aversion could serve as a costly and hence credible signal that the contestant is not about to concede, preempting his opponent’s strategy of outlasting him just one more round. I already mentioned some evidence from Richardson’s dataset which suggests that combatants do fight longer when a war is more lethal: small wars show a higher probability of coming to an end with each succeeding year than do large wars.66 The magnitude numbers in the Correlates of War Dataset also show signs of escalating commitment: wars that are longer in duration are not just costlier in fatalities; they are costlier than one would expect from their durations alone.67 If we pop back from the statistics of war to the conduct of actual wars, we can see the mechanism at work.

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I already mentioned some evidence from Richardson’s dataset which suggests that combatants do fight longer when a war is more lethal: small wars show a higher probability of coming to an end with each succeeding year than do large wars.66 The magnitude numbers in the Correlates of War Dataset also show signs of escalating commitment: wars that are longer in duration are not just costlier in fatalities; they are costlier than one would expect from their durations alone.67 If we pop back from the statistics of war to the conduct of actual wars, we can see the mechanism at work. Many of the bloodiest wars in history owe their destructiveness to leaders on one or both sides pursuing a blatantly irrational loss-aversion strategy. Hitler fought the last months of World War II with a maniacal fury well past the point when defeat was all but certain, as did Japan. Lyndon Johnson’s repeated escalations of the Vietnam War inspired a protest song that has served as a summary of people’s understanding of that destructive war: “We were waist-deep in the Big Muddy; The big fool said to push on.”