you you there is a tradition that certainly goes back to Adam Smith if not earlier of explaining the behavior of markets in by simple assumptions and mainly by the assumption of self-interest so the great insight of Adam Smith right and the wealth of nations was was that you don't have to postulate any agent or any planning or any central planning but the equilibrium that we see in the economy is produced by people who are self-interested were acting in their self-interest now when you have that basic idea which is completely basic to economics to make it
work that is to make it generate precise predictions you have to make assumptions about what people view as their self-interest what they're trying to do and and you have to assume that whatever they're trying to do they're doing well because it's just much simpler to assume that whatever people are trying to do they're not making mistakes so the assumption of rationality came from their it was that in order to have a theory that predicts something about the behavior of markets from assumptions about individuals it's very natural to predict that people don't make mistakes at loops
from there when you try to develop a very precise theory then what does it mean not to make mistakes then it begins then the the concept of full rationality develops and it's a concept that's very non-intuitive basically it means that people take everything into account and that all their beliefs are internally consistent and all their preferences are internally consistent and this is simply because if you have decided that you are going to assume rationality there is no obvious limit then is a definition of referent and and and that's the way it goes so the development
makes perfect sense you start from self-interest you try to explain what self-interest is and you end up with a rational agent and I don't think that we should exaggerate the impact of behavioral economics but it certainly has made a lot of progress that is 25 with 25 years ago it was not obvious well me count about 25 years ago I was teaching it at Berkeley almost 30 years ago I was teaching at Berkeley with well-known economist Roderick Olaf who also got the Nobel Prize before the year before I did I think and and we were
teaching a course together and he was advising this was a course for doctoral students and and he was telling his students all this material is very interesting but you should be very careful not to make a career of it because you will ruin your career if you do this and that was less than 30 years ago and now you have now it's the most popular topic I think at Harvard in the graduate program and at Berkeley and and you have several clock medalists and you have the president of the Economic Association so clearly it is
now establishment but it wasn't 25 years ago so it's been a very rapid development I think it's important to realize ahead of time that this is going to happen I mean so the worst thing a thing that can happen is for people to be surprised because they assume that that it's not going to happen and then the the general principle that you have to focus on the resistance and looking for ways of reducing the resistance that is a general psychological principle it doesn't come from loss aversion but it fits very well with law school but
you know sometimes sometimes it's impossible sometime people must lose and then you must force them to lose so it's there is no general rule about what you can do but knowing ahead of time that this is going to happen and trying to minimize the abruptness of the loss and and even trying to show understanding to the losers all these are generally good things you could imagine that people would know the probabilities and would decide to take the risk because the benefits outweigh the risks so you know gamblers know that they're gambling what is interesting is
that in many domains of life people gamble and they don't know that they're gambling so that is optimistic overconfidence so and it causes you know it causes people to take risks that they they might not take if they knew if they admitted what the risks are so people deny the risks this is what we find one of the problem that organizations have when when they're generating a decision or a plan is that when they're converging towards a plan especially if the leader of the organization has made a commitment to the plan or is looking like
his he or she is making a commitment then then it becomes very difficult to dissent it becomes very difficult to express doubts about the problem and and there is really social pressure against pessimists and there is social pressure against doubters now the pre-mortem technique it involves getting people together and and in effect well you tell people the following things suppose we have adopted this plan and and now it's a year later and it was a disaster and write the history of that disaster on one page and now you have turned things around so that people
compete to produce interesting ways in which the project could fail and that I think a very good idea in many context I think the problem of exaggerated optimism and pessimism that is human nature and you know we're not going to get rid of that I'm not an expert on financial institutions and I'm not an expert on regulation but it seems to be fairly clear that professionals know about certain things and they know for example that when you have executives in in banks that are highly optimistic or highly overconfidence the banks may fail and and that
this is a risk for society so regulation is about that regulation is in part aimed at controlling the optimism and the exuberance of of capitalists and also to protect people against their own optimism in some cases the sense making machine produces coherent and simply interpretations of the world and and it does that by in effect denying the ambiguity that actually exists so when there is ambiguity you you choose a particular interpretation of the world over other possible interpretations in that sense we we live subjectively in a world that is much simpler than the world really
is now you know whether this is a good thing or a bad thing in general in general I think optimism is good in general and in the grand scheme of things you know animals are wired to survive and but humans are special and we're special in the sense that evolution hasn't prepared us for the world we live in evolution you know may have prepared humans for for another kind of existence for another set of problems so we live with the mind and with and and with emotions and with a body that is not perfectly adapted
to the circumstances of our lives and that that is the underlying you know reason for a lot of what is happening certainly religion is one of the ways to remove ambiguity and to provide a ready-made interpretation to any mystery in life and and so that is clearly one of its functions and and it it is also the case that people are that the mind is is prepared for religion that is the mind is prepared when we see then so when we see something happening we very frequently it's natural for us to interpret that as intentional
that is that something wanted this to happen or chose for this to happen and so having you know God or religious presence that is intentional that wants the world to be the way it is is a very natural thought for human beings our political beliefs and a religious beliefs that you know they're they come from the same place really I mean they they are primarily based on on how we were socialized you know and and who we lived who we grew up with I mean you know why do people have the religion of their parents
and not some other religion I mean so clearly it's it's in people's personal history they acquire that belief and what I find remarkable and really very interesting is that you know most of us feel that we know things so religious people know things about the world and and non-religious people and I'm not religious but I feel I know many things because I believe the scientists who tell me those things but in fact I have no way of telling so my belief in scientists is not all that different from the belief of religious person in the
tea dreams of religion there they come from the same place they come from trusting people because we have no way of understanding the world on our own we must understand the world by trusting others there are those two ways of evaluating of evaluating life and you can evaluate life as you live it over time or you can evaluate life as as you think about it when you think about it and and those can be very different so the the question to people of their mood over time you know how they feel about their life as
they live it and the question of how satisfied they are with their lives when they think about it are two very different questions and you don't get the same answer and many years ago like 15 years ago even less I I used to think that how you actually live your life is the only thing that matters you know what you think about your life is there's an error is an illusion that I don't think so anymore I think you have to have both both perspectives even if they don't agree and the reason I think that
is that basically I think people are motivated to improve the quality of their memories more than they're motivated to improve the quality of their experiences and and so it doesn't make any sense to have a conception of well-being that doesn't reflect what people want to do and what they want to do is they want to have good memories I think there are many thing that people can do to you know to live more sensibly but one of the things is to try to view problems that are recurrent problems to view them as as recur to
make to make policy decisions rather than to make decisions one problem at a time so you know when an example is dieting for example I mean so so the decision never to have dessert is one decision the decision making a series of decision not to have this dessert or not that dessert and not to have the third one is a very different thing and much much harder to do so viewing taking a broad view is important another thing that is very important is that is knowing ahead of time what you will get used to what
you will get accustomed to so people may know that there are certain things that you don't get accustomed to I think that having a house is a beautiful view or a view of the water people can derive pleasure from that for many years the size of the house matters less the size of the car there are other things that people very quickly get used to people don't get used to seeing friends so if you see the same friends week after week the pleasure doesn't diminish but eating exactly the same thing week after week you know
that the pleasure could diminish so knowing what other thing that you can adjust to and cannot adjust to that I think would be useful is that rich people are certainly more satisfied with their life there is no question we also know that they are different from poorer people on average you know they're healthier they're them you know then they grow up healthier but in some cases they're born healthy you know happiness is in part a a character trait and and happy people tend to become richer than unhappy people not a lot richer but there is
there is an effect in that direction it's not only that the happier rich it's that happier people do better at the economy and then then unhappy people what we do find though is that the effect on emotional experience is not large where money is very important is is when bad things happen when bad things happen it's much better to be rich because you can protect yourself much better so being ill is much easier for the rich it's not a good thing but it's not easier divorce is much easier for the rich so for many of
the miseries of life money makes a difference whereas in the absence of misery the difference is less you know it's the same in the United States with health insurance you know many people don't have health insurance and it it is the effect on on their well-being is quite small when they're healthy the effect of their well-being is enormous when they're sick so when you're sick and you in addition have to worry about money that that becomes every problem becomes greatly exacerbated or having you know having a sick trial or taking care of parents in all
of these problems having money makes a big difference when definition of that I was interested in some time ago was that happy people spend most of their time not wanting to be somewhere else and if you spend a lot of your life wishing you were in another situation than you certainly are not a happy person and flow it doesn't the way that it's described and the way that it's experienced it's not the characteristic happy state because people are completely unaware of themselves I mean that's the essence of flow but the essence of flow is also
that people really don't want to be interrupted that is they want to continue so in that sense flow is a happy state the essence of flow is that your attention is completely mobilized and that it becomes effortless to keep your attention where it is that is if I read a book and the book is boring then I'm attending to the book but I have to force myself to attend to the book if I'm in a state of flow I no longer have to force myself that's the essence so it's it is attending to the experience
but attending effortlessly that's you know this is this is a very good state clearly in flow people are intensely focused on something but what you don't have is you do not need executive control that is you do not need effort in order to keep focused on what you're focused on and that's that's the what defines flow is a very desirable state then a virtuous point is an interesting point I think because he distinguishes between rationality and intelligence that is he says there are some people who can be intelligent but they're not rational and and what
he means by that is they do not control their thinking they do not monitor the quality of their thoughts and the quality of the indecisions so they can be intelligence in the sense of having a lot of brainpower that is they can solve problems but they're not rational in the sense of controlling the way they think and the way they make decisions it's it's still not established the extent to which that distinction is is a strong one but there is work on this that you can have intelligent people who do not monitor themselves they they
an and Stanovich would call them deficient in rationality we have evidence that in many situations the first impulse that people have is actually a generous impulse so in many situation you know Oscar Wilde I think wrote about that a hundred and fifty years ago but he he wrote what should be where your first impulse because it's the good one you know it's the generous one so it's it is not obvious you know children it's a generosity is built in part in system one I mean so it's not only that we're not only selfish we're also
naturally generous Earthman was well in the first place you know he enjoyed what he was doing I mean it is not that that's well established but it's also true that he was in a context there are a lot of people with doing similar things and and you know what is very frightening is that you can create a situation in which people can be treated like animals and you know we they are no longer humans and you don't feel what you would normally feel and and it's possible it is possible to make reasonable people act in
that way I mean that's the important lesson I think is that argument is not all that different from the rest of us when we see success or we see failure we assume that it was somebody who succeeded or fail because of something they did who didn't do whereas you know it could be that they succeed or fail because of something that somebody else they didn't do so it wasn't under their control and that's what I mean by luck if you believe that luck is the only thing and if you believe that everything is willed and
that would we and that what we do doesn't matter and so on then then that's not a recipe for a very successful society although I mean even even with that there are exceptions I'm just arguing in favor of some kind of balance not denying that if you try hard you know it's it's lucky you're likely to do well and if you don't try hard you know you're likely to suffer for it I'm just saying that when we look at ourselves and when we look at other people we tend to put to assume much more control
and in fact we have it's very easy to point out that you know democracy as a system is not particularly well equipped to deal with certain problems I mean I I think that global warming for example is is the kind of problem that democracies are going to find more difficult to deal with you know if I had to guess who is who is going to take more action about global warming try now the United States I would bet on China today because because they are an authoritarian system and if the government realized that the problem
they're more likely to do something about it and then they are able to do something about that's an isolated problem for most other aspects of life you know I would rather live in a democracy than in than in a thora terraeum system but it's clear that democracy as we practice it people vote very largely by system what they don't you know it's not system - it's not a deep analysis that makes people vote I think there are a large differences in in the extent to which politicians and political movements encourage system one that is appeal
to emotions appeal to anger appeal or appeal to a more general and more universal and longer and and some longer term view of where society is going so there clearly are differences you know it's not not I'm certainly not neutral in my attitude to different kind of politics but I think that even the the politicians who are the most civilized if they are going to attract a following it is because they managed to appeal to the emotional people I hope that it's not the same kind of emotion that it's not hatred and it's not fear
but that it's sympathy or empathy or hope but but a politician cannot succeed without appealing to the notions you you
