Costs of Financial Innovation

In “Golden Eggs and Hyperbolic Discounting”, the author argues that the liquidity brought by modern finance is not a good thing.

By enabling the consumer to instantaneously borrow against illiquid assets, financial innovation eliminates the possibility for partial commitment. This has two effects on the welfare of the current self. First, the current self no longer faces a self-imposed liquidity constraint and can therefore consume more in its period of control. Second, future selves are also no longer liquidity constrained and may also consume at a higher rate out of the wealth stock that they inherit. The first effect makes the current self better off. The second effect makes the current self worse off (since the current self would like to constrain the consumption of future selves).

Golden Eggs and Hyperbolic Discounting, David Laibson, The Quarterly Journal of Economics, Vol. 112, No. 2, In Memory of Amos Tversky (1937-1996) (May, 1997) , pp. 443-477.

Memorization and Repetition Still Needed for Learning

I believe in learning for understanding, critical thinking, and inquiry-based learning. But even so, real fluency still requires some drill-and-kill.

The problem with focusing relentlessly on understanding is that math and science students can often grasp essentials of an important idea, but this understanding can quickly slip away without consolidation through practice and repetition. Worse, students often believe they understand something when, in fact, they don’t.

via How I Rewired My Brain to Become Fluent in Math – Issue 17: Big Bangs – Nautilus.

Time after time, professors in mathematics and the sciences have told me that building well-ingrained chunks of expertise through practice and repetition was absolutely vital to their success. Understanding doesn’t build fluency; instead, fluency builds understanding. In fact, I believe that true understanding of a complex subject comes only from fluency.

Predicting happiness when making choices

From “Happiness: Unlocking the Mysteries of Psychological Wealth” by Diener and Biswas-Diener, 2008:

There are several predictable thinking errors people commonly make that lead them to incorrectly predict their own future emotions in general, and future happiness in particular:

  1. Focusing on a single salient feature or period of time in a choice, rather than looking at the big picture.
  2. Overestimating the long-term impact of our choices.
  3. Forgetting that happiness is an ongoing process, not a destination
  4. Paying too much attention to external information while overlooking personal preferences and experience.
  5. Trying to maximize decisions rather than focusing on personal satisfaction.
  6. Confusing wanting something for liking it later, and forgetting to evaluate whether we will enjoy the choice once its novelty wears off.

The good news is that by identifying these errors and learning about why they occur, we can guard against them. We may never be able to overcome them entirely, but we certainly can reduce their impact on our lives. By considering a wide range of information, by remembering our ability to cope and adapt, by tapping personal experience, and by remembering that happiness is an ongoing process, you will be far more likely to make decisions that will make you optimally happy. To make good happiness forecasts, get some experience when you can, and check with others who have had similar experiences to the one you will have. Focus on the entire picture, not just on some salient aspect of it, and think what it will be like after a year, not just during the initial period when things may be either more stressful or more exciting. By becoming a good happiness forecaster, through practice and experience, you will substantially increase your psychological wealth.

Distraction and Attention

From In Defense of Distraction:

“Where you allow your attention to go ultimately says more about you as a human being than anything that you put in your mission statement,” [Merlin Mann] continues. “It’s an indisputable receipt for your existence. And if you allow that to be squandered by other people who are as bored as you are, it’s gonna say a lot about who you are as a person.”

Positive emotions make us more vulnerable

From What Makes Us Happy?:

… positive emotions make us more vulnerable than negative ones. One reason is that they’re future-oriented. Fear and sadness have immediate payoffs—protecting us from attack or attracting resources at times of distress. Gratitude and joy, over time, will yield better health and deeper connections—but in the short term actually put us at risk. That’s because, while negative emotions tend to be insulating, positive emotions expose us to the common elements of rejection and heartbreak.

Then there is this (emphasis mine):

When Vaillant told me he was going to speak to Seligman’s class, he said his message would be from William Blake: “Joy and woe are woven fine.” Earlier in his career, he would use such occasions to demonstrate, with stories and data, the bright side of pain—how adaptations can allow us to turn dross into gold. Now he articulates the dark side of pleasure and connection—or, at least, the way that our most profound yearnings can arise from our most basic fears.

Self-control via strategic allocation of attention

From Don’t in the New Yorker:

What, then, determined self-control? Mischel’s conclusion, based on hundreds of hours of observation, was that the crucial skill was the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow—the “hot stimulus”—the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from “Sesame Street.” Their desire wasn’t defeated—it was merely forgotten.

Once you realize that will power is just a matter of learning how to control your attention and thoughts, you can really begin to increase it.

… this is how self-control “cashes out” in the real world: as an ability to direct the spotlight of attention so that our decisions aren’t determined by the wrong thoughts.