Monday, January 1, 2007

The same statement can make two claims:
1) Explaining how the world really is
2) Explaining how one believes the world really is

the experience of birth

and suddenly we come to exist. we awaken out of dreamless sleep. not softly but due to the unstoppable, shrill wake-up call of a biological clock (we will get used to it). within a blink of an eye our existence - a warm and weightless one - changes brutally as we are exposed to the contradiction of the ego and his world for the very first time. there is no warning. no mercy. and no choice. we are forced to be. we are literally pulled out of the warm shelter, which is all we can know until that moment. actual existence begins with a shock. we start naked, as depending, helpless, living beings; crying loudly, unable to digest or grasp what just has happened. we are exposed to this world, to its gravity and cruel harshness, after months of becoming consciousness. in this sense, birth is a process rather than an event. it is a process that culminates into an overwhelming stimulus satiation against which our fragile skin is suddenly to protect. life with all its sensational stimuli begins as a supreme surprise (nothing can be more unexpected later on), and who can imagine what a pain beyond all bearing it must have been - breathing this air, feeling room temperature, sensing smells, noise, and this blinding light for the very first time. we cry loud at birth in response to this forgotten but formative experience, far from a warm welcome to this world. but the world is not merely as it seems. there is a second impression that may give us hope - the affection of a mother to her child, our very first emotional experience. regardless whether motherly love cannot be understood at birth, at least it can be felt. this love may have been felt even before the shock, but it becomes meaningful only after our cruel exposure to reality. this becoming of meaningfulness is in accordance to a scheme that is essential to our existence - the need to experience pain until the value of comfort, or the absence of pain, can be understood. and life with its intellectual appeal is yet waiting for us... as our bodies and minds grow up we wander and look around: astounded, shocked, and we wonder what we are doing here, or where we came from, as if we had lost our memories...

Saturday, December 16, 2006

Some unfinished thoughts from December 2003, integrating some readings on psychology and behavioral finance -

What is rationality?

Rationality refers to normatively acceptable beliefs and behaviors. Normatively acceptable beliefs and behaviors are consistent among agents who have similar characteristics and who grew up under similar circumstances.

Rational agents’ beliefs are normatively acceptable when they correspond with physical and abstract reality to the extent possible given their sensational experience. Assuming that the sensational experience is not disturbed, their view to the world should be representative for physical and abstract reality. A human being is rational to the extent that his capability to construct a representative world view based on input is not limited (cognitive rationality). In this context, rational agents are also required to update their beliefs correctly.

It is assumed that rational agents, as human beings, form culturally influenced individual beliefs regarding the existence of “universal“ ethical (what constitutes “good” and “bad”, e.g. fairness, freedom,…) and social (what constitutes “appropriate” behavior) values and determinants.

It is assumed that humankind essentially identifies itself with normative acceptability, normatively acceptable being rational beliefs as well as rational (in itself normatively acceptable), social, and ethical behavior. As soon as legitimate interests are involved (also interests from parties that cannot articulate themselves) rational behavior resembles ethical behavior but not all rational behavior is ethical and not all ethical behavior is rational.

Society provides the fundamental context within which individuals develop their egos and personas, and therefore their identities, by providing a framework of “basic beliefs and assumptions about the nature of things, the world, and the conduct of life held in common by the members of the group” (Progroff, 1954 – cited by: Jenner, 2000)

For a rational agent, his will must always be identical to a normatively acceptable end (self-sufficient rationality). Therefore, a rational agent is required to dominantly desire rationality as an end in itself. But, what actually constitutes normatively acceptable ends?
What is perceived as being a normatively acceptable end? It appears this is subject to individual/cultural determinants! Therefore, rationality as an end in itself is ultimately relative.

Rational agents’ behavior essentially represents a means to realize an end, which is his will. His will is formed by a choice (decision) of the most desirable future state of physical and abstract reality given
- an egoistic desire (pain, joy, painful / joyful emotions)
- non-egoistic natural desires to act according to what is perceived as being “normatively acceptable”
o the desire to preserve integrity as a rational being by acting according to what is perceived as being “rational” (rationality as an end in itself)
o the desire to preserve integrity as an ethical being by acting according to what is perceived as being “good” (the “good” as an end in itself)
o the desire to preserve integrity as a social being by acting according to what is perceived as being “appropriate”
The total desirability of different states of physical and abstract reality is determined by individual (collective?) preferences (-> value function). If the choice isn’t made, the behavior results from the unconsciousness.

In another, less sophisticated sense, a human being acts rationally to the extent that he acts in an effective (as perceived) way to realize a previously defined end (often the maximization of his own utility). (instrumental rationality).

It becomes clear that behavior does not only result from a rational reflection of the legitimation of interests but
- is founded on the belief in a non-rational set of ethical and social values and
- involves a fundamental trade-off between individual desires and the desire to act rational, social, ethical (contrary to a tradeoff between own and other’s interests)
by human nature.

In fact, rational agents’ behavior is constrained by both his beliefs and preferences. His beliefs are dependent on his capability to construct a representative world view. His preferences are limited to the extent that his desire to be rational is limited by other desires.

Several cognitive and behavioral biases limit human rationality. These biases are an instinctive response to human limitedness to cope with an overwhelmingly complex (regarding causal relationships), chaotic, and uncertain (regarding the future) world.

Representativeness: Tendency to categorize an object as belonging to a certain population based on perceived similarity, neglect of the sample size
Illusion of knowledge: Self-assigned confidence intervals tend to be too narrow. Estimates of certainty and impossibility tend to be wrong 20% of the time.
Tendency to estimate one’s own or one kind’s characteristics and abilities as being above average (example: the rationality of humankind)
Self-attribution bias: Tendency to attribute success to own ability and failure to the environment
Painful feeling
Painful feeling of regret (loss of integrity) when being confronted with evidence of erroneous behavior, particularly when errors are due to activity rather than inactivity. Leads to disjunction effect (Waiting with decision-making until irrelevant information is revealed, reluctance to act upon unclear information (ambiguity aversion)), reluctance for innovation, preference for routine behavior,…
Painful feeling of cognitive dissonance (mental conflict) when being confronted with evidence of false beliefs (invalid assumptions), reluctance to update beliefs by avoiding, ignoring, forgetting, doubting, misinterpreting new information. Leads also to reluctance to construct/create new models.
Framing: The way a situation is perceived/presents itself influences the decision
Mental compartments: Tendency to consider separate parts instead of considering the whole. Tendency to segregate rather than integrate. Tendency to overlook the essential. Opening and closing of separate accounts for a series of outcomes (mental accounting).
Selective attention – leads to availability bias: Tendency to base judgments on most salient and available data. Leads to a tendency to emphasize own and most recent experience.
Structure of language: Situation can only be perceived conditional to the terms available

Further biases:

Tendency to believe that
interpretation of own experience should be identical with other’s interpretation of experience
the world is inherently understandable by human mind
reason determines what’s reasonable (the validity of questions is determined by oneself)
e.g. everything must have a reason/meaning/cause
perception of the world (“world view”) and reality are identical (implying “what cannot exist/be true in my worldview cannot exist in reality“
verbal description of the world and concrete things are identical
verbal description of the world and underlying ideas are identical
concrete things and underlying ideas are identical (Plato showed that this isn’t the case)
things, abstract relationships, thoughts, ideals and names exist in the same way
History developed as intended by historical actors – retrospective fallacy, believing that the future couldn’t have unfolded otherwise at any time in history
the truth of a statement is determined by characteristics of its source
difficulty to separate emotions from judgment
there is only either-or, either true or false
“equality” is the same for the right to own property and the right to pursue happiness (making life a lottery)
freedom is the same for the freedom from tyranny and the freedom from hunger
equity rights apply to consumption goods in the same way as they do for investment goods (qualitative difference of goods is disguised by monetary value)

Human beings are unable to imagine the infinite, to overcome space and time.

Human beings follow a quasi-scientific heuristic: formulate hypothesis (in retrospective) and test them through experience, while relying on an extremely small sample.

Systemic biases: believing that
Every effect has exactly one cause (no multicausality)
The cause is the effect (when it’s actually vice versa)
Cause and effect can’t be the same
What always happens in sequence must be cause and effect