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Self-Interest And How to Get the Best Out of Life
Transcription of interview with Barry Schwartz on August 22, 2011.
Barry Schwartz is a professor from Swarthmore College in Pennsylvania, who has written many
books, including The Paradox of Choice and The Battle for Human Nature. One of Professor
Schwartzís theories is that self-interest is not necessarily what makes people tick.
Douglas Goldstein, financial planner & investment advisor, interviewed Barry Schwartz for the
second time on Arutz Sheva Radio.
Barry Schwartz: Itís a part of what makes people tick, but it isnít self interest that
inspires us to have children and nurture them. Anyone whoís got kids knows that itís a
life-changing experience on a day-to-day basis, and most of these life changes are worse.
You donít have any time to yourself. Youíre schlepping from one place to another. Youíre
asking yourself why you did this. In the long run, weíre all thrilled, delighted and feel
fulfilled that we have children, but we nurture children not out of self-interest but out
of our interest in their welfare. We participate in civic activities of all kinds, not out
of self-interest, but in our interest in improving the society we live in.
A significant part to most of us is the desire to do meaningful things that actually improve
the lives of other people. What happened, in my view, is that the ideology of self-interest
which is so central to the organization of competitive markets went from being a piece
of the story to being the whole story. Adam Smith wrote two books, the one everybody knows
about called the Wealth of Nations, which is the one that advanced the market. The other
one, the Theory of Moral Sentiments, is all about how people care about the welfare of
other people. He thought that the only reason why the competitive market works is this basic
concern that people have to do the right thing and see to the welfare of their fellow human
beings. Whatís happened in economics is that that piece of us got forgotten, and that wouldnít
be so bad. What makes it especially bad is that whether you show that other piece, the
non-self-interested side depends on what kind of society you live in.
If you live in a dog-eat-dog world, where if you donít take care of yourself, no one
will take care of you, youíd better be self-interested. But if you live in a world where education
and health care are provided and thereís a safety net if you lose your job, then thereís
not as much as need to be self-interested. We create a competitive environment and essentially
force people to play out the scenario that economists assumed was basic to human nature
to begin with.
I donít doubt that people feel good about themselves when they do good things or things
that improve the welfare of others, but I donít think itís a big mistake to treat
a consequence of that act as its cause. When you do something like that, it has multiple
consequences. One is it makes you feel good, and another is that it actually improves somebody
elseís life. The problem in the academic world is that it has reached the point where
the only way you can claim that somebody is not acting self-interestedly is if they do
something that actually makes them worse off. If I gave a million dollars to a hospital
and it makes me feel good, the cynic will say, ìYes of course, he gave a million dollars
to us because he wanted to feel good. Thatís why he did it.î The only times when you canít
make that kind of explanation is if it causes you to suffer. Thatís way too strange a criterion
for calling something self-interest.
Douglas Goldstein: How does your theory about people having too many possibilities relate
to investments, because it is true that people have tons of choices but given thatís the
way it is today, what would you suggest people do to make a wise decision in their investing?
Barry Schwartz: I make two recommendations in my book that are relevant. One is ìchoose
when to choose,î and what I mean by that is delegate the decision to other people sometimes.
It doesnít mean they have to be an expert. It could be somebody who doesnít know any
more than you do, but perhaps has already researched whatever it is youíre looking
for, a digital camera or new computer. You buy the same one your friend bought. On some
decisions, you do the research but for some, you just take advantage of the fact that people
you know and trust have done the research for themselves already.
In the case of financial investments, it seems to be that the thing to do is to hire someone
you trust enough to be your agent. Not only because the decisions were likely would be
better, but also because even they arenít any better, you will be spared all of the
anguish that goes into making these decisions. The advisor has the anguish, you just get
the returns. Thatís one piece of advice.
The second, which I think is complete enough in the financial world, is ìdonít try to
maximize, donít try to get the best possible return.î The question you should be asking
yourself is what is a good enough return? What kind of return do I need to be able to
live in retirement and the style that I aspire to? Will 5% annually do it? Will 3% annually
do it? And then you look for an investment strategy that will produce that return under
the widest set of future circumstances. In effect, youíre choosing to maximize robustness
to uncertainty rather than return on investment, but as near as I can tell, itís an approach
by the end of business stakes.
I think the reason why itís an important approach is that youíre supposed to do risk
assessment, but often we attach probabilities to outcomes and they are complete fiction.
Thereís no basis for these probability assignments. You can pretend that the financial world is
precise enough that you can actually make meaningful statements of probability. Whatís
the probability that the Yankees are going to win the World Series? I say itís 70% because
I bet on how confident I am that the Yankees are going to win the World Series. Youíre
going to take that to the bank only if youíre insane. I think a lot of probability statements
in the world of finance have that same character. If you canít actually attach probabilities
to the outcomes, you canít maximize because to maximize is to compute amount times the
probability of getting those amounts.
Douglas Goldstein: How about to optimize, meaning to optimize your portfolio, to develop
a portfolio thatís optimal for the clientís needs, which depends not only on what he needs
to do in order to retire but so he can have a portfolio that he can sleep at night with?
Barry Schwartz: The reason why I donít use the word ìoptimizeî is that ìoptimizeî
and ìmaximizeî are sometimes used interchangeably. To really make clear that Iím talking about
something quite different, the term I use, which I stole from a very distinguished psychologist
50 years ago, is ìsatisfies.î I used it in my book The Paradox of Choice and I use
it in talking about robustness. ìSatisfiesî means choosing something that will produce
a satisfactory, not an optimal, result because you canít compute an optimum. You canít
compute a satisfactory result. You can ask people sit down, ìWhat do you need?î ìWhatís
good enough?î ìWhat kind of life do you want to live when youíre 65?î And they tell
you and you tell them ìOkay, youíre going to need X percent of return on investment
and this is the best way to achieve that result, and donít tell me that your friend is getting
X plus 2% because thatís not relevant.î
Itís probably not true, but even if it was true, itís not relevant. Your aim is not
to get the most; your aim is to get enough. I think this would transform the way businesses
formulates strategies, whatís a good enough return for the coming fiscal year instead
of how we maximize the return for the coming fiscal year.
Douglas Goldstein: That would apply to other fields as well, for example dating, like how
many times you speak to someone who is in his 30s, 40s or 50 who hasnít found the right
woman.
Barry Schwartz: I havenít done research on this, but I think thatís exactly right. I
think a lot of the reason why you see single people in their 30s is they think their task
is to find the best possible partner and of course there is no such thing. The problem
when you finally find the best possible partner is that youíre going to have to ask yourself,
ìWhy would this person possibly want to be with me? Iím not the best possible partner.î
Douglas Goldstein: Itís a good philosophy in life. Itís a very good approach that people
should consider, which is simply that if you constantly want the very best all youíre
doing is setting yourself up for disappointment.
Barry Schwartz: The Paradox of Choice is about that, and the states we see when it comes
to choosing colleges, our best students. They have to go to the best school whatever that
means. The colleges have to pick the best students, whatever that means. The result
is that high school becomes a nightmare of competition and extra tutoring so that theyíll
get into the best and theyíll be miserable if they get into the third best.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel. Securities offered
through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried
by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article. While it is
believed to be current and accurate, divergence from the original is to be expected. The original
podcast can be heard at https://sites.google.com/site/goldsteinradioshows/. All information on this website is purely
information and should not be used as the sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult
with a professional financial advisor before making any financial decisions. Please see
the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.