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Lszl Mr
THE EVOLUTION OF MONEY
Selected Chapters for the Economic Psychology Class at
Babes-Bolyai University, Cluj, !!"
1. Interest-bearing st!"#is$
Good ideas compete for capital, but capitals also compete for
good ideas.
#obinson$s dream % &he nature of interest % &he
protagonist appears on the scene % 'oney ascapital % &he role
of psychology % &he self-reproduction of capital % &he
perspective of thestoc(-fish % &he various forms of life
%. T$e birt$ # e!n&i! 'al(eExchange creates new economic
value similarly to a car factory: it re-arranges the
existingmaterial into a more useful form.
E)change creates value % &he principle of comparative
advantages % &he problem ofe)change rates % &he idea of
demand % E*uilibrium in the mar(et % Consumer surplus and
producer surplus % +utocatalysis in economy
). T$e nat(re # in'est&ent *e!isins
Every starting enterprise is more or less a bluff.
#obinson$s ne dream % ounding an enterprise % &he value of
#obinson$s idea % #obinson
as an employee and an oner % #obinson becomes a majority oner %
&he company beginsto or( % .t is not the company that produces
the yield % /ecisions made by consumers andinvestors % #is( and
yield, nothing else % #ichson$s dog
+. ,$ as a /s!$lgist aar*e* t$e Nbel /rize in e!n&i!s0
It is also rational if one does calculate upon ones own
irrationality.
/iversification % &he beta % C+P', the Capital +sset Pricing
'odel % #is( see(ing, ris(avoidance % Prospect theory % C+P' and
Prospect theory
. Mne t$e &ti'atr
Even if money does not mae you happy, prolonged and severe lac
of money definitelymaes you unhappy.
E)ternal and intrinsic motivation % 0hen do you have enough
money % /efensemechanisms % &he flo % 'oney and happiness %
'oney motivates to ma(e money
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1. Interest-bearing st!"#is$
Good ideas compete for capital, but capitals also compete
for
good ideas.
+ccording to family legend, my grandfather dragged his brain a
lot in the nd0orld 0ar hoto invest his little ealth2 .nvesting into
an enterprise as out of the *uestion in thosedisturbed times2
3eeping it in money as not orthhile either, for it as sure to be
inflated
4and it sure did, although even he could not foresee the orld
record hyperinflation in5ungary after hich the street seepers sept
up the valueless million, billion, and*uadrillion peng6 ban( notes2
5o should he save his possessions until the ar is over 7old
preserves its value, but it can be stolen easily2 Should he buy
a house .t is difficult to steal,but can hardly ithstand bombing2
Should he buy a piece of land .t ithstands bombing, butdoes not
tolerate nationali8ation too ell4he foresa this danger correctly
ell in advance2Should he invest it in salt .t ithstands both
bombing and nationali8ation, but it is veryheavy2
&here is no happy ending2 9either my grandfather, nor the
family possessions survived thear2 &his short train of thought
did survive, hoever, and no . also do something to help itlive on,
this time as an e)ample of the competition among the various forms
of money :orcapital, rather;2
&his is a boo( about the evolution of money, and e have (non
since /arin that evolutionalays develops from the competition
beteen different varieties2 Since /arin, hoever, ehave learnt many
other things about ho life or(s2 Biology researchers of the past
centuryand a half have succeeded not only in revealing many
important details, li(e brea(ing the
genetic code, or solving the structure of /9+, but they have
also given ansers to much morecomple) and larger scale
*uestions< e have come to understand the nature of the
mechanismunderlying life2
=iving beings aregenerated by things :genes; that are not alive
in themselves, but together, inappropriately assembled groups are
able to code the most varied living beings, and underappropriate
environmental conditions, the beings they code really come into
e)istence2 0iththis discovery, biology of the !thcentury discovered
a mechanism that points much beyondthe form of life e call
biological life2 .t may very ell be that the principles of
operation ofso calledspiritual lifeor economic lifeare based on the
very same logic as those of biologicallife2
2binsn3s *rea&
5istory drove my grandfather into a too complicated situation2
=uc(ily, a number ofeconomic mechanisms can be e)cellently
demonstrated by much simpler e)amples, even bythat of an
uninhabited island2 .f all the fables economists have ritten about
#obinson erecompiled in a boo(, it ould be many times longer than
/efoe$s original novel2 0hy shall enot start also ith him
>n this uninhabited island, the only source of food #obinson
has is the fish daring to comeclose enough to the shore2 0hen
#obinson in luc(y, he can bash them on the head ith hisclub, so he
can eat them2 5oever, the fish are bris(, and #obinson can catch
only five pieces
of fish a day by beating the ater all day4hich is just enough to
earn his daily food2 &his is
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ho #obinson lives from one day to the ne)t2 5e is dead tired by
the evening, and justtumbles over on his simple lair under a big
tree, and daydreams a little before falling asleep2
&here are trees on the island, that bring no fruit, but from
hich nice thic( rinds can be splitoff2 >ne could ma(e a
primitive fishnet from these rinds, ith hich #obinson could catch
asmuch as tenty fish a day2 .f he had a net li(e this, #obinson
ould have to or( only onevery fourth day, and could do many other
things on the other days2 Preparing such a net,hoever, ould ta(e
thirty days4during hich #obinson ould starve to death2
+pparently, #obinson as to spend the rest of his life clubbing
fish, for there is not muchchance of a British ship coming along
and ta(ing him home2 But it is hard to live ithouthope, so #obinson
continues to hope at the bottom of his heart and diligently beats
the fishday by day, so that if miracle did happen, it ould find him
alive2
>ne day, another #obinson, also living as a lonely castaay on
a neighboring island, appearsune)pectedly on the scene2 &his
second #obinson has some surplus fish, because he is mores(illed
ith the club than our #obinson, and can catch as much as si) fish a
day2 So he madesome stoc(fish by letting his unsalted fish dry
naturally by sun and ind2 &hus, 1@! e)tra
pieces of stoc(fish accumulated in the course of times, hich he
stored for uncertain times2
&his second #obinson4let$s call him #ichson4can see
#obinson$s distress perfectly, andunderstands #obinson$s dream
about the fishnet2 5e offers to lend him his on 1@! pieces
ofstoc(fish ith the condition that #obinson ould spend the ne)t
thirty days e)clusively by
preparing the fishnet, and from the ?1 stday he ould give
#ichson five pieces of fish everyday for a year2
&he offer elicits mi)ed feelings in #obinson2 >n the one
hand, he finds it impudent that#ichson as(s for 1@! pieces of fish
monthly :in fact, even 1@@ in the ?1-day months; for 1months in
e)change for a loan of 1@! pieces of stoc(fish2 >n the other
hand, if #obinson
consents to the offer, in thirty days he ould have to spend only
every other day fishing,because he could catch tenty pieces of fish
a day, paying bac( ten and eating ten for todays2 +nd his situation
ould be even better after a year2
#obinson is more and more inclined to rise above his moral
indignation over #ichson$simpudence and accept the offer,
nevertheless, he tries to negotiate a little2 But #ichson notonly
appreciates #obinson$s great idea, but also sees his desperate
situation, so he does notgive in2 #ichson e)plains ho much ris( he
ta(es even ith an unconditional faith in#obinson$s trustorthiness
and not even thin(ing of the possibility of #obinson not (eepingthe
agreement2 #obinson might not even live for thirty more days, hile
eating a substantialamount of #ichson$s fish, and leaving #ichson
ith a half-ready, good-for-nothing fishnet2 .nthe heat of debate,
#obinson *uic(ly ma(es fifty push-ups to prove his good
physicalcondition, so #ichson does not have to fear not getting his
fish, and even much more, bac(2
#obinson, hoever, is troubled by something else as ell2 .f he
agrees, he ould have to giveup his hope to be saved by a British
ship for a year, for being an English gentleman, he couldnot leave
the island ithout having paid his debt2 &hus, #obinson proposes
that if a Britishship appears, #ichson ill get #obinson$s fishnet,
thus repaying all debt2 #ichson replies thatthe net is useless,
unless somebody fishes ith it, so he insists on getting fish for
his fish,rather than some ma(eshift stuff fabricated of rinds that
is useless for him2 #ichson does notant to adopt #obinson$s
invention, he has a different idea of getting along in the
future2
+fter various spectacular shos :#obinson$s push-ups, #ichson$s
moc(-anguish, etc2;, theyeventually sha(e hands and agree that from
the thirty-first day #obinson ill pay 1@! piecesof fish every
month, but if a British ship happens to appear, #obinson$s duty to
pay is
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automatically terminated2 Eventually, #ichson further acceded to
getting an fi)ed amount of1@! pieces of fish each month2
.n this business, #ichson ha8arded his 1@! pieces of fish in the
hope of a long-term profit2 5egave all of it to #obinson
immediately, because he did not ant to deal ith this issue in
thene)t thirty days2 or #ichson, even this very promising business
ould not be orth if he hadto spend his time ith chec(ing #obinson$s
progress every day2 &rust is at the root of
business the ris(ier the business, all the more2
T$e nat(re # interest
.t is a popular lay opinion that interest is the price of using
the money2 5oever, this vie isrong2 Using money is free< hen e
spend money, e pay no fee for using it2, .t could beraised as an
objection that one has to pay a fee for using money only if e use
somebodyelse$s money2 But even in this case, money or(s differently
from other things2 .f . have ane car . do not need right no, and
lend it to someone ith the condition that . ant a
similar ne car hen . get it bac( tenty years from no, e feel it
is fair2 But if . antedtwosimilar cars, .$d get *ueer loo(s2 et the
very same thing happens hen . put my moneyin the ban(4even in times
of inflation2
&he agreement beteen #obinson and #ichson points at the
essence of interest better2 &he1@! pieces of lent fish ma(es it
possible for #obinson to increase his fish-production sometime in
the future, in our case, in thirty days2 #obinson thin(s it is orth
paying some of thee)tra fish as an interest for the loan4not to
tal( about his life becoming more comfortable2
.nterest is the fee for the immediate availability of the money
2 #obinson is illing to pay sucha hideous interest for 1@! pieces
of fish not because he is using them, but because they
areimmediatelyavailable2
0hat if #obinson (ne at the time of negotiation ith #ichson that
there ill be another#ichson in a year ho ould be satisfied ith
getting the five pieces of fish daily only forhalf a year after the
thirtieth day &his other #ichson is not very inhibited, either,
for heould also ant si) times as much fish as the loan, but he is
very reliable and is sure to comein e)actly one year2 5oever, it is
not certain that #obinson ill still be alive if he has tocontinue
clubbing five pieces of fish every day for one more year in order
to eat2 #obinson isoptimistic and strong even in a strained
situation, but this #ichson is present here and no2or #obinson, it
is orth paying more for not having to club fish for another full
year2
or #obinson, 1@! pieces of borroed fish is orth more today than
later2 .n technical terms,e can say #obinson has a time preference2
&his prompts him to be illing to pay even a very
high interest for the loan of the 1@! pieces of fish2 #ichson,
of course, e)ploits this, even ifpeople fron on his behavior2 or
there is another side to interest, beyond being the price ofthe
time preference of the borroer2 >n the part of the loaner,
interest is the price of thesacrifice of not consuming the produced
goods for a longer period2
#ichson says he actually helps #obinson fulfill his dream, and
nobody forces #obinson toma(e this deal2 #ichson is right in this,
and he can be forced to behave more modestly only bythe concurrent
#ichsons and the development of the financial mar(et2 By the time e
meet#obinson and #ichson again a fe chapters later, all this ill
already be available2 +s e$llsee, #ichson ill offer much more
refined financial constructions to #obinson to reali8e hisne dream
:actually, a fishing ship;2
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T$e /rtagnist a//ears n t$e s!ene
&here has been no ord about money yet, but e have tal(ed
about interest already2 0ith thise have folloed the same approach
usually ta(en by standard te)tboo(s in finance2rederic( S2
'ish(in$s idely used te)tboo( in finances begins to tal( about hat
money is
only in the ?rd
chapter2 5e starts ith the situation hen a robber suddenly pops
up and shoutsat us Dour life or your moneyF ell, in this case e do
not as( him D0hat e)actly do youmean by moneyF 0e may even fare ill
by acting uncomprehending, for the robber might, onthe spur of the
moment, include our nec(lace or pair of ne shoes2 'eir 3ohn$s
financialte)tboo( begins to discuss the concept of money in Chapter
A ith the sentence D0e all (nohat money isF2
By this time, both authors have used the ord money several
times2 +nd justly so, since edo understand its meaning2 et there is
no agreement even among economists hat e)actlymoney is2 'oney is
usually defined by some of its functions :means of payment, medium
ofe)change, unit of settling of accounts, measure of assets,
preserver of assets, means ofdelayed payment, etc2;, then list some
things that used to embody these functions :beads,shells, tobacco,
beer, salt, butter, (nife, animal s(in, hale-teeth, etc2; and some
that still do:cash, ban( savings, ban( card, chec(, bonds, shares,
options, insurance, etc;2
&he topic of our boo( regards a special aspect of money,
namely, that money can bear money2Principally, this aspect may
elicit the interest of a scientific-minded person2 .t is
self-evidentfor a scientist that our concepts are developed through
ell-selected and thoroughly studiedindividual e)emplars, and that
the ealth of nature ill sooner or later produce e)ceptionseven to
our best-defined and most general concepts2 &hus, e are not
going to define theconcept of money e)actly, but e ill not use it
in the strictest everyday meaning of theord, either2 +s a starting
point, the concept of money ill include all of the above
functions,
plus4as e$ll soon see4the fact that it can ta(e the form of
capital as ell2
/o not be deceived by the fact that in everyday usage e
generally see money in its veryconcrete form, li(e ban( notes or
coins2 .n these forms money does not bear money2 'oney
bears money only if it appears in the form of capital2
Mne as !a/ital
+lmost any production tas( can be made easier by using more
suitable instruments2 .n orderto ma(e such instruments, hoever, one
has to sacrifice some of the present consumption forthe sa(e of the
future2 .f #obinson can settle for four pieces of fish, he ill be
able to ma(ehis fishnet on his on2 &here is a danger of his
starving to death by the time the net is ready,
but if he endures this difficult period in his life, he may
later come to the same position as#ichson2 +nother, less life
threatening possibility is to resort to instruments produced
byothers, but not consumed, li(e #ichson$s 1@! pieces of fish2
+ssets reserved from the outcome of a previous production for
the sa(e of ma(ing futureproduction more effective either for
ourselves or for others are called capital2 0hen moneyproduces
interest :or other types of yield in more comple) financial
constructions; to itsoner, it ill manifest itself as capital, but
no capital is guaranteed to produce yield2 ore)ample, if #obinson
does not survive the thirtieth day, #ichson$s capital ill be
lost2
=et$s play ith the idea that there are many #obinsons on the
islands2 or the time being, theyare all in fishing :this ill also
change by the time e ne)t meet our heroes a fe chapters
later;, nevertheless, they are not totally ali(e2 #ichson, for
e)ample, as more clever ith theclub and could bash si) fish a day2
or him, the loan-fish ould be orth less interest,
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because his time-preference as less, for he could have produced
a fishnet ithout a loansooner or later :but, unfortunately, such an
idea never occurred to him;2 +nother #obinsoncan eave a net much
faster, so he ould need less loan-fish furthermore, he does not
haveto invent the idea, it is enough for him if he just ta(es a
loo( at the other #obinson$sinvention2
Hust imagine yourself to be in the luc(y position of having a
thousand e)tra pieces ofstoc(fish2 0hich #obinson ould you prefer
to lend it to +nd for ho much ou may not
be as hard hearted as the ban(ers and you may not ish to profit
as much of your thousandpieces of fish as possibleI .n this case,
thin( of your old daysI Hust thin( of Somerset'augham$s old,
penniless character ho says he is not poor, he only lived too long
for hisealth2
T$e rle # /s!$lg
+s soon as e thought of our old days, ris( as revalued higher2
Perhaps it ould be orth
ma(ing a deal ith the most s(illed and strongest #obinsons
although they are illing to payless interest, but they are more
certain to really pay it2 0e$ll soon reach the point e
cane)perience in our relationships ith the ban(s daily< ban(s
are the most illing to provideloans to those ho need it the least
and can demonstrate this convincingly4if not ith push-ups, but some
other means of displaying strength2
5oever, e are not alone in the stoc(fish-mar(et< others also
have more or less stoc(fish,and they ould also li(e to have it
produce more stoc(fish2 9ot only the #obinsons competefor the
capital, but the capitals also compete for the #obinsons2 +nd the
#obinsons ill
borro a loan from those ho lend it for the least interest2
&he situation is similar to therelationship beteen
manufacturers and consumers on the mar(et< manufacturers try to
getthe highest possible price for their products, but this is
limited by the fact that they are not theonly manufacturers2 .n the
case of similar *uality, consumers buy the products from
themanufacturers ho sell them the cheapest2
By its very appearance in the orld, money creates a special
mar(et, hich differs from theusual mar(et of manufacturers and
consumers in one important aspect2 9amely, the usualmanufacturer is
not in the least interested if the consumer spends his last penny
on the productor has some money left for other goods2 &his is
not true for #ichson2 5e is very muchinterested in #obinson$s
general economic situation, and even in his health and
psychologicalcondition :for e)ample, ho the appearance of a British
ship changes #obinson$s psychiclife;2
&o be more e)act, #ichson is interested in the totalris( he
is ta(ing by ma(ing a loan2 5e setsthe price of the loan against
this ris(4and, of course, against his on illingness of ris(-ta(ing2
+ young #ichson may ta(e greater ris(s in the hope of greater
yield, hile an older#ichson ill probably ta(e smaller ris(s and ill
be satisfied ith loer, but more certaininterest2 +t the same time,
#obinson is not interested in #ichson$s general condition2
5avingreceived the fish-loan, #obinson ould not care less if
#ichson starved to death the ne)t day2
&he concepts of capital and ris( are intimately intertined2
&he recognition of the role of ris(leads us to deal ith
decisions related to capital as a special (ind of long term
decision2 &he
presence of capital :the pure fact that a stoc( has accumulated
someho some time ago;inspires one to ma(e totally different (inds
of decisions than the daily decisions ofmanufacturers and
consumers2 Understanding this psychological aspect ill be
unavoidable inunderstanding ho capital operates2 &he importance
of the *uestion is further indicated by thefact that psychologist
/aniel 3ahneman on the !! 9obel Pri8e in Economics for his
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research in human ris(-perception mechanisms4the main results of
his research ill bediscussed in Chapter J2
T$e sel#-re/r*(!tin # !a/ital
'oney has a very strong motivating poer, e are illing to do many
things to get it2 &hus,hen money begins to act as a capital, it
already has firm foundations2 'oney as a capital has
became *uite ingenious in utili8ing man$s psychological
mechanisms in the service of its onsurvival and reproduction2 'oney
ma(es its oner use it the most sensibly, preferably, to
produce more capital2 &his is ho capital reproduces
itself2
.t ould seem from all this that money appearing in the form of
capital almost behaves as if itere a living being that anted to
reproduce itself2 &his, hoever, ould be a very
superficialanalogy2 Save that there is also a much deeper
parallelism beteen the forms of life appearingin biology and in
economy2
0hen e tal( about living beings, e usually thin( of comple)
organisms li(e elephants,
ater lilies, ants, or us, humans2 0hat proteins these creatures
are composed of, and hothese proteins should be organi8ed into a
living mechanism are determined by the genes2 0eusually do not
consider genes as living beings, although it is genes that survive
for really long
periods of time in more or less unchanged forms2 .ndividual
living beings are born andbecome dead, and the period beteen the to
events is embarrassingly short2
'oney, or to be more e)act, money ta(ing the form of capital is
related to life in a similarsense as gene is< it generates a
form of life2 &he comple) living beings that are produced bythe
capital are the smaller and larger enterprises2 Capital can produce
a stupendously diversevariation of enterprises just as much as
genes can bring forth many forms of biological life4it cannot be
seen yet, hoever, ho capital can achieve this2
T$e /ers/e!ti'e # t$e st!"#is$
Stoc(fish is a (ind of fish that as once caught from the sea,
only to be consumed at a latertime2 ish as stoc( ere no longer
simply fish, but an essential condition for life and the
possibility of obtaining more fish at the same time2 But the
latter possibility is true only if thefish as not consumed for
daily life immediately after obtaining it2 Still, in order to
bereproduced, the stoc( :the capital; must be consumed sooner or
later, and there is noguarantee that it ill be born again after
consumption2 &his parado) is the very essence of
thecapital2
Soon e ill say good bye to #obinson and the fish for a hile2 .n
the folloing chapters eill turn to a more detailed study of the
basic principles of life, and e ill need differentmodels for this2
But first, let us strip another s(in from this very simple model2
+fter all, ecan thin( of our little capital in our poc(et as
stoc(fish that has become *uite flat in themeantime, its material
has become paper-li(e, its color has become greenish :or some
othercolor;, and finally, numbers and the image of an +merican
president :or of a European
bridge; got printed on it2 &he point is, that e ill be able
to fill our stomach by its help at alater time2
9o, let us e)amine the situation from the perspective of
thisstoc(fish2 &his fish is no longera biological being that
can reproduce itself by spaning2 &his fish found a
completelydifferent tric( for reproduction2 &his strange
abstract being becomes alive by being caught bysomebody someho<
club, fishnet, fishing boat, or anything else2 +nd it is alive4
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theoretically even forever4until somebody consumes it as food2
>nly fish that has beencaught can be stoc(fish it does not
matter ho many other fish sim in the ater2
&he ne)t step ill probably seem *uite absurd2 But let$s go
on2 +s British politician =loyd7eorge said D/onKt be afraid to ta(e
a big step if one is needed you canKt cross a chasm in tosmall
jumps2F
Hust imagine that the commandment Dbe fruitful and multiplyF
also applies to the abstractstoc(fish2 &herefore, it ill do
everything it can to reproduce2 #eproduction in the case
ofstoc(fish means that there are more fish in the form of being
caught, but not yet eaten4ourabstract stoc(fish is alive only in
this state2 &he commandment Dbe fruitful and multiplyF,hoever,
does not only apply to a specific representative of the stoc(fish2
rom this
perspective, it is irrelevant hich individual stoc(fish is alive
at a particular moment< one isjust li(e another2 .f #obinson
eats one of them, only to have the strength to catch to more,all of
the fish ill rush to be consumed, because this is ho they comply
ith the higher orderthat applies to them2
9aturally, real living fish ill not jump under the club or rush
to #obinson$s net, because thisould not promote their on
reproduction2 .t is our abstract stoc(fish, the previously
caught,
but not yet consumed fish :behaving in accordance ith the higher
order that applies to them;,that ill do everything to be consumed
by a strong #obinson, because their reproduction isonly possible if
#obinson is able to catch more real, living fish he does not have
to consumeimmediately2
+lthough #obinson eats the stoc(fish, he is not their enemy, but
a condition for theire)istence2 &heir enemies :or rather<
competitors; can be only those beings that are able toma(e #obinson
attend to them, and not to the stoc(fish2 Since #obinson must eat
from time totime, this concurrent being must be able to fill
#obinson$s stomach2 .f this alternative beingcan also be put aside
for future use, it ill also or( as stoc(fish do, thus it ill also
be a
stoc(, even if not fish, but another form of capital2 .ndeed,
there is a strong competitionamong the various forms of capital,
thus, the conditions under hich survival rate isdetermined by
natural selection have developed2 5ere, Lnatural selection$ also
includes the#ichsons$ interest in or indifference toard a certain
form of capital2 &his is ho theevolution of capital and of the
various forms of enterprises, the DbeingsF created by capital,could
start2
T$e 'ari(s #r&s # li#e
. used to or( in a technical research institute for ten years in
an earlier period of my life2 .t
as there here . learnt that every ell-designed technical device
can be used for much morepurposes than originally designed2 =et me
mention just one e)ample2 Computers ereoriginally designed for
performing comple) mathematical calculations2 &oday, hoever,
themillions of computers in the orld spend only a fraction of their
time ith actualmathematical calculations, e use them much more for
editing te)ts, spreadsheeting,correspondence, retrieving
information, and even for play2
Something similar happened to the structure forming the basis of
life2 &he grand logic of thething proved to be able to operate
completely different forms of life as ell2 .n this boo(, eare
underta(ing to discover this logic, and the operation of this logic
ill be e)amined in thecase of money2
.t is orth ta(ing a loo( at the main parallelisms among the
various forms of life2 &here are afe e)pressions in &able 1
that are not very proper to use ithout any previous
e)planation,
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M
li(e meme, cognitive schema, and replicator2 0e are going to
e)plain each of them in detail,but for the time being, let us
settle for seeing them together2 &he parallelisms summari8ed
inthe table are bound to be made more convincing by the much more
detailed tables inChapter 1@2
!iology "sychology Economythe replicator: gene meme capitalN
the beings: biologicalbeings
Dthought beingsFne of them is reducing cognitive dissonance,
hichis independent of memes from the perspective of memes, it is an
e)ternal psychologicalmechanism2
0e have not proved yet that money is a replicator4and e ill not
do so for *uite a hile2 .nPart .. e ill get ac*uainted ith a fe
economic and psychological mechanisms that illturn our to be the
e)ternal mechanisms money as a replicator uses for the construction
andoperation of its survival machines :smaller and greater
enterprises;2
E4!$ange !reates 'al(e
.magine 'r2 Boo(ish once received a room bicycle as a gift2 5e
tried it once of tice, but gotfrightened of the strange muscle
deposits in his legs, so the bi(e is just getting dusty in acorner
of his apartment2 +t the same time, 'r2 itness has a beautiful set
of chess gettingdusty in his apartment although he tried to lift
its nice figures, but found them too light2
>nce, 'r2 Boo(ish and 'r2 itness have a conversation and
decide as a result that they oulde)change the to articles ith each
other2 Both rub their hands that they have made ane)cellent
e)change2 Both feel they became richer as a result of the e)change2
9o the*uestion is if the amount of goods in society have increased
or not, i2e2, if any ne value has
been created by the e)change2 &he first reaction of most
people is a definite no, as e haveonly one room bi(e and one set of
chess both before and after the e)change, nothing ne iscreated2
5ad this been so, the good feelings of the to parties ould be
just some vague psychologicalthing that is totally unimportant for
economics2 &his is partly true2 rom the perspective ofeconomics
it is unimportant hy 'r2 Boo(ish is more happy ith the nice set of
chess thanith the room bicycle, and hy the attitude of 'r2 itness
is just the reverse2 But once this isso, then it is literally true
that both of them have become richer ith the e)change< they
bothgained more than hat they paid2
Economics usually does not tal( about ne material goods, but
about gains :or utilities; andcosts2 +nd similarly to all science,
it vies its subject in a more general and abstract ay thaneveryday
thin(ing does2 .n economics, everything is considered as utility if
at least one person
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finds it useful for himself, and if he is illing to give up
another useful thing in order toobtain it2 .n the economic sense,
obtaining a car or a bottle of beer is a utility just as much
ashealth, atching a movie, or sunbathing for an hour are2 Cost is
all those utilities e sacrificefor the sa(e of obtaining another
gain4and e do not tal( about material things only2
urthermore, economics does not tal( about ne material goods,
because it ould be difficultto define hat comprises Dne materialF2
9ot a single ne atom is born in a shoe factory2 &heactivity of
the factory called :and accepted by everybody as; production simply
re-arrangesthe e)isting atoms into a ne, more useful form this is
ho using up ra hide, tannin, andmany more things ill come out as
shoes in the end2 +lmost all production produces utility
byre-arranging e)isting materials into a more useful form2
&his is e)actly hat the e)change beteen 'r2 Boo(ish and 'r2
itness did< it broughtpreviously e)isting materials into a more
useful arrangement2 .t also created ne value,similarly to a shoe
factory2 .t also increased the amount of value in society, or its
generalrichness2 &he ne product in the course of e)change as
not the room bicycle or the set ofchess, but the fact that both
objects found a place here their usefulness is greater than
before2 $hisne product does have real value or utility, this is
hy e)change increased theealth of society2
.t is a common erroneous belief that an e)change is correct only
if goods of e*ual value aree)changed2 +n e)change is neverthe
e)change of e*ual values if it ere so, it ould be ofno sense2 .t
ma(es sense only if both parties sacrifice something that is of
less value to themin e)change for something that is more valuable
for them2 .f . am a ba(er, . am glad to
provide my shoe-ma(er neighbor ith bread in e)change for shoes2
+nd not because bread isof no value to me2 .t does have a value,
because . sacrifice something in producing it2 Even if. find the
flour and other ingredients in the street, . sacrifice an hour of
atching television orsunbathing hen ba(ing the bread2
&he room bicycle or the set of chess ere not totally useless
for their previous oners, either,otherise, they ould have gotten
rid of these dust-catchers a long time ago4somebodyould have been
glad to ta(e them aay for a fe buc(s2 But both of them found
anopportunity to e)change these objects for something that is
really more valuable for them onlyno2
'r2 Boo(ish ould not have sold it to a merchant for a price that
ould have been more thanenough to buy the same set of chess 'r2
itness gave him in e)change2 'r2 Boo(ish got it asa gift a long
time ago from his aunt ho misjudged him, but ho is still dear to
his heart2 &hesituation as the same ith 'r2 itness and his set
of chess2 .n order for the e)change to ta(e
place, they had to discuss all this2 &his discussion opened
the psychological possibility toard
the e)change< it as not only to objects that got e)changed,
but to stories about the gifts asell2 +fterards, both of them could
resolve their cognitive dissonance of anting to get ridof their
dear gifts2 0e already (no that it is easily possible that years
later 'r2 Boo(ish illtell the story of the beautiful set of chess
to his grand children as Dyou (no, this is the one .received from
+unt 'aryIF
&he informal conversation beteen 'r2 Boo(ish and 'r2 itness
created real economic value2Similarly, the change created in the
students$ heads, or the change brought about by thedoctor in his
patients$ body have an economic value, and so does the
psychological changethat ma(es it possible to reali8e an economic
possibility2 &he discussion beteen 'r2 Boo(ishand 'r2 itness
also increased the ealth in society2 .t ould have increased it even
if for
some reason or other the actual e)change ould not have ta(en
place, for the psychologicalchange did come about2 >nce e learn
to notice such things, e$ll easily find more far
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1
reaching e)amples of the value-creating role of informal human
relations and various otherpsychological mechanisms in the
economy2
T$e /rin!i/le # !&/arati'e a*'antages
.magine an abstract, but illuminating mini society that has only
three producers, +, B, and C,and they produce only to products,
food :its unit is 1; and clothing :its unit is 1C;2 .n thismini
society any unit of food can replace any other unit of food, and
the situation is the sameith clothing2 5oever, the capabilities of
the three producers are differentur first *uestion is< .magine
that the producers are not so free after all, because there is
adictator, /, in this society, ho dose not produce anything, just
dictates2 / determines that the
hole society needs 1 amount of food a day to ma(e everybody
sated, but any amount ofclothes ill go off2 .n fact, the more
clothes people have, the happier they are2 / ishes toma(e his
people as happy as possible2 0hom should he command to produce the
single unitof food
Usually, the first thought of common sense is that it is +, for
he can produce the necessaryfood *uic(ly :in a *uarter of a day;,
then everybody can peacefully concentrate on clothes
production2 Everybody ould spend more time on producing 1, for +
is the most efficient2But let$s do some calculation2
.f + produces 1, he can still produce :?QA;NJCRGC in the
remaining three *uarters of histime, hile B and C produce only
clothes, i2e2, ?1 units2 &hus, in sum, 1!C are produced
inaddition to the 1 in a day2
.f B produces 1, he can produce C in addition, and together ith
the J1 units of clothesproduced by + and C, the total production of
clothes ill be 11C2
.f C produces 1, he can produce half a unit of clothes in
addition, hile + and B produce?J units of clothes, so the total
production of clothes ill be 112@ C2
&hus, the isest decision / can ma(e is order C to produce
the necessary food, despite Cspending half of the day ith this
tas(2 .f this as your first intuitive anser, you either havea very
good sense for mathematics, or you are already sufficiently
inoculated by economicthin(ing2
.n economic thin(ing the *uestion is not ho produces hat and ho
fast, but hat onesacrifices in the process, ho much his cost of
production is2 Producer + sacrifices the
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1?
production of to units of clothes for the production of one unit
of food, this sacrifice is oneunit for B, hile for C, it is only
half a unit2 &his ay, it becomes clear immediately that Ccan
produce food the most cheaply :i2e2, ith the least sacrifice;2
>nce e have ac*uired theorld of thought of economics, this ill
not be the result of some obscure calculation, but itill be
self-evident2
Clumsy little C, ho is the sloest in producing anything, is
suddenly promoted to the mostefficient food producer2 .t as not /
ho promoted him, because he has alays been there4not in the
absolute sense, but in the sense that he is the one ho sacrifices
the least for
producing food2 &he principle of comparative
advantagesbecame manifest in our e)ample2&his principle states
that it is not the absolute advantages, but the relative efficiency
thatcounts in determining what is worth producing by whom2
.n international trade the principle of comparative advantages
prevails2 .t is possible that afterthe investment of a huge
green-house project, 7ermany could produce even coffee beans at
aloer cost than Bra8il, but this is not a branch of industry that
re*uires high precision, orhere 7ermany ould have a comparative
advantage2 &hus, even if 7ermany had the money
for this project, she ould spend it on something else2.n our
e)ample, + had absolute advantage in the production of all
products, but had a relativedisadvantage against both B and C in
producing food, because in producing food + ouldhave to sacrifice
the production of more clothes than B or C2 +t the same time, + not
only hasan absolute advantage, but a comparative advantage as ell
in producing clothes2 But eventhis is not automatic< it may even
happen that many people have a comparative advantageover the orld$s
best2
.magine a layer hose hobby is typing, and ho does it so ell that
he becomes orldchampion in typing2 Should he type his documents
afterards &he anser is< not necessarily2.t depends on ho
good a layer he is2 .f he is the 1!!thbest layer, he is certain to
lose ith
typing his papers2 9o matter ho much he loves typing, his boss
ill justly tell him to type athome as a hobby and not in the office
for a class + lawyerssalary2
9otithstanding, it is not surprising that this layer chose to
ma(e a living as a layer ratherthan as a typist2 &hat is the
field here he has a comparative advantage, even if he is only
the1!!thas a layer and the first as a typist2 urthermore, he ill
find the competition as alayer less (een than as a typist2 .f three
layers become better than him, he ill still be the1!?rd, not ma(ing
much of a difference in his life2 9aturally, this does not mean
that he canrela) as a layer at all2 .f he does not perform as
e)pected of a layer in the 1!! thposition,sooner or later he$ll be
paid only as the 1!!! thlayer and his boss ill not mind typing
hison documents at a magical speed2 +nd if he performs even orse,
he may type the
documents of others for a class + typist salary2 By that time
that is here he$ll have acomparative advantage2
0e do not necessarily have to be the best in something2 >nly
one person can be the best, ande are many2 urthermore, it is
possible that even the best ill not do hat he is the best in,
because he may have a comparative advantage in something else2
0hat is important< eshould find the area here e have a
comparative advantage over others2 &his is not alayseasy in a
society here more than to things can be done2 .t is still orth it,
because this isho e can best contribute not only to our on, but to
society$s ell-being as ell2
&he principle of comparative advantages is actually a
psychological principle, too2 .n apsychological adaptation<
people in their choices generally consider the comparative
advantages rather than the absolute ones, although this is
usually not a conscious approach20hen a great 5ungarian actor,
'i(ls 7Tbor died, &amTs #vbVr rote in memory of him
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1A
D7irls e ere in love ith ere in love ith him2 &hey ere
realists, so eventually theybecame our ives, but he occupied the
first place in their hearts2 +nd it as all right2 0e erehappy ith
the second place, because e all (ne that it is not only impossible
to competeith him, but it is not necessary, eitherF2 =et$s be less
elevated< e all had a comparativeadvantage even over 'i(ls
7Tbor, and ithout especially struggling for it2
&his Dmi(lsgTborF is a very scarce thing2 So are e, even if
not as much so as theDmi(lsgTborF, but our comparative advantage
:some in this, some in that; ensures that e arerelatively even more
scarce in some things2 .f e can ma(e the best of it, girls do not
have to
be painfully realists, our comparative advantage ill prevail in
their choices2 &he principle ofcomparative advantages often
or(s very ell as a psychological e)planatory principle2 &he
poer of the orld of thought of economics is shon by the fact
that this far-reachingprinciple as not discovered by psychologists,
but by a British economist, /avid #icardo in1J1"2
T$e /rble& # e4!$ange rates
&he promotion of C as the most efficient food producer as
not caused by the logic ofdictatorship, but by that of economy2 9o,
imagine a totally different society, a (ind ofcommunism here no
dictator is needed, but people as good communists reali8e their
onneeds correctly2 =et$s say these needs are as follosne of the
candidates isBeachson$s holiday-ship enterprise he eventually set
up4if not from #obinson$s ship, thenfrom another it does not matter
to us no2 &he other candidate is an umbrella factory2
0eestimate that the stoc(s of these to companies promise the
highest yield relative to theirris(s2 .n order to ma(e the
decision, e need to (no hat the eather ill be li(e in thecoming
years2
.f it ill rain a lot ne)t year, Beachson$s ship ill be less
popular, hile the products of theumbrella factory ill sell ell2
=et$s assume the umbrella factory ill yield a A!Y profit,hile the
holiday ship ill produce a 1!Y loss2 .f, hoever, it ill be nice,
sunny year, thesituation is reversed, and the holiday ship ill
yield the A!Y profit, and the umbrella factory
ill produce the 1!Y loss2 =et$s disregard intermediate
possibilities no2.f the chances of nice and bad eather are e*ual,
then both investments ill produce a A!Y
profit or a 1!Y lost ith a probability of @!Y2 9o matter hat e
chose, our e)pected gainill be 1@Y :the average of A! and %1!;2 0e
ould be happy ith this moderate 1@Y profit,
but the problem is that neither the umbrella factory, nor the
holiday ship can guarantee this2Both of them can only promise that
it may be much better or much orse, but on the average,on the long
run, the gain ill be this much2
&he famous British economist, Sir Hohn 'aynard 3eynes used
to say referring to similarpromises, that on the long run, e are
all dead2 &his 1@Y yield on the long run is nice, butill e live
to see it 9o matter hich investment e choose, after a fe unluc(y
years e
become penniless, and e ill not be consoled by the fact that
people investing in the samestoc( at that time ill become ealthy2
Both stoc(s are ris(y, this is hy their profit is 1@Y2
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#ichson$s ban( pays only @Y interest, and even that is somehat
ris(y, for a ban( can also goban(rupt2
0ell, in this special situation e can reach a 1@Y profit ithout
any ris(2 +ll e have to do isbuy stoc(s of the holiday ship for
half of our money, and buy stoc(s of the umbrella factoryfor the
other half2 &his ay, no matter hat the eather is li(e, half of
our money brings aA!Y profit, the other half a 1!Y loss, and as a
sum, e gain 1@Y for sure2 &his ay e haveapplied the method of
diversification, i2e2, e invested our money in a mi) of
investments, sothat the desired return is produced at the loest
possible :here 8ero; level of ris(2
>nce you come across an investment-constellation li(e the
holiday ship and the umbrellafactory, do not ait ith the investment
even a second2 Hust imagine, that on your ay to thestoc( e)change
you go to #ichson$s ban( to ithdra the money for buying the stoc(s2
ou
pee( in to #ichson$s room to boast ith your discovery< you$d
li(e to see his long facehearing that you can achieve 1@Y yield
ithout ris(, and that you ill not leave your moneyin his ban( for a
trifle @Y interest2 #ichson responds you$d better hurry to the
stoc( e)change,
because if he (eeps you hile ansering, you may suffer a great
loss2
Even so, as you arrive at the stoc( e)change, you can see that
the current price of the stoc( ofboth the holiday ship and the
umbrella factory has tripled2 &hus, the joint fi)ed profit of
thediversified investment decreased threefold, e)actly to @Y2
>thers have also noticed hat youdid, and the suddenly increased
demand drove the prices up in the case of both the holidayship and
the umbrella factory2 Hust as much as the lo value of joint ris(
justified it2
#ichson did not ant to ta(e it to his heart that you miss the
great opportunity, so he did notstart e)plaining the economics of
the situation2 5e ould have said, by and large, thatnaturally, even
this constellation is not ithout ris(s2 or e)ample, in case of a
stormyeather, not only the holiday ship ould produce a loss, but a
lightning may stri(e theumbrella factory as ell2 &he mar(et
seems to have evaluated such ris(s about the same as
#ichson$s ban( going ban(rupt2 &his is hy the profit of both
investment possibilities:diversified stoc(-buying and ban( deposit;
leveled off at @Y2
&he value of the stoc(s of the holiday ship and those of the
umbrella factory ere raised notbecause their economic situation
suddenly improved, but because they complement each otherso
luc(ily2 'aybe this is hat Beachson sensed ith an e)cellent
intuition in economics henthe idea of the holiday ship occurred to
him2 .f so, he fully deserved that the value of hisstoc(s suddenly
got tripled2 +nd if so, Beachson probably bought4in time4as many
stoc(sof the umbrella factory as he could ithout his very buying
driving the prices up2
.f it happened so, then4as e$ll see later4the money as a
replicator found its ay toreplication through Beachson this time,
and produced a holiday ship for this purpose2 But letus not run
ahead this much2 .t may not have happened so2 Beachson may have
just gottenluc(y4things li(e that happen2 +nd for the umbrella
factory, the appearance of the holidayship, and thus, the rise of
their stoc(s may have been an une)pected gift from ortuna2
T$e beta
.n reality, the luc(y constellation as e sa in the case of the
holiday ship and the umbrellafactory rarely happens2 But
diversification can be very productive even if the
relationshipamong the stoc(s is not so strong2 .t is not even
necessary that the relationship beteen toinvestments be inverse it
is enough if e find investments that are affected by e)ternal
factors very differently2
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&he more investments e can find that are affected
differently by the e)ternal circumstances,the more e can eliminate
the ris( of diversified investment2 .f e can collect about
tentysuch investments, the ris( drops to practically 8ero4let$s say
to the level of a ban( going
ban(rupt2 &his means that a diversified investment of tenty
different (inds of stoc(s :intechnical terms it is calledportfolio;
has almost no ris( at all2 But this is true only if the effect
of the e)ternal circumstances on one of the stoc(s in the
portfolio is not at all related to thevery same effect on another
stoc( in the portfolio2 9aturally, it is much better if
therelationship is definitely negative, but no e are happy if the
stoc(s in the portfolio areunrelated2
Unfortunately, hoever, it is almost impossible to find tenty, or
even less such investments2&he reason is that it is true for
almost every investment that on the long run they move moreor less
together ith the hole economy2 &his means that hen the hole
economy has agood year, the specific investment also closes a
better year than usual, and hen the holeeconomy is stagnant, the
same investment does not produce the usual profit, or even has
aloss2 .n every year there are e)ceptions to this rule, but not
many on the long term2 +nd if an
investment canbe an e)ception on the long run, its price ill go
up so much that, eventually,its yield ill not be higher than the
ban( interest2
&his means that the success of most investments more or less
moves together ith that of theothers :and ith that of the hole
economy;2 &herefore, the effect of the sum of
e)ternalcircumstances is similar, or at least partially similar for
all investments2 +nd this is hy it isimpossible to eliminate
completely that part of the ris( that springs from the
unevenfunctioning of the economy2 .t is possible only in the luc(y
case of a portfolio li(e the holidayship and the umbrella
factory2
&hose parts of the ris( of an investment that can be guarded
off by diversification, are notjustified to be really considered a
ris(2 .t is called the non-systematic ris, hich is not
ac(noledged by the mar(et as real ris(, and is not honored by
e)tra profit2 &o be moreprecise< e cannot say that the
mar(et DhonorsF or Ddoes not honorF, it only enforces the laof
demand and supply for investments as ell2 &he economists DSiss
(nifeF, the analysis ofthe demand and supply curves can ell be
applied here, too2 .f an investor can guard off one(ind of ris(
:e2g2, by diversification;, this ill push the supply curve donard,
since thisay the investor can be satisfied ith a loer yield2 .f
demand does not change in themeantime, prices :in our case<
yield e)pected of the investment; ill decrease2 +fter sometime, an
e*uilibrium develops here the non-systematic ris( has no longer an
effect on theyield-e)pectation2
&hus, it doesn$t ma(e any difference ho sensitive an
investment is to the good or badconditions of the environment, the
important thing is only that its sensitivity be of different(ind
from that of the others2 &his seems to be unfair, because if an
investment is moresensitive, its ris( is higher, thus e should
e)pect a higher yield2 #ichson in the first chapteractually did
ta(e #obinson$s physical condition into consideration, because he
thought if#obinson is strong, the ris( of not getting his loan and
its interest bac( is less2 .n case of aloan, he is right, but if
#ichson is thin(ing in terms of investment, the situation is
different2 +#obinson ho is e)pected to become ill often, ill
probably produce less income, becausehen he is ill, he does not
produce anything2 &herefore, the value of investing in him is
less2&he ris( arising from ea(ness is orsened only if this
#obinson tends to get ill at the sametime as the others2 &he
part of the ris( hen various #obinsons fall ill independently of
eachother can be arded off by diversification2
#is( that cannot be arded off even by diversification is called
systematic ris2 &his is thepart of the ris( that comes from the
fact that the success of a specific investment more or less
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?G
moves together ith the success of the hole economy2 .n the case
of the #obinsons, ris(arising from physical ea(ness also has such a
component2 0ea(er #obinsons probably fallvictim to epidemics and
hard inters more than the stronger ones2 9o then, in times
ofepidemic and hard inter, the hole economy struggles ith
difficulties2 &he ea(er a#obinson, the more his performance ill
move together ith these difficulties2 .nvesting in
such #obinsons is said to have a high beta value2 >n the
other hand, the stronger a #obinson,the more li(ely he ill not fall
ill along ith the majority in times of epidemics and hardinters2
.nvestment in these #obinsons has lo beta value2 &he higher the
beta value of aninvestment, the higher the profit that is e)pected
of it2
Beta is scaled so that its value is 1 if the profit of the
investment fluctuates as a result of thechanges in the
circumstances, similarly to the average profit of the hole mar(et2
Beta is lessthan 1 hen the given investment generally reflects the
general state of the mar(et so as tolevel it off, hile beta is
greater than 1 hen the given investment generally amplifies
thecurrent fluctuations of the mar(et2 .f, for e)ample, betaR, than
fluctuation is tofold thus, ifthe average yield on the mar(et is
1!Y, this investment brings !Y, hile if the loss is
typical, this investment ill produce double the average loss2 .f
betaR!, the profit of theinvestment varies independently of the
average, i2e2, sometimes they move together,sometimes in opposite
directions2 &heoretically, beta can be negative, but in
practice, it veryrarely happens2
+ctually, it is the beta value in hich investors compress all
the information they have aboutthe ris( of the studied investment2
0hen #ichson analy8ed the ris( of the fishing company inthe
previous chapter, he did not pay much attention to the dangers the
ship has to face on thesea2 9ot because these dangers are not
ris(y, but because they are not systematic ris(s2#ichson too( this
(ind of ris( into consideration by mentally devaluating the
e)pected profitslightly, for the hole ship may get destroyed, even
if the chances of it are lo2 &his,hoever, does not affect beta,
because the probability of such an accident is independent ofthe
hole economy$s booming or stagnating2
Beta is affected, hoever, by the fact that the company produces
basic food :although it mustbe admitted, that no other food e)ists
in these islands;2 #ichson too( this fact as a betareducing factor,
for people must eat even hen the economy is stagnating2 &hus,
the demandfor the products of the fishing company is affected by a
general economic recession only alittle2 >n the other hand, hen
the economy is in the upard phase, people ill not eatsignificantly
more2 or this enterprise, then, beta has a lo value in this
respect2 >n the otherhand, the estimated income depended very
much on the small changes in the fish production2.t did matter
hether the number of fish caught as M! or ?!!2 +nd this does affect
beta, forthis can change together ith the general state of the
economy2 .n good eather everything
flos more smoothly, and the fishing ship has a greater output2
0hen the eather is bad,everything goes a bit orse, but the fishing
business feels this in a particularly amplifiede)tent, because its
outcome is greatly influenced by as little as ten missed fish2
0e have seen a component that reduces the beta of the fishing
ship enterprise, and anotherone that raises it2 #ichson summari8ed
these to :and many other; things hen he evaluatedthat the
systematic ris( of the fishing ship enterprise is relatively high,
say, betaR?2"
67;M: t$e 6a/ital 7sset ;ri!ing M*el
.n the previous chapter, e generously s(ipped the step of ho
#ichson arrived from
estimating the ris( :i2e2, determining that betaR?2"; to
e)pecting A!Y yield from thisinvestment2 0ell, the so called
Capital +sset Pricing 'odel, or C+P', may have been of
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?"
great help to #ichson2 >ne of the conse*uences of the C+P' is
perhaps the most fre*uentlyused mathematical formula in the
monetary orld2 &his formula is also called the e*uation
ofthesecurity maret line it shos the re*uired yield as a function
of beta :or ris(;2
&he mathematical deduction of the e*uation of the security
mar(et line is rather complicated2&he basic idea of the
deduction is similar to ho Beachson as thin(ing :provided he
proceeded very consciously, and he did not just get luc(y;2 .n
C+P', an optimal portfoliothat includes the investment to be
studied is imagined around the given enterprise2 &here*uired
yield of this optimal portfolio gives the value the investor can
e)pect of the givenspecific investment2 &his is ho the C+P'
includes that the diversifiable part of the ris( doesnot justify
increasing the re*uired yield2
+lthough the deduction is complicated, the arising e*uation is
pleasantly simple2 .t can beseen in the figure that there is a
linear relationship beteen beta and re*uired yield2 &o
fi)ed
points determine a line4in our case, e get these to points by
(noing the ris(-free return:or rather the return of minimal ris(;,
and the average mar(et return2 &he former has a betavalue of !,
the latter is betaR12 &hus, once e succeed in determining the
beta value of a
specific investment, the re*uired return can easily be read from
the figure2 +nd from here one can calculate the value of the
investment just as #ichson did in the previous chapter2
&he linear e*uation of the security mar(et line is only a
side effect of C+P', although a greatproportion of the practical
application of the model is ta(en by the use of this e*uation2
&hetheoretical significance of C+P' lies mainly in proving that
a (ind of e*uilibrium in themar(et can develop on cases of
investments as ell2 &he functioning principle of
thise*uilibrium is very similar to hat e shoed about the mar(et
e*uilibrium of demand andsupply in Chapter G2 'ar(et e*uilibrium
frees economy of the unpleasantly huge, hysteric
fluctuations in the mar(et4at least in theory2
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Similarly to all models, C+P' does not describe reality
perfectly2 &he validity of C+P' canbe e)amined easily, for e
can place ourselves into any moment in the past and can chec(hat
investment recommendations C+P' ould have given at that moment2
&hen, (noingthe subse*uent turn of events, e can see ho
successful the decision based on C+P' ouldhave been2 +lthough these
studies have shon that the e)actness of C+P' is far from being
perfect, it has proved to be very difficult to improve the model
so as to surpass the success ofC+P' by the improved model2
&he basic principles of C+P' had an enormous effect on the
thin(ing of economists2 .n the1M"!s, an actual beta-cult prevailed
on 0all Street2 +s every sharply rising trend in fashion, itlater
leveled off, but the concept of beta is still e)tensively used by
investors, and in a moregeneral sense than folloing from C+P' only2
&heoretically, beta can be used only forcompanies that have a
long standing history and the relationship beteen their
performanceand the development of economic activity in the mar(et
can ell be seen2 .n practice, beta:and C+P'; is used to evaluate
all (inds of investment possibilities, even beginningenterprises,
just as #ichson did2 .n these cases the ine)actness of the C+P' is
due to the fact
that beta cannot be determined accurately enough29o onder that
many attempts have been made by many people in many ays to
improveC+P' and to ma(e it more e)act2 5oever, the purely
mathematical or economic approacheshave lead to very modest
results2 &he most promising road lead through the application
of
psychological research4for the first time in the history of
economics2
2is" see"ing: ris" a'i*an!e
Perhaps it is not an e)aggeration if e say that in a certain
sense, beta is the memory of thecapital, because investors condense
all the ris( factors ta(en from past e)perience in thissingle
number2 0e sa in Chapter @ :p2 OOO;, hoever, that human memory
isfundamentally reconstructive in nature2 rom this e)perimentally
thoroughly grounded
psychological phenomenon an important characteristic of
information society resulted, i2e2,the stability of facts2 0hat is
relevant from our perspective no, is, that upon the influence
ofe)ternal information, memories can greatly change2
+ video record on hich to cars had an accident as shon to
e)perimental subjects2 9e)t,the subjects performed various other
tas(s, then they ere as(ed to recall the video< half ofthe
subjects ere as(ed about the video Don hich the to cars hit each
otherF, and the otherhalf ere reminded as Don hich the to cars
smashed each otherF2 &he to groups recalledthe accident
completely differently2 &hose ho ere as(ed to recall the to
cars hittingeachother, remembered the speed of the cars to be much
loer than those ho had to estimate ho
fast the to cars smashing each other ent2 urthermore, the
majority of the first groupresponded ith a DnoF to the *uestion
hether they sa any bro(en glass, hile the majorityof the second
group said DyesF :although there as no bro(en glass in the
film;2
9ot only our memories, but our preferences are also easily
manipulated by changing thepoints of reference2 .n one study, for
instance, people ere as(ed to choose beteen toemployment policies2
>ne of them as characteri8ed by high employment and a
highinflation rate, the other by loer employment and a loer
inflation rate2 0hen it as as(edhether unemployment should be 1!Y
or @Y, the majority accepted a higher inflation rate forthe sa(e of
decreasing unemployment2 0hen it as as(ed hether employment should
beM!Y or M@Y, the majority of the respondents considered (eeping
inflation lo more
important2
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.n one of their studies, 3ahneman and &vers(y had subjects
ma(e an unpleasant decision2
.magine that a rare lethal disease brea(s out in a village, and
all G!! of the inhabitants areinfected2 &hey can try to drugs,
but, unfortunately, the to drugs preclude each other2
&hesituation as described to half of the e)perimental subjects
as follosnly the surroundings, hatever is aroundhappiness, that
cost you money, the stupid, boring accessories2 .t does not cost
you money
that you are in .taly, but it does cost you money to travel
there and sleep under a shelter2 .tdoes not cost you any money that
the oman is your lover, but it does that she has to eat anddrin( in
the meanhile, and that she has to dress in order to undress2F
&he great majority of
people thin( similarly, even if they cannot e)press it so
poetically2
+s research has shon, it is true only in certain cases and only
to a certain e)tent that themore money is paid to someone, the
better he ill perform2 or most people, there is a pointafter hich
this curve does not rise, but, in fact, begins to fall2 &his
point generally comesmuch before performance cannot be increased
due to biological or intellectual limits2 =et megive you a typical
e)ample< in 9e or( City, there are much feer cabs in the streets
in theafternoon on rainy days than on dry days in fact, it is
almost impossible to catch a cab on
rainy afternoons2 >ne ould thin( cab drivers are happy to
or(, for there are manypassengers, and the cabdrivers can ma(e a
lot of money2 &his is not ho the majority of thecabdrivers
thin(, hoever2 Because of the heavy demand, they can ma(e
sufficient money forthe day in the morning, then they go home and
enjoy a free afternoon2
+ll this is rarely true of businessmen and invertors2 .t remains
to be ansered hy ouldanyone having a fe hundred millions ant to
have further hundreds of millions, hen hecould live on that sum
till the end of his life, and beyond, up to his great
grandchildren2 +ndstill, it is not uncommon to see that above a fe
hundred millions, every cent counts2
=et me mention a parallel story, hose gist ill really become
clear only in Chapter 1A2 .n1M!@, at the age of @, +lbert Einstein
published four papers in physics in hich he solved a
fe of the most important problems of physics of the time2
&he *uestion for the 9obelcommittee as not hether the young
scientist deserved the pri8e or not, but they haddifficulty in
deciding hich of his papers should be aarded2 9evertheless,
Einstein devotedhimself deeply to studying the *uestions of
physics, and nobody as(ed him hy, havingachieved so much and having
received such a high pri8e2 Could the situation be similar iththe
hundred millions of businessmen
By the time e reach Chapter 1A, it ill become clear that this
parallel is not just an analogy,but an e)act logical identity2
0hile the scientist is motivated by the scientific problem
itself,the businessman is motivated by money itself2 But only a fe
businessmen admit this tothemselves2 9elson Bun(er 5unt, a
&e)as oil-billionaire said D'oney never meant anythingto us2 .t
as just a sort of ho e (ept the score2F &he majority of
successful businessmenand investors develop more comple)
e)planations for themselves than that2 &hey tal(
aboutinnovation, creating jobs, running the economy, or about the
heritage of their children2 .norder to understand the motivation
behind these statements, e have to get ac*uainted ith afe
fundamental psychological mechanisms2
9e#ense &e!$anis&s
Successful businessmen also (no that the orth of living does not
lie in having moremoney2 +s e sa under the section+ichsons dog at
the end of the previous chapter, eventhey do not pay anything that
is orth living for from their capital, but from their salary or
the
yield of their capital2 >n the other hand, it is the essence
of their profession that the money in
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their possession should multiply as much as possible2
Unavoidably, it causes cognitivedissonance in them2
+s e sa in Chapter A, one cannot go on living ith cognitive
dissonances for a long period,so e try to resolve them as much as e
can2 >ne of the most fre*uent methods is to changethe facts in
ourselves for ourselves2 .f this encounters difficulties, the ne)t
ea(est lin( in thechain is our opinions, and if that cannot change,
our feelings and attitudes fall victim to thereduction of cognitive
dissonance2 Sometimes even that does not help4changing our
feelingsand attitudes may encounter severe obstacles e cannot ta(e
upon ourselves2 &hen e employmeans psychologists call defense
mechanisms2
&hese mechanisms first appeared in Sigmund reud$s
psychoanalytic theory2 .n reud$stheory, the role of the defense
mechanisms is to prevent the recognition of those
personallyrelevant moments that threaten our self esteem or lead to
an)iety2 /efense mechanisms areunconscious and are usually
manifested in some (ind of action :or the avoidance of action;2
reud developed his theory more than half a century before the
theory of cognitive dissonanceas developed2 .n vie of the concept
of cognitive dissonance, a great proportion of reud$sideas got ne
light, and in addition to the ones he described, a fe ne defense
mechanismshave been also discovered2 =et$s have a loo( at the most
important defense mechanismshose e)istence have been supported not
only by theoretical considerations, but empiricalstudies as
ell2
+ccording to reud, the most important defense mechanism is
repression2 .t means the personunconsciously e)cludes thoughts,
images, and memories related to instinctual impulses fromthe
conscious mind that are too fearful or painful for him2 &hey
ould usually causeembarrassment, bad conscience, decrease in self
esteem, or other feelings of suffering2
.t is a typical repression hen a rich person forgets, represses
the memory of once having
been very poor2 +s a result, he can sho no empathy toard the
poor, definitely avoids, oreven hates them2 5e does not ant to,
therefore, he does not notice poverty2 5e may evenemploy
self-deceptive thoughts li(e they surely have money, they just thre
it aaymindlessly or dran( it aay2 &hus he successfully
represses his intensive fear of poverty2
&here is one positive outcome of this defense mechanism for
the businessman< he does notfeel an)ious of the possibility of
becoming poor again2 5e unconsciously represses the feelinghe (nos
and he used to suffer from2 .t can be seen that despite the
frightening name,repression should not be considered a negative
thing only2 #epression, hoever, is rarely
perfect2 #epressed contents bombard consciousness, and may cause
an)iety and even bodilydisease if they come to the surface only
partially2 &hus, further mechanisms are also needed2
+eaction formation is another fre*uent defense mechanism2 .n
this case, one conceals theunacceptable repressed desires and
impulses from oneself by developing just the oppositemotivation2 or
e)ample, he may too vehemently scourge lo morality, alcohol, or
gambling2.n cases li(e this it often turns out that the person
himself have had very similar problems, andith the fervid attac( he
mainly ants to defend himself from relapse2
&his may be the mechanism in the bac(ground hen a rich
businessman begins to have fits ofe)cessive generosity, shoing that
he is not miserly or greedy2 .n reality, he ants to havemore money,
but he turns his greediness to its opposite< he employs the
defense mechanism ofreaction formation in the service of his on
mental health2
&he mechanism ofproectiondefends us from admitting our on
unpleasant traits or desires
by attributing them to others2 + typical e)ample is hen the
husband begins to be jealous ofhis ife and unjustly accuses her of
infidelity2 &his behavior often conceals the fact that he
is
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A"
the one ho ould li(e to cheat on her, but represses his desire,
because it ould causeunpleasantly bad conscience for him2
#epression, hoever, is not *uite successful, and thedesire
stubbornly comes to the surface2 &hen, the ne)t defense
mechanism comes to play, thistime, projection2 +s a result, he is
becoming increasingly certain that his ife is cheating onhim, and
cannot get it out of his mind, for infidelity is in his very
head4but is projected to his
ife2.t is a typical e)ample hen a rich man complains that
everybody ants only his money, andhe is loved only for his money2
+lbeit he is the one ho ma(es friends only ith those fromhom he
hopes to gain something2 But he conceals this from himself, and
attributes his on,repressed and rejected desires to others2
istancingis another defense mechanism2 .n this case, e do not
project the material to berepressed onto others, but insert another
object beteen ourselves and the object of our desire,or
compartmentali8e our feelings and cognitions2 &his ay, e escape
the pain of theunbearable closeness of the object of our on desire2
+lthough the insertion itself can beconscious, it remains hidden
from ourselves hy e do that2 or e)ample, hen a girl in love
is pic(ing petals murmuring Dloves meI loves me notF, pic(ing
petals is a ay of distancing2.t is a typical distancing behavior
hen a businessman deals ith his business affairs veryefficiently
and does not mi) them ith his everyday life at all2 5e pays himself
a salary hedetermines via negotiations ith his partners or4if he
has none4ith himself2 5e covers thecosts of his lifestyle from
this, but ma(es his capital completely independent of it2 &his
ayhe defends himself from his ealth seducing him into e)penses that
he feels are inappropriateand unise2 Perhaps it as this defense
mechanism that paved the ay to the emergence ofthe capital2
+ationali(ation is a very common defense mechanism2 .t is used
already in +esop$s fableabout the fo), ho cannot reach the grapes,
but convinces himself that he does not ant to,
because they are too sour2 &hus, rationali8ation does not
mean e act rationally, but that etry to present our actions as if
they ere rational2 0e loo( for a good e)cuse for our action inorder
to be able to hide the real cause from ourselves2
&here as a typical instance of rationali8ation on both
sides, hen 'r2 Boo(ish and 'r2itness e)changed goods in Chapter G2
+fter the conversation they could already rationali8ehy they got
rid of the gift of a dear relative2 &his is hy e said that
actually, in addition toto objects getting e)changed, to stories
also got e)changed2 0e also sa that theconversation beteen 'r2
Boo(ish and 'r2 itness brought about real value in economics,
because it created a psychological change that made the mutually
advantageous e)changepossible2 /efense mechanisms often bring about
real economic values, because they create
the psychological conditions for reali8ing that value2.t is also
a typical rationali8ation hen a businessman says he is striving at
collecting as muchealth as possible, in order to pass it over to
his children as a legacy2 &his is ho he ma(eshis desire to ma(e
as much money as possible more acceptable for himself2 &his ay
it is notmoney, but biology that motivates his actions%hich is more
acceptable for him2
Intellectuali(ationis related to rationali8ation2 .n this case,
one guards off painful contents ofconsciousness by treating them in
an abstract, intellectual form2 + doctor, for e)ample, couldnot
bear the burden of identifying psychologically ith the suffering of
each of his patients2
9o matter ho empathic he is, he must dra a line beteen his and
his patients$ problems2
0hen a businessman tal(s about opening ne job opportunities,
about running the economy,and similar things e)ceedingly
emphatically, he probably uses the defense mechanism
ofintellectuali8ation2 &his is ho he hides from himself that in
reality he is motivated by money2
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isplacement, or in reud$s original e)pression,sublimation, is
the most acceptable ay ofsatisfying certain aggressive or se)ual
motives2 .n this case, the drive itself is not changed,only its
object2 +ctually, e do satisfy it, but in another, socially
acceptable form, li(e inmartial arts, or in some creative form,
li(e arts, poetry, music4or perhaps business, hich isfight and a
creative activity at the same time2
N N N
.f the defense mechanisms do not or( appropriately or are too
strong, they can lead to bothpsychological and bodily diseases2
Still, they are essential for all of us, and e all use them2reud
and his folloers thought that the condition for mental health is to
get to (no thetotality of our conscious and unconscious mind ith
all their contents2 .t has become clearsince then, hoever, that
defense mechanisms play a basically positive role in fact,
psychologists today often aim not at uncovering the repressed,
rationali8ed or sublimatedcontents of consciousness, but to repair
the malfunctioning defense mechanism2 .f somethingis ell cemented
in the unconscious, it is usually better to leave it there
undisturbed, and oftenthe psychologist can help the most if he
helps the client in this2
/efense mechanisms help us maintain our psychic balance, thus,
in (eeping our bodily andmental health2 But they do not ma(e us
happy2 &he secret of happiness could be found, or atleast
successfully studied, by entirely different methods and in entirely
different areas2
T$e #l
5ungarian-born professor of psychology of the University of
Chicago,'ihTly CsV(s8entmihTlyi :pronounced me-5.75
chee(-sent-me-5.75-ee; intervieedhundreds of successful people
:artists, athletes, musicians, chess players, surgeons; abouttheir
pea( e)periences and about hat it feels li(e doing hat they are
doing2 >n the basis of
these reports he developed his theory about the psychology of
optimal e)perience :or moreloftily< of happiness;2 +s he put it,
optimal e)perience is based on Dflo4the state in hich
people are so involved in an activity that nothing else seems to
matter the e)perience itself isso enjoyable that people ill do it
even at great cost, for the sheer sa(e of doing it2F .n case ofthe
respondents of CsV(s8entmihTlyi, the most important common
characteristic as thefeeling of effortlessness, even hen the
athlete$s muscles ere very sore and could hardlygasp for air2 :=et
me note that the e)pressionflowis used in the psychological sense
here2 .neconomics, the ord is used in an entirely different
meaning2;
Subse*uently, CsV(s8entmihTlyi and his colleagues intervieed
tens of thousands of peopleall over the orld2 +s it turned out,
optimal e)perience is described ith almost identical
ords by men and omen of various age, nationality, culture, or
educational level2 >ptimale)perience as virtually alays coupled
ith the presence of flo2
+s a ne)t step, CsV(s8entmihTlyi and his colleagues came forard
ith an ingenious research-methodological invention2 &he
subjects of the investigation ere e*uipped ith a pager for aee(2
&he pager beeped randomly, J times a day on the average2 0hen
the beeper sounded,the respondents had to fill out a brief
*uestionnaire about hat they ere doing at themoment, hat they ere
thin(ing, and ho happy they ere feeling2 .n the course of
todecades, several hundred thousand *uestionnaires ere
collected2
#elying on the responses, the researchers tried to determine the
best ay to describe thosemoments hen people reported ma)imal
happiness2 +s it turned out, they can be identified
the most e)actly by eight characteristics2 .f they included
either more, or less characteristicsinto the analysis, it made the
identification of the moments of ma)imal happiness less e)act2
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AM
>n the basis of this, it can be (non that flo is determined
by the folloing eightcharacteristicsne of the most often cited
characteristic of theflo e)perience is that one forgets all other
aspects of life2 +ll troubles in life stope)isting, all information
unrelated to the tas( at hand is pushed out of
aarenesstemporarily2
G2 # sense of control2 .n the state of flo one does not orry
about controlling the situationor activity2 5e concentrates only on
the present, on the flalessness of the given moment2'any signs
indicate that in order to achieve flo, one has to give up wanting
to be incontrol2 .n Hade 0arrior, a movie based on the innish
national epic, 3alevala, the iseold mon( tells the young
heartbro(en hero D5ad you not anted her, you ould havegotten
herF2
"2 + loss of the feeling of self-consciousness.+s an e)ample,
this is ho an roc( climberdescribed his e)perience< D.tKs a \en
feeling, li(e meditation or concentration2 >ne thingyou are
after is the one-pointedness of mind2 ou can get your ego mi)ed up
ithclimbing in all sorts of ays and it isn$t necessarily
enlightening2 But hen things becomeautomatic, it$s li(e an egoless
thing in a ay2 Someho the right thing is done ithoutyou ever
thin(ing about it or doing anything at all2 I.t just happens2 +nd
yet, you aremore concentrated2F &his e)cerpt as cited, because
several other characteristics also
appear in it clearly2
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@!
J2 $emporarily distorted time senseis a typical characteristic
of flo e)periences2 0e do not(no yet if this is only an accidental
by-product of intensive concentration, or somethingthat contributes
to the development of flo on its on2 .t is easily conceivable
thatescaping the bondage of time in itself increases, or even
produces the enjoyment of fullinvolvement2
inally, let$s mention a characteristic of flo that could not be
directly identified in the*uestionnaires, but all the bac(ground
studies pointed in this direction2 'ost flo e)perienceshappened
during activities that ere inherently rearding, because the person
enjoyed doingit2 +ctivities that can bring about flo are great
motivators in themselves4the specificactivity that can bring a
given person into the flo state, hich may, of course, vary from
person to person2 Contemplation ith understanding, li(e profound
enjoyment of the beautyof 9ature may also lead to flo2 +nd in the
psychology of homo informaticus, it is animportant feature to enjoy
involved contemplation of not only the physical orld, but theorld
of information as ell2
Mne an* $a//iness
=et$s bring the truism Dmoney does not ma(e you happyF under
scrutiny in vie of theaforementioned psychological research2 0ell,
if happiness can really be identified ith flo,then it has nothing
to do ith money2 But let$s recap the ords of +ntal S8erb<
D>nly thesurroundings, hatever is around happiness, that cost
you money, the stupid, boringaccessories2F 0ell, even if money does
not ma(e you happy, prolonged and severe lac( ofmoney definitely
ma(es you unhappy2
'oney is generally used as an e)trinsic motivator2 0e or( for
money, so that afterards ecan do hat e enjoy2 But or( can also be a
source for flo, and as research has revealed, itoften is2 &his
is possible only if4in ourselves4or( is completely separated from
the factthat e get a salary for it2 =et me tell you a personal
story, instead of cumbersomee)planations2
ears ago, . participated in a television game sho)eopardy2 .f
somebody could in in tenconsecutive rounds, he could in a car2
&he contest itself as a rather fast, rapidly rolling*ui8 game,
here one had to ma(e very fast decisions hether or not one (ne the
anser,and press the button2 >therise, the other played pressed
the button sooner and earned theright to anser2 Under these
circumstances, one unavoidably tal(s a lot of rubbish as
ell,including the inner2
&his game suited me very much, but . did not *uite
understand hy2 &hey say, the
shoema(er$s ife is alays the orst-shod< . reali8ed only much
later that hat . (no frompsychology, applies to my functioning
also2 &his game suited me, because it could bring meinto the
state of flo2 or e)ample< during the game, . had no idea ho long
e had been
playing2 . as happy if my anser as correct, but fran(ly, . did
not care much if hat . saidas correct or not2 'y state of mind as
D>3, let$s see the ne)t *uestionF . performed much
better toard the end of the game, hen the *uestions came ith
lightning speed, than in theprevious, thematic rounds2 .t came to
me only very sloly, hy2
&he anser lies in the Gthcharacteristic of flo as described
above2 or after ansering thethematic *uestions, the player alays
had to name the topic from hich he anted to get thene)t *uestion2
0ell, overta(ing control, even if only this much and for that short
a time, gotme out of the state of flo, undermining my performance2
&his part of the game favored thoseho ere pulling out all the
stops, instead of playing in the state of flo2 Some of them
haddefinitely greater (noledge than . did, but . on the game
nevertheless4than(s to the flo2
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@1
&he most shoc(ing e)perience struc( me in the seventh round2
.n this round, . side-glanced atthe car, on the road to hose inning
. as already more than half ay2 &his had a verystrange effect2
. sloed don, . could not remember anything, and if . did, it as not
correct2=uc(ily for me, . had the ea(est rivals in that round2 .f .
had played li(e that in any of theother rounds, . ould have plainly
lost2 E)trinsic motivation stopped flo, and hat as left
as just endeavor2 . ent to play for the car, but . could in,
because . completely forgotabout it4e)cept for this single instant2
&he game itself became an intrinsic motivation2 .enjoyed
playing2
'oney as an e)trinsic motivator or(s against flo, and thus,
happiness2 et at the sametime, it is also an essential condition
for it2 &his parado) can be resolved only if e forgetduring or(
that e are actually or(ing for money2 .f e succeed, e can
e)perience floduring or(, too2
. have heard from many e)cellent authors and other creators that
receiving an order is theirmain source of inspiration, and deadline
is their best 'use2 &hey may be right, but it does
notcontradict hat has been said above2 'any authors, once they
start, can merge ith the tas( at
hand, but in order to start, they need an e)trinsic impetus2
Mne &ti'ates t &a"e &ne
.n the case of entrepreneurs, businessmen, and investors, ma(ing
money itself is or(25oever, money can really become an intrinsic
motivation for many people2 .f . as as(ed togive an e)ample of
something that carries all eight characteristics of flo in the most
simplemanner, . ould say money ma(ing, not in the sense of ma(ing
money to spend it, but tomultiply it2 =et$s run through the eight
characteristics of flo ith respect to ma(ing moneyto ma(e
money2
.t is easy to identify ith this activity2 .t challenges one$s
s(ills to the utmost2 7oals are clear,feedbac( is unambiguous and
immediate2 =arry +dler, one of the orld$s most s(illedharmonica
players once said in an intervie D'oney is the only applause a
businessman getsfor his performanceF2 'erging ith the tas( is very
easy4although in order to do that,sometimes the employment of a
defense mechanism or to may be necessary2 +nd notorrying about the
control is sometimes unavoidable< people ho can never trust
others, illnever ma(e money multiply2 >nce e have found hom to
trust and e have created theframeor( of the activity, e must let
things happen2 =oss of the feeling of self-consciousness ta(es
place almost by itself< money is an ideal medium to
concentratee)clusively on it2 +nd any businessman can give plenty
of e)amples of distorted time sensee2g2, cases of missed planesI
Perhaps this is hy they thin( it is orth buying the terribly
e)pensive airplane tic(ets ith hich the time of travel can be
modified even in the lastminute2
or the majority of people, the most realistic ays for achieving
a flo state are arts, se), andsports2 But as e have seen, money is
also a suitable activity to enter flo2 0hen #obinsonand #ichson had
a discussion in Chapter ", #ichson as more in a state of flo
than#obinson2 5e as doing something in hich he can get immersed the
most easily2 #obinsoncould do this only after the agreement, hile
building, and then hile running the ship2 +sith everything else, e
are not ali(e in the ays e reach happiness2
.t follos from the functioning of the human psyche that money
can very easily turn frombeing an e)trinsic motivator into being an
intrinsic motivator2 9either man, nor money isresponsible for
this4it is just in the nature of flo, and in the nature of
money2