The Dao of Capital: Austrian Investing in a Distorted World by Spitznagel Mark

Author:Spitznagel, Mark [Spitznagel, Mark]
Language: eng
Format: epub, mobi
Publisher: Wiley
Published: 2013-08-16T07:00:00+00:00

Becoming aware of and even overcoming our time preferences do not occur simply by wishing or wanting it to be so. If it were that easy then everyone would do it and, as we said about Produktionsumweg in Chapter 5, any advantage from it would no doubt disappear. (There would be a great many Henry Fords foregoing profits to build more tools.) The key is in the human brain and what we know about those gray-matter structures that govern our thoughts, impulses, desires, and behaviors. But before going to the scientific and empirical, we again follow the lead of the Austrians by taking a logical, deductive approach that starts with the individual.

In his astute observations of human nature, Böhm-Bawerk was the first (along with John Rae, an obscure nineteenth-century economist whom Böhm-Bawerk thanked for his contributions, which he then greatly surpassed) to connect the dots from time preference to time inconsistency (and hyperbolic discounting) as the most daunting challenges to Produktionsumweg. To see that Böhm-Bawerk anticipated the modern work in behavioral economics and finance, consider this passage: “Who of us, faced with disagreeable but unavoidable visits or errands or tasks that had to be attended to within a certain time, has not postponed them from the days when it would have been relatively convenient to attend to them, and then finally been forced to act in hurry and haste . . . ?”4 To model procrastination—where someone really does intend to do something, just not right now—involves not merely a discount on future enjoyments, but a more subtle problem of time inconsistency, of thinking that what is too onerous in the present will somehow be easier to endure in the future. (For example, we have a high time preference now with a predilection for consumption, but we expect that in the future our time preference will somehow be lower, enabling us to forego consumption and/or save later on.) Universal to us humans is the difficulty of doing the exact opposite: inverting our natural drives and desires so to endure a negative present stage in order to enjoy a positive future stage. Yet the time inconsistency identified by Böhm-Bawerk had remained all but unknown in finance until its empirical discovery a few decades ago by behavioral psychologists (most notably studying addiction); its tremendous financial implications specifically to capital investment and valuation remained unrecognized until now. Thanks to Böhm-Bawerk we can build the awareness and self-knowledge that allow us to apply these means to our desired ends of Austrian Investing. For that, we return to a pioneer in the identification and study of what we now call time preference.

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