This paper was prepared for John B. Taylor and Michael Woodford, Editors

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people with strong hearts were better able to endure the ice water.  They found that those

in the experimental group in fact held their hands in the ice water longer.  If indeed, as

appears to be the case, those in the experimental group held their hands in the ice water

longer to prove that they had strong hearts, then this would be quasi-magical, since no

notion was involved that there was any causal link from holding hands in ice water to

strengthening the heart.

While this particular experimental outcome might also be explained as the result of a

desire for self deception, Shafir and Tversky report as well as other experiments that suggest

that people do behave as if they think they can change predetermined conditions.  Shafir and

Tversky (1992) show, with an experimental variant of Newcomb’s Paradox, that people

behave as if they can influence the amount of money already placed in a box.

Quasi-magical thinking appears to operate more strongly when outcomes of future

events, rather than historical events, are involved.  Langer (1975) showed that people place

larger bets if invited to bet before a coin is tossed than after (where the outcome has been

concealed), as if they think that they can better influence a coin not yet tossed.

It appears likely that such quasi-magical thinking explains certain economic phenomena

that would be difficult to explain the basis of strictly rational behavior.  Such thinking may

explain why people vote, and why shareholders exercise their proxies.  In most elections,

people must know that the probability that they will decide the election must be

astronomically small, and they would thus rationally decide not to vote.  Quasi-magical

thinking, thinking that in good societies people vote and so if I vote I can increase the

likelihood that we have a good society or a good company, might explain such voting.  The

ability of labor union members or oligopolists to act in concert with their counterparts,

despite an incentive to free-ride, or defect, may also be explained by quasi-magical thinking.

The disposition effect (Shefrin and Statman, 1985) referred to above, the tendency for

individuals to want to hold losers and sell winners might also be related to quasi-magical

thinking, if people feel at some level that holding on to losers can reverse the fact that they

have already lost.  Public demand for stocks at a time when they are apparently overvalued

may be influenced by quasi-magical thinking, a notion that if I hold, then the stocks will

continue to rise.

Attention Anomalies and the Availability Heuristic

William James (1890, p. 402) criticized earlier psychologists, who in their theories

effectively assumed that the human mind takes account of all sensory input, for taking no

note of the phenomenon of selective attention:

But the moment one thinks of the matter, one sees how false a notion of

experience that is which would make it tantamount to the mere presence to

the senses of an outward order.  Millions of items of the outward order are

present to my senses which never properly enter into my experience.  Why?

Because they have no interest for me.  My experience is what I agree to

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There is evidence that the stock market crash of 1987 can be viewed in these terms, see Shiller

(1989).

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attend to.  Only those items which I notice shape my mind — without

selective interest, experience is utter chaos.

The same criticism might equally well be applied to expected utility maximization models

in economics, for assuming that people attend to all facts that are necessary for

maximization of the assumed objective function (Berger, 1994, elaborates on this point).

Attention is associated with language; the structure of our language invites attention to

categories that are represented in the language.  Taylor (1989) showed, for example, that

certain concepts of “the self” were apparently absent from languages in the time of

Augustine.  The language shapes our attention to even the most inward of phenomena.

In economics, certain terms were apparently virtually absent from popular discourse

fifty or more years ago:  gross national product, the money supply, the consumer price

index.  Now, many economists are wont to model individual attention to these concepts as

if they were part of the external reality that is manifest to all normal minds.

Attention may be capricious because it is affected by the “salience” of the object;

whether it is easily discerned or not (Taylor and Thompson, 1982) or by the “vividness” of

the presentation, whether the presentation has colorful details.  Judgments may be affected,

according to the “availability heuristic,” that is, by the “ease with which instances or

associations come to mind”  (Tversky and Kahneman, 1974).

  

Investment fashions and fads, and the resulting volatility of speculative asset prices,

appear to be related to the capriciousness of public attention (Shiller, 1984, 1987).  Investor

attention to categories of investments (stocks versus bonds or real estate, investing abroad

versus investing at home) seems to be affected by alternating waves of public attention or

inattention.  Investor attention to the market at all seems to vary through time, and major

crashes in financial markets appear to be phenomena of attention, in which an inordinate

amount of public attention is suddenly focussed on the markets.

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Economic theories that are most successful are those that take proper account of the

limitations and capriciousness of attention.  One reason that the hypothesis of no

unexploited arbitrage opportunities (a hypothesis that has led to the Black–Scholes (1973)

option pricing theory, the Ross (1976) arbitrage pricing theory, and other constructs of

finance) has been so successful is that it does not rely on pervasive public attention.  The

essence of the no-arbitrage assumption, when it is used successfully to produce theories in

finance, is that the arbitrage opportunities, were they to ever exist, would be exploited and

eliminated even if only a tiny fraction of investors were paying attention to the opportunity.

Culture and Social Contagion

The concept of culture, central to sociology and cultural anthropology ever since the work

of Tylor (1871), Durkheim (1893) and Weber (1947), is related to the selective attention that

the human mind exhibits.  There is a social cognition, reenforced by conversation, ritual and

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