Eric Falkenstein reiterates his key idea, that envy dominates greed when it comes to explaining human behavior:
The idea that ‘incentives matter’, and that people generally act in their material self interest, is a powerful assumption. Alternative conceptions of human action, such as that people care mainly about their community, country, or God, are considerably more convoluted in explaining, say, why stock prices are uncorrelated from one day to the next.
However, there are many anomalies to this assumption, and my big idea in this article is the standard conception of self interest is not cynical enough: envy can explain most of what greed can, plus more. For example, a non obvious implication of a standard formulation of self interest–that our happiness increases in wealth, but at a decreasing rate–is a necessary and sufficient condition that a ‘risk premium’ must accompany risky assets. This was developed in the 1950s and 1960s into Modern Portfolio Theory, and is a mainstay of business school curricula. Yet the data supporting this seemingly intuitive theory (‘higher risk–correctly defined–implies higher expected return’), is lacking for every asset class you can imagine (stocks, bonds, lotteries, currencies, futures), with only a few conspicuous consistent anecdotes (ie, short-term US Treasuries and AAA bonds have low risk and low returns).
Why might this be? I wrote a book arguing this is because if everyone is benchmarking against everyone else, not maximizing wealth but rather relative wealth, it turns out the mathematical implication is that the risk premium goes to zero. It’s a rather straightforward implication, and it does involve a little math, but the bottom line is, different assumption, different reality.
[...]
Most work finance today involves teasing out the nuance of risk that explains this null result. Like a wine expert finding they can’t discern a Chateau Lafite Rothschild from Two-Buck Chuck, experts are very good at rationalizing, especially using ‘powerful econometric techniques’ that hide the embarrassment in obscure metrics.
[...]
Of course, people are still risk averse, in that they will pay to avoid having risk thrust upon them, and so buy insurance. Yet, systematic risk, the risk that presumably yields a prisk premium, is distinct from that. Note that if ‘risk-free’ is buying the market or consensus portfolio, you have the potential for bubbles. As a sector like internet companies, or housing, becomes larger, one allocates more to it without much notice, because it isn’t risky if everyone is doing it. My experience working in finance is that it is much easier to sell a new strategy if several of your competitors are already doing it, indeed, one should probably anticipate your superiors asking for good reasons why one is not doing what competitors are doing. An investment that starts off solid and gains conspicuous support can cross over into a bubble because at some point investment demand can create a positive feedback loop as more people try to emulate their peers, who then generate more benchmarks that generate more emulation.
[...]
Humans are inherently social creatures, and so our greatest rewards and problems come from other people, as opposed to ‘stuff’. For economists to focus on wealth as consumption, independent of others, ignores all this and so and so has to massively nuance theory to get things to explain much of what we do.
[...]
Economists strongly prefer the idea that people are merely wealth maximizing agents because this generates tractable models, and economists are primarily modelers. Envy would invalidate many models, if not entire subdisciplines, because in that case one cannot aggregate preferences into one person, as it makes no sense to talk about the aggregate happiness of people, when their happiness depends mainly on their relative positions. Economists like to add these curiosities outside models, but clearly the objective function to maximize GDP is misleading if envy is very important. As the old can opener joke goes, economists like the assumption because it generates nice answers.
You should probably read the whole thing — if not because I say so, then because Aretae says so.