《學而》第一

Note: The princely scholars, sometimes translated as gentleman-scholars, are more or less the intellectual elite who assign themselves the task of defining morality and leading by example. Here, they have a rambling discussion about the desirable traits of a princely scholar (and therefore the ideal benevolent man), and how such a person participates in managing the masses, who need not understand anything but merely follow along.

1. 子曰：「學而時習之，不亦說乎？有朋自遠方來，不亦樂乎？人不知而不慍，不亦君子乎？」
Master said: “Learning and fittingly applying it, isn’t that also persuasion? Having comrades from afar be drawn, isn’t that also concordance? Others not understanding yet one not harboring resentment, isn’t that also being a princely scholar [junzi]?”

(To learn and teach through example and action, and to get resonance among peers is the mark of an elite intellectual; whether others get it is not important. Confucius is talking about his own reasons for teaching rather than going on the lobbying circuit, where he was frequently rebuffed.)

2. 有子曰：「其為人也孝弟，而好犯上者，鮮矣；不好犯上，而好作亂者，未之有也。君子務本，本立而道生。孝弟也者，其為仁之本與！」
Master You said: “He who treats others with filial and fraternal piety [xiao, ti], but likes to violate superiors, has been rare; he who doesn’t like to violate superiors, but likes to raise discord, doesn’t yet exist. A princely scholar seeks the basics [ben], if the basics stand then the guidelines [dao] emerge. Filial and fraternal piety, those are the basics of benevolent humanity [ren]!”

(An elite intellectual can derive for himself general moral guidelines from basic principles of family relationship.)

3. 子曰：「巧言令色，鮮矣仁！」
Master said: “Sophistic speech and pandering expression, rarely have been benevolent!”

4. 曾子曰：「吾日三省吾身：爲人謀而不忠乎？與朋友交而不信乎？傳不習乎？」
Master Zeng said: “I daily inspect my being on three things: In advising for others am I undevoted? In associating with comrades and friends am I untrue? Do I preach what I don’t practice?”

5. 子曰：「道千乘之國：敬事而信，節用而愛人，使民以時。」
Master said: “To guide a state of a thousand chariots: Conduct duties with reverence and be true, expend with restraint and be considerate of others, mobilize the masses according to opportunity.”

(Conducting the affairs of a state uses the same guidelines as conducting oneself benevolently.)

6. 子曰：「弟子入則孝，出則弟，謹而信，汎愛眾，而親仁。行有餘力，則以學文。」
Master said: “A disciple should practice filial piety upon entering the home, fraternal piety upon exiting; he should be cautious and true, pour forth consideration for the multitude, and hold benevolence dear. What energy he has to spare from doing these, he should use to learn the classics.”

(Conducting oneself benevolently is about being modest, sincere, considerate.)

7. 子夏曰：「賢賢易色，事父母能竭其力，事君能致其身，與朋友交言而有信。雖曰未學，吾必謂之學矣。」
Disciple Xia said: “The astute talent shifts his outer bearing, in serving his parents he is able to exhaust his energy, in serving his prince he is able to send his life, in associating with comrades and friends he is true to his word. Though he said he has not yet learned, I must call him as learned.”

(Upholding an inner ideal affects outer behavior, and doing this is also a form of learning.)

8. 子曰：「君子不重則不威，學則不固。主忠信。無友不如己者。過則勿憚改。」
Master said: “A princely scholar who is inconsistent would hold no sway; the learning would not be firm. Maintain being devoted [zhong] and true [xin]. There exists no friend unlike oneself. Upon transgression, be not apprehensive about reformation.”

(An elite should be consistent and emphatic in his meritorious behavior, otherwise he could neither learn nor be an example.)

9. 曾子曰：「慎終追遠，民德歸厚矣。」
Master Zeng said: “By attending to funeral rites and recalling ancestors in memorial rites, the virtue of the masses has returned to favorability.”

(Practicing basic familial obligations improves the general moral fiber of the masses.)

10. 子禽問於子貢曰：「夫子至於是邦也，必聞其政，求之與？抑與之與？」子貢曰：「夫子溫、良、恭、儉、讓以得之。夫子之求之也，其諸異乎人之求之與。」
Disciple Qin asking of Disciple Gong, said: “Whichever dominion Sir Master arrives at, he always discovers its governance, does he beg of it? Or is it given to him?” Disciple Gong said: “Sir Master uses gentleness [wen], kindness [liang], piety [gong], reservation [jian], and courtesy [rang] to ascertain it. Those things of Sir Master’s entreaty all differ from those things of the entreaties of others.”

11. 子曰：「父在，觀其志；父沒，觀其行；三年無改於父之道，可謂孝矣。」
Master said: “While one’s father lives, observe one’s will; while one’s father is no more, observe one’s actions; if for three years no changes are made to the guidelines of one’s father, one can call it as having practiced filial piety.”

12. 有子曰：「禮之用，和為貴。先王之道，斯為美。小大由之，有所不行。知和而和，不以禮節之，亦不可行也。」
Master You said: “In the employment of propriety [li], harmony is treated as valuable. In the guidelines of earlier kings, harmony is treated as an ideal. If all things trivial and significant conform to propriety, there exist situations that do not work. Knowing about harmony and being harmonious, without using propriety to regulate it, also cannot work.”

(Propriety is the necessary means for maintaining harmony, which is the essence.)

13. 有子曰：「信近於義，言可復也；恭近於禮，遠恥辱也；因不失其親，亦可宗也。」
Master You said: “If being true approximates fellowship [yi], what is spoken can be reciprocated; if being pious approximates propriety, it is far from shame and disgrace; a cause that does not lose that which it is close to, likewise can be adhered to.”

(Received behaviors that closely match the underlying morality are easy to follow.)

14. 子曰：「君子食無求飽，居無求安，敏於事而慎於言，就有道而正焉，可謂好學也已。」
Master said: “A princely scholar who eats without begging satisfaction, resides without begging contentment, who is keen to duty and attentive to speech, who accommodates to established guidelines and rectifies himself within them, can already call himself as being fond of learning.”

(Somebody who doesn’t ask too much and regulates himself is well socialized.)

15. 子貢曰：「貧而無諂，富而無驕，何如？」子曰：「可也。未若貧而樂，富而好禮者也。」子貢曰：「《詩》云：『如切如磋，如琢如磨。』其斯之謂與？」子曰：「賜也，始可與言詩已矣！告諸往而知來者。」
Disciple Gong said: “Being poor without fawn, being rich without boast, how does this obey?” Master said: “It is fine. But it is not yet as if being poor and concordant, or being rich and fond of propriety.” Disciple Gong said: “The Book of Odes states, ‘The prince is … as cut and filed, as carved and milled.’ Is that what this is called?” Master said: “Ci (Disciple Gong), from the start I could have already mentioned the Book of Odes to you! You are one who knows what comes when told about what goes.”

16. 子曰：「不患人之不己知，患不知人也。」
Master said: “Do not fret about others’ not understanding oneself, fret about not understanding others.”

• 子 [tsjəʔ] master, firstborn < 子 (崽) [tsəʔ] child, infant
• 曰 [gʷjot] (see 云)
• 學 [gruk] imitate, learn < 覺 [kruk] be aware (cf. 斆 [gruks] be imitated, teach)
• 而 [njə] conjunction moreover, but, so <- 而 [njə] hair
• 時 [djə] be opportune, be fitting, be seasonable < season < 寺 [zjəs] be regulated + 日 sun < 司 [sjə] regulate
• 習 [zjup] practice <- 習 [zjup] sound of flapping
• 之 [tjə] (see 者)
• 不 [pjə] verbal prefix not
• 亦 [ljᴀk] likewise, also <- 亦 [ljᴀk] armpit
• 說 (悦) [hljots] be persuaded < 說 [hljot] explain, persuade < 兌 [lots] appeal, pray + 言 speech
• 有 [gʷjəʔ] existing, some < exist, have < 又 [gʷjəs] hand + 肉 flesh
• 朋 [bəŋ] comrades, group of people <- 朋 [bəŋ] five shells of money
• 自 [dzjits] origin, beginning <- 鼻 [bjits] nose
• 遠 [gʷjans] be far < 遠 [gʷjanʔ] get farther <- 袁 [gʷjan] long shirt + 辵 stroll (cf. 近)
• 方 [bjaŋ] be on the side, margins, bounds, stricture < 方 [pjaŋ] bound (cf. 方 [pjaŋs] be bounded, square; 旁 [baŋ] be alongside; 房 [baŋ] side room; 舫 [pjaŋs] catamaran; 邊 [pjen] edge)
• 來 [c-rə] come, be drawn near < 來 (徠) [c-rə] summon <- 來 (麥) [mrək] wheat
• 樂 [g-rawk] be in concord, be reconciled, be harmonious < 樂 [ŋrawks] music, harmony, symphony < 樂 [ŋrawk] concord with, harmonize
• 知 [trje] understand, know <- 矢 [hljijʔ] arrow + 于 [gʷja] take + 口 mouth (cf. 智 [trjes] be understood, knowledge)
• 慍 [ʔjuns] begrudge, harbor resentment < 溫 (蘊) [ʔjun] accumulate, store up (vs. 昷 (溫) [ʔun] be lukewarm)
• 君 [kjun] prince, sovereign < 尹 [gʷjinʔ] rule + 口 mouth < 又 [gʷjəs] hand
• 其 [gjə] demonstrative pronoun that, of that (cf. 斯)
• 為 [gʷjaj] do, treat, handle < 又 [gʷjəs] hand + 象 elephant (cf. 爲 [gʷjajs] be treated as; 偽 [ŋʷjajs] be false, falsehood)
• 也 [ljᴀjʔ] be (cf. 矣 [ɦjəʔ] have been)
• 孝 [xrus] be devoted to elders < 老 [c-ruʔ] elder + 子 child
• 弟 (悌) [dijs] be respectful of seniority < 弟 [dijʔ] junior, younger brother < rank, seniority
• 好 [xuʔ] be fond of, like = 女 woman + 子 child (cf. 好 [xus] be liked)
• 犯 [bjomʔ] offend, defy < 㔾 [bjomʔ] invade + 犬 dog
• 者 [tjᴀ] definite pronoun the one (cf. 之 [tjə] the one’s)
• 鮮 [sjenʔ] be rare < 鮮 [sjen] be fresh, be raw < a type of fish
• 矣 [ɦjəʔ] (see 也)
• 作 [tsak] raise, make, do <- 人 human + 乍 [dzraks] be sudden (cf. 作 [tsaks] arise, be made, be done)
• 亂 [c-rons] discord, confusion, revolt < be disorganized, be tangled
• 未 [mjəts] not yet < 勿 [mjet] do not <- 木 [mok] tree + 屮 [thrjat] sapling
• 務 (敄) [mjoʔ] seek, strive < 矛 [mju] spear + 攴 [phok] hit + 力 force (cf. 務 [mjoks] important affairs)
• 本 [pənʔ] be basic < tree root
• 道 [lus] guideline, pathway, guidance < 道 (導) [luʔ] guide < 首 [hljuʔ] head + 辵 stroll
• 生 [sreŋ] live, emerge, grow < plant, give birth to
• 仁 [njin] benevolence, humanity < 人 [njin] human
• 與 (歟) [lj'a] contraction be < 也 [ljᴀjʔ] be + 乎 [ga] exclamation
• 巧 [khruʔ] be cunning < 丂 [khuʔ] withhold + 工 skill
• 言 [ŋjan] speech < 言 [ŋjan] speak about, discuss, mention < 云 [gʷjən] say
• 令 [c-rjeŋs] accommodate < 令 [c-rjeŋ] order
• 色 [srjək] mien, expression, disposition, bearing
• 吾 [ŋa] personal pronoun I (cf. 吾 [ŋra] my, 我 [ŋajʔ] me; vs. 汝 [nja] thou, 汝 [nrja] thy, 爾 [njejʔ] thee)
• 省 [sreŋʔ] scrutinize = 屮 sapling + 目 eye
• 身 [hjin] life, being < body
• 爲 [gʷjajs] (see 為)
• 謀 [mjə] adivise, plan <- 某 [mjəʔ] plum tree + 言 speech
• 忠 [k-ljuŋ] be devoted, be loyal < 中 [k-ljuŋ] center + 心 heart
• 與 [ljas] be with, be at < 與 [ljaʔ] give, grant
• 友 [gʷjəʔ] friend < cooperate, aid < 又 [gʷjəs] hand
• 交 [krew] associate < interleave < 爻 [graw] intersect
• 信 [snjins] be true < 㐰 [snjins] messenger < 人 [njin] human + 口 mouth
• 傳 [drjon] convey < 專 (轉) [trjon] spin + 人 human < 叀 (塼) [tjon] spindle (cf. 傳 [drjons] conveyance)
• 乘 [Ljəŋs] chariot < 乘 [Ljəŋ] climb onto
• 國 [kʷək] state, defended territory < 戈 [koj] dagger ax (cf. 域 [gʷrjək] territory)
• 敬 [krjeŋs] be reverent < 敬 (警) [krjeŋʔ] warn < 茍 [kjək] be cautious + 攴 hit (cf. 驚 [krjeŋ] be startled < horse fright)
• 事 (倳) [tsrjəs] be dutiful < 吏 [c-rjəs] official (cf. 事 [ɦsrjəs] duty; vs. 仕 [dzrjəʔ] serve < 士 [dzrjəʔ] able man)
• 節 [tsik] constrain < tie < 即 (卪) [tsik] knot + 竹 bamboo
• 用 [ljoŋs] employ < 中 [k-ljuŋs] be on the mark + 卜 divinate < 中 [k-ljuŋ] center
• 愛 (㤅) [ʔəts] be considerate of, love <- 旡 [kjəts] hiccup + 心 heart
• 使 [srjəʔ] mobilize, order < 吏 [c-rjəs] official + 人 human < 又 [gʷjəs] hand
• 民 [mjin] populace
• 以 [ljəʔ] use
• 入 [njup] enter (cf. 内 [nups] be inside)
• 則 [tsək] conjunction then accordingly < 則 [tsək] convention, law = 刀 knife + 貝 shell
• 出 [thjut] exit (cf. 出 [thjuts] be outside)
• 謹 [kjənʔ] be cautious < 茍 [kjək] be cautious
• 汎 [bjum] float, pour out < 凡 [bjom] be common + 水 water (cf. 泛 [phjoms] be afloat)
• 眾 [tjuŋs] multitude, be many = 目 eye + 㐺 three people
• 親 [tshjin] get close, hold dear (cf. 親 [tshjins] be close)
• 行 [graŋ] carry out < run through < 行 [gaŋ] course, road (cf. 行 [graŋs] action, comportment)
• 餘 [lja] be left over < 余 [lja] shed + 食 food
• 文 [mjən] literature < writing < 文 (纹) [mjən] marking
• 賢 [gin] be exemplary, be capable, talented man < 賢 [gin] treasurer < 臣 [gjin] minister + 貝 shell of money
• 易 [ljek] shift, pour (cf. 易 [ljeks] be loose, be easy, flow; 賜 [sljeks] bestow)
• 能 [nəŋ] be able, be powerful < 能 [nə] beast (cf. 耐 [nəs] endure)
• 竭 [gjat] exhaust < carry on shoulder <- 曷 [gat] what + 立 stand
• 致 [trjits] deliver < 夊 [trjijʔ] trek + 至 [tjits] arrive
• 雖 [sjuj] conjunction if, although
• 必 [pjit] verbal prefix always, must
• 謂 [gʷjuts] call < 謂 [gʷjuts] appellation, have been said < 曰 [gʷjot] have said < 云 [gʷjən] say
• 重 [drjoŋs] be consistent, be redundant, be bulky < 重 [drjoŋ] double over
• 威 [ʔjuj] overpower, authority = 戌 destroy + 女 woman (cf. 畏 [ʔjujs] be overpowered, awe)
• 固 [kas] be firm, be solid < 故 [kas] be past, be old < 古 [kaʔ] past
• 主 [tjoʔ] maintain, preside over < chief
• 無 [mja] not exist, not have, none < 亡 [mjaŋ] flee
• 如 [nja] follow, obey <- 女 [nrjaʔ] woman + 口 mouth (cf. 若 [njak] be following, be obedient, as if)
• 己 [kjəʔ] reflexive pronoun self
• 過 [kʷajs] trespass, transgress, be past < 過 [kʷaj] pass
• 勿 [mjet] do not < 無 [mja] not exist (cf. 滅 [mjet] finish; 戌 [smjit] destroy)
• 憚 [dans] be apprehensive < 難 [nans] affliction, be afflicted < 難 [nan] afflict
• 改 [kəʔ] adjustment, reformation <- 己 [kjəʔ] self + 攴 hit
• 慎 [djins] be attentive < 真 (填) [djin] fill up + 心 heart
• 終 [tjuŋ] ending < 冬 [tuŋ] winter + 糸 thread
• 追 [trjuj] chase, recall < 堆 [tuj] pile up + 辵 stroll
• 德 [tək] virtue < rise <- 直 [drjək] be straight + 行 course + 心 heart
• 歸 [kjuj] revert, defect <- 堆 [tuj] pile up + 止 foot + 方 direction
• 厚 [gos] be generous, be rich, be favored < 厚 [goʔ] favor
• 至 [tjits] arrive
• 夫 [pja] adult man (cf. 父 [pjaʔ] father)
• 於 [ʔja] preposition at, in, on, to, for, from, by, with < 於 [ʔja] be in, be at < 央 [ʔaŋ] inside
• 是 [djeʔ] indefinite article some, any, such < 是 (直) [n'tjəʔ] be aligned <- 日 [njit] sun + 十 [ɡəp] ten + 止 [tjəʔ] foot
• 邦 [proŋ] dominion, vassal state < 封 [pjoŋ] confer land to vassal < boundary < 方 [pjaŋ] be alongside
• 聞 [mjun] hear of, sense <- 門 [mun] gate + 耳 ear (cf. 聞 [mjuns] information; 問 [mjuns] ask of)
• 政 [tjeŋs] governance, administration, politics < 正 (征) [tjeŋ] impose < 止 [tjəʔ] foot
• 求 [gju] beg, request (cf. 救 [kjus] aid)
• 抑 [ʔjək] conjunction or rather <- 抑 [ʔjək] curb
• 溫 [ʔun] be gentle, be mild < be lukewarm
• 良 [c-rjaŋ] be kind, be good <- 良 (廊) [c-raŋ] veranda
• 恭 [kjoŋ] be pious, be submissive < 恭 (供) [kjoŋ] offer sacrifice (cf. 貢 (供) [koŋs] be offered for sacrifice, tribute)
• 儉 [grjamʔ] be reserved, be austere < 斂 [c-rjamʔ] retract, collect <- 僉 (劍) [kjams] sword + 攴 hit
• 讓 [njaŋs] be courteous, be yielding < 襄 [snjaŋ] divest + 言 speech
• 得 [tək] gain = 彳 pace + 貝 shell of money + 又 hand
• 諸 [tjᴀ] contraction all, various < 眾 [tjuŋs] multitude
• 異 [ljəs] be different < 異 [ljə] differ <- 異 [ljəks] helmet
• 在 [dzəs] be alive < 在 [dzəʔ] live, remain
• 觀 [kon] observe < 雚 (鹳) [kons] heron + 見 [kens] see
• 志 [tjəs] will, destination < 㞢 [tjə] go + 心 heart
• 沒 (殁) [mət] be dead < 歾 [mət] die, disappear <- 勿 [mjet] do not + 歺 skeleton
• 可 [khajʔ] be allowed, be fine <- 丂 [khuʔ] withhold + 口 mouth
• 禮 [c-rijʔ] propriety < ritual < 豊 [c-rijʔ] gift, ritual offering + 示 [Ljijs] worship
• 和 [gojs] harmonious, be matched < 和 [goj] harmonize, coordinate <- 禾 [goj] grain + 口 mouth
• 貴 [kjuts] be valuable
• 斯 [sje] demonstrative pronoun this, of this (cf. 其 [gjə] that, of that)
• 先 [səns] be earlier, be advanced < 先 [sən] advance = 㞢 go + 人 human
• 美 [mrjəjʔ] be ideal = 羊 ram + 大 be big (cf. 媄 [mrjəjʔ] be beautiful)
• 由 [ljiw] conform to, follow (cf. 由 [ljiw] cause)
• 近 [gjəns] be near < 近 [gjənʔ] get nearer <- 斤 [kjən] fell + 辵 stroll (cf. 遠)
• 義 (誼) [ŋrjajs] fellowship < 宜 [ŋrjaj] be appropriate for + 言 speech (vs. 儀 [ŋrjaj] be adopted < appearance, posture <- 我 [ŋajʔ] weapon + 羊 ram)
• 復 [bjuks] be reciprocated, be repeated < 復 [bjuk] return, repeat, redouble
• 恥 [hnrjəʔ] shame <- 耳 [njəʔ] ear + 心 heart
• 辱 [njok] disgrace < 辱 (耨) [noks] rake
• 因 [ʔjin] be depended on, be followed, cause < 依 [ʔjəj] depend
• 失 [hljit] lose <- 手 [hjiwʔ] fist + 乙 [ʔrjit] fish gut, second stem
• 宗 [tsuŋ] be adhered to < ancestral hall < 尊 [tsun] venerate, honor
• 食 [Ljək] eat (cf. 食 [Ljək] food; 飤 [zljəks] feed)
• 飽 [pruʔ] be satisfied, be fulfilled < 包 [pru] contain + 食 food
• 居 [kja] reside < 居 (踞) [kjas] squat < give birth
• 安 [ʔan] be contented, be tranquil = 女 woman + 宀 roof
• 敏 [mrjəŋʔ] be quick, be keen <- 每 [məʔ] nourish + 攴 hit
• 就 [dzjuks] accommodate to, go with < 就 [dzjuk] take in, annex < 京 fortress + 尤 (又) hand
• 正 [tjeŋs] be straight, be rectified < 正 (整) [tjeŋʔ] rectify < 正 (征) [tjeŋ] impose < 止 [tjəʔ] foot
• 焉 [ʔja'n] contraction in it < 烏 (於) [ʔja] be in + 㱏 (是) [n'tjəʔ] such (vs. 焉 (爰) [gʷja'n] to it < 羽 (于) [gʷja] go to + 㱏 (是) [n'tjəʔ] such)
• 已 [ljəʔ] already, only, merely < cease, stop
• 貧 [brjən] be poor < 分 [bjəns] be divided + 貝 shell of money < 分 [pjən] divide
• 諂 [kh-ljomʔ] fawn < sleeptalk <- 臽 [khomʔ] pit + 言 speech
• 富 [pjəks] be rich < 畐 [phjəks] be filled + 宀 roof < 畐 [phjək] fill
• 驕 [krjaw] be proud < tall horse < 喬 [krjaw] be tall + 馬 horse < 高 [kaw] be high
• 何 [gaj] = 曷 [gat] interrogative pronoun what
• 詩 [stjə] poem < 寺 [zjəs] be regulated + 言 speech < 司 [sjə] regulate
• 云 [gʷjən] say (cf. 曰 [gʷjot] have said)
• 切 [tshits] be cut < 切 [tshit] cut <- 七 [tshjit] seven + 刀 knife
• 磋 [tshajs] be filed < 磋 [tshaj] file <- 差 [tshraj] dispatch + 石 stone (cf. 銼 [tsojs] file)
• 琢 [troks] be carved < 琢 [trok] carve <- 豖 [thrjok] shackle + 玉 jade (cf. 鑿 [dzaks] chisel)
• 磨 [majs] be milled, millworks < 磨 [maj] mill <- 麻 [mraj] hemp + 石 stone
• 始 [hljəʔ] origin < 台 [hlə] fetus + 女 woman
• 告 [kuk] tell, announce (cf. 告 [kuks] be told, announcement)
• 諸 [tj'ᴀ] contraction the thing about < 之 [tjə] the one's + 於 [ʔja] about
• 往 [gʷjaŋʔ] go off < 遠 [gʷjanʔ] get farther
• 患 [grons] fret < 串 (毌) [krons] penetrate + 心 heart (cf. 患 [grons] trouble)

Old Chinese phonetic reconstruction according to Baxter, slightly modified with some w-=>gʷ- (中古‘云’母).

Now let’s turn to the other model of behavior, where things are swapped around. Here, consumption is the default. To consume is what happens if you do nothing; that is the raison d’etre. All other actions service that need. In other words, why bother to “save” or “invest” or “work” if you do not consume? See how this is inverted? Again, this is tightly coupled with the notion that borrowing is a tool of persistent leverage for greater return. This is typically risk taking behavior, in technical parlance of course.

To make the cases even more distinct, here are two graphs of model behaviors:

“savers”

“consumers”

So people try to analyze why East Asia saves so much and why China especially cannot get internal demand going due to excess savings, whether it’s because of the lack of a social safety net, or because of an inequitable distribution of wealth. Yes, these have some effects, but no. I don’t think those are why. It has to do with how personal financial behavior is internalized from the past, as much as influenced by conditions in the present. I think risk averse behavior is ingrained into people in times of scarcity (credit scarcity or capital scarcity) and how long this behavior lasts depends on the severity of a downturn and the subsequent period of prosperity. (As an aside, it can be argued that risk taking behavior isn’t entirely risk taking behavior but partly a bad estimation of the actual risk.)

Here’s some random guy’s page. He’s a big proponent of using a total market portfolio: http://homepage.mac.com/j.norstad/finance/total.html

His hand-waving is almost convincing, almost. Okay, “J. Norstad”, let’s take you point by point.

Many people feel that the strongest arguments for investing in total markets are based on market history. Innumerable studies have shown that individual investors and even professionals like institutional fund managers and mutual fund managers have terrible track records trying to beat the market. For example, many studies have shown that total-market index mutual funds consistently outperform most actively managed mutual funds.

It is easy to see why most actively managed mutual funds must fail to beat their passive total-market index fund counterparts. The performance of “the market” is nothing more or less than the capitalization-weighted average of the performance of all the investors in the market. If some active managers outperform, other active managers must underperform. For every winner (a performer above the average), there must be a loser (a performer below the average). This is a matter of simple arithmetic. Index funds match the market’s performance minus their low expenses. Actively managed funds have considerably higher expenses than index funds because they must pay for expensive research into individual securities and sectors, and they must pay extra costs for frequent trading of individual securities. As a consequence, the average performance of all actively managed mutual funds must trail the performance of total-market index mutual funds by the significant difference in their expenses. John Bogle has done many studies that confirm that this is exactly what happens in practice.

The underlined part is a good observation. But to believe this weighting is efficient is suspect. Moreover, this guy likes to believe in “arithmetic”, well, precisely because this is a capitalization weighted average, it is quite possible on “arithmetic” alone for an overwhelming majority of participants (by number) to be outperforming the market by large margins, if they be of small capitalization (not saying it is so).

Bogle’s numbers are just averages. Over any given time period some active managers do in fact manage to outperform the market even if most of them do not. Is this luck or skill? If it is skill, we would expect those active managers who have outperformed in the past to continue to outperform in the future…

A few active managers like Warren Buffett and Peter Lynch have astounding track records over long periods of time. How is it possible to claim they were just lucky? Perhaps their success was indeed due to skill. Then again, perhaps even they were just lucky. After all, if you have 1,000 chimpanzees flip coins ten times in a row, it is likely that one of them will get heads all ten times. We call the chimpanzee lucky. If the chimpanzee were a mutual fund manager we would call it talented. In any case, whether it is luck or skill, these few long-term success stories are in the past. How is an investor supposed to identify the next Buffett or Lynch in advance?

This is a strong argument here. I give props.

The Efficient Market Hypothesis states that modern financial markets are “efficient.” This means that they quickly react so that prices reflect all available information. For example, new information can often cause prices to rise or fall on the world’s major stock and bond exchanges to adjust appropriately within only minutes. Prices of individual securities, market sectors and style segments, and entire stock and bond markets are therefore always “correct” in the sense that they always reflect the collective beliefs of all investors taken together as a whole about their future prospects.

I take some issue with this “correctness” argument. This collective “belief” as reflected in the price is a capitalization weighted average. Participants naturally have different objectives and beliefs, but are only able to assert their beliefs in accordance with their share in the market, which are determined by their wealth and willingness to take risk, not by any notion of correctness or diligence.

One major consequence of the EMH is that unless an investor is just plain lucky, it is impossible to exploit the market to make an abnormal profit by using any information that the market already knows. Another consequence is that for someone without any such private information, it does not make any sense to talk about “undervalued” or “overvalued” individual securities, sectors, styles, or markets.

Another consequence of the EMH is that the total market is always perfectly diversified. Other portfolios that deviate from the total-market portfolio are never “more diversified” than the total-market portfolio. In other words, it is impossible for any other portfolio to have both a higher expected return and lower risk than the total-market portfolio. (The technical way to say this is that the total-market portfolio is always located on the “efficient frontier” in academic risk/return models. This is true in both the classical single-factor risk model of Markowitz and Sharpe and in the newer three-factor risk model of Fama and French.)

There are several serious problems with this efficiency claim. First of all, any claim of market efficiency is dependent on the existence of arbitrageurs making it so. Even if risk and return of every asset can be perfectly predicted, it is not true that the market operates efficiently. This is clearly seen in various portfolio scenarios wherein a point on the efficient frontier is not obtained by averaging the assets held in the two extemal efficient points associated with minimal and maximal risk. Again, if the market consisted of two such extremal investors (each perfectly rational), the average allocation still would not be operating at an efficient point, in the absence of arbitrageurs.

Second, it seems to me the kind of arbitraging needed to achieve another point on the efficient frontier would be to borrow an inefficient portfolio, liquidate it and use proceeds to purchase the efficient portfolio of the same risk, then liquidate that at a later date, and use the proceeds to repurchase and repay the inefficient portfolio, in turn keeping the excess return. However, it isn’t clear what this “later date” would be to ensure an excess return.

Third, the market allocation that happens to optimize the needs of all arbitrageurs (each with own risk/return appetite) according to their peculiar capital investment amounts in the market has nothing to do with being efficient as an overall portfolio. It may very well be that no arbitrageur is holding the overall market portfolio, and that because it isn’t efficient.

Fourth and a major complication, forward-going risk and return are not known quantities, and are merely assessed by the participants of the market on an individual basis. So returns and risks of particular assets can at best be modeled as random variables (each with a distribution). It might make some sense for a class of participants who impute the same future risk/return on the assets to drive some arbitraging process that allocates as in the previous paragraph; but then, the distribution of efficient allocations among arbitrageurs holding different estimates on risk/return would not average to the efficient allocation given by taking the market mean future risk/return assessment of each asset as the actual risk/return. Even worse, arbitrageurs have no real way of making a survey of risk/return assessment to find the mean and they do not actually operate this way.

The EMH does not require that investors behave rationally. This is a common misconception. When faced with new information, some investors may overreact and some may underreact. Indeed, this behavior is expected and common. Markets would not behave the way they do in the real world if everyone always reacted in the same perfectly rational way to new information. All that is required by the EMH is that these overreactions and underreactions be random enough and cancel each other out enough so that the net effect on market prices cannot be exploited to make an abnormal profit. Stated another way, irrationality is irrelevant as long as it is unpredictable and unexploitable. Even the entire market can behave irrationally for a long period of time and still be consistent with the EMH, again as long as this irrational behavior is not predictable or exploitable. Thus crashes, panics, bubbles, and depressions are all consistent with a belief that markets are efficient.

It isn’t clear what is being discussed here: behavioral irrationality or underlying uncertainty. Pricing uncertainty may be unexploitable on average if fluctuations are noisy (one can always use luck), reflecting the randomness of the arrival of information, but that isn’t a sign of investor irrationality. Crashes and depressions aren’t necessarily irrational, though bubbles and panics may be. This sounds like word games, but if a certain behavior is called “irrational”, it is certainly judged against some information that contradicts it, and if that be the case, then certainly the behavior is exploitable on average (perhaps over a long time).

Here are a few examples of efficient reasons to differ from the total market:

1. A young investor with a stable job, a good education, and a solid foundation in his trade or profession feels capable of being more aggressive than average and holds, for example, an 80/20 stock/bond portfolio.

2. A retired investor with no pension uses his or her investment portfolio to supply living expenses and feels less capable of taking on risk than average. This investor, for example, might hold a 40/60 stock/bond portfolio.

–snip 10 more bullets–

Notice how these examples are in pairs. In an efficient market, for every set of investors with good reasons to deviate from the average in one direction, there is some other set of investors with equally good reasons to deviate in the opposite direction. These investors are in effect using the markets to make trades of risks which benefit both sides of the trade. Many academic theorists say that this is in fact what efficient markets are all about.

This is an almost trivial observation. These allocation strategies don’t come “in pairs”. Maybe if one presupposes everyone does indeed start with the total market, then they can arrive at their desired holdings by executing a series of pairwise trades in individual assets amongst themselves, without affecting the total market.

In the case of equal-weighting countries, people who believe that markets are efficient counter by noticing once again that if the cap-weighted international market percentage for some country is, for example, 15%, and if some behavioral analyst says that the proper weighting is some other percentage, say 10% or 20%, then the question to ask the analyst is “The international market thinks the proper weighting for this country is 15%, but you disagree – what do you know about this country’s prospects that the international market does not already know?” To an efficient market believer, equal-weighting countries or regions in international investing makes no more sense than equal-weighting sectors, styles, or even individual stocks in US investing. None of these equal-weighting strategies have anything at all to recommend themselves if markets are efficient.

Besides all the reasons prior, there are additional reasons to believe international capitalization weighting is not a priori reasonable. For one, global capital flow is far from liquid. Capital is often country-bound and filtered through currency exchange barriers and currency risk, especially in the emerging market. Some people just don’t have the choice of investing in certain markets, not because they would not like to. Secondly, information flow about global markets is not efficient. Thirdly, the objective of the investor in one country is likely to be far different from the objective of those in other countries or the country in which the capital project is taking place.

It isn’t bad to start with the total market if one is forced to be able to do only a few rough modifications to it (in a limited funds situation). However, why bother with this belief in efficiency based on the wrong assumptions, when one can pick a few assets (or asset classes as reasonable) and run optimization to find an efficient portfolio for the risk to be taken? One may need to track efficiency over time. Why deviate from the market? Because the market isn’t run by one investor like you and it isn’t going to be efficient for you or for anybody in particular. Not being able to exploit inefficiencies within the market doesn’t mean holding the market as a portfolio is efficient — those are two separate issues.

In Internet terminology, a troll is a person who enters an established community such as an online discussion forum and intentionally tries to cause disruption, most often in the form of posting inflammatory, off-topic, or otherwise inappropriate messages

What is a troll in Chinese? I don’t think there is a term. Wikipedia’s “in other languages” sidebar offers up 小白 for troll, but that just means idiot or annoyer, someone with a thick skin or someone who doesn’t get it; so no, that’s not exactly a troll. It doesn’t capture the aspect of intention and the not infrequent subtlety of trolling. The article on 小白 itself is hilarious. It’s obvious the usage is restricted to Taiwan.

Mainland and overseas Chinese BBS are full of subtlety to begin with, for reasons not worth mentioning at this moment. Maybe every Chinese is a native troll. Certain Chinese history points to training in – ah nevermind, I’m trolling. However, a subset of more benign trolling behavior seems to elicit more condemnation on these Chinese BBS and have terms associated with them. For instance: posting off-topic messages and inappropriate messages can take the form of 刷屏 or repeated re-posting, or posting in multiple sub-forums. Posting a stream of emoticons or other useless messages (to readers) such as 顶, 批, 阅, 路过 to increase the number of posts by one is known as 灌水. The meaning of 灌水 has expanded to include, in some cases, posts that are not just useless, but specifically useless for ongoing rational discussion. Since a post that elicits 灌水 behavior is known as a 坑 and somebody who writes such is engaging in 挖坑, then 挖坑 may yet emerge as the logical equivalent of trolling (verb). It has been used in that sense already.

Still no word for troll (noun), though 坑王 is a good candidate.