Homo Sapiens evolved to be fair? Part 2

We know that people tend to reject deals which they see as grossly unfair. This is most apparent in the classic economic experiment of the ultimatum game.

In this game, two players are given a pot of money to share. One player is randomly chosen. She can propose any a split for herself and for the other player. The second player can then reject the deal outright, in which case both players get nothing, or can accept the deal, in which case both players get what the first player proposed. Critically, there is no second deal. There is no Shadow of the Future notion of reciprocity of retribution. This game has been played thousands of times, across cultures. The consistent finding is that deals where the second player gets less than 20% of the pot are consistently rejected...although the second player is worse off in rejecting the deal outright.

The common interpretation of this game is that this dents the neo-classical notion of homo economicus. This is just wrong. The Economist article makes this error, quite surprising because the Economist is usually sympathetic to neo-classical notions. Neo-classical utility maximization theory easily accommodates this behaviour. The theory is framed in terms of maximizing utility rather than income for a very good reason. All you need to believe is that utility is a function of relative income as well as absolute income. The second player in the ultimatum game is maximizing utility, not income. He is happier saying no to a deal which feels wrong.

Under this interpretation the great neo-classical results, like Ronald Coase's insight into free agents negotiating their way to a Pareto-optimal outcomes, are totally valid. The ultimatum game does not create a case for governmental/ authoritarian meddling in people lives or in the economy generally.

What the ultimatum game does offer a really useful insight into is not economics, but politics. Why does income distribution so dominate political discourse? Why is unequal income distribution even though of as "unfair"? It seems to be a pattern of thought that is hard-wired into us as a species.

This is not a normative point; more equal outcomes in a society is not better or worse in a moral sense. My own take is that equality is simply irrelevant from a moral or normative viewpoint. This is just a positivist point. Privilege is naturally resented in every social group: cricket team, company or nation state. More so if it is seen as unearned, inaccessible or both. Finding ways to address or harness that resentment in a creative way is a necessary part of any polity. This is a managerial task...not a moral task.

There are some interesting puzzles that this view might help answer.

For instance, why to the janitors employed by Goldman Sachs earn more than the janitors employed by the municipal government? Both sets of janitors are equally skilled and productive. This is a commonly observed phenomenon. Most companies that pay well do so across job families or skill levels. Are companies trying to address that political problem thrown into sharp relief by the ultimatum game? I can just hear the Goldman janitor cribbing to his mates at the pub "I work for Goldman. The guy with a funny nose also works for Goldman. Why does he make 100 times what I make? How is that fair?". The guy with the funny nose might have a Ph.D. or an ivy league degree...but that sense of grievance is going to be out there anyway.

This may be the reason outsourcing often reduces costs even when working within the same labour pool. Changing the badge on the janitor's uniform breaks that limbic sense of connection between the janitor and the Ph.D. guy with the funny nose. Breaking that limbic connection makes the inequality easier to swallow.

A much more speculative and flaky line of argument...but what the hell...I've been drinking some Chardonnay from Burgundy...

This view might also talk to why third world countries find it hard to trade with the first world. As an Indian, I find it weirdly easy to understand the emotional heft of this argument.

India has done spectacularly well since opening up to the world economy in 1991. Yet, despite this success, political commitment to trade or free-market principles is really thin. Why? Because an Indian negotiating with an American is still talking to someone about 25 times richer than him. He is likely to come away from that negotiation feeling screwed, regardless of the objective outcome of the negotiation. I grew up in Indira Gandhi's India when we were trying to promote South-South co-operation. Meaning...we liked dealing with other poor countries more than we liked dealing with rich countries. This is self-destructive. India still badly needs the income that trade brings and the gains from trade are greater between dissimilar countries or agents. But at some visceral level, this all makes sense.

Homo Sapiens evolved to be fair?

Another fraught moral question. Does distribution matter? Is it really OK if the winners win really big if the losers are also a little bit better off.

Both evolotionart biology and behavioural experiments suggest that this does matter. People consistently refuse deals which feels unfair, even if they are obviously better off taking the unfair deal. This is a very well established result in behavioural economics. It's called the ultimatum game.

The surprising new learning is that chimps will accept unfair deals. This notion of fairness seems to be unique to our species. We probably evolved with this sense. It probably plays a key role in our success as a species, in making possible more complex social organization.

http://www.economist.com/science/displaystory.cfm?story_id=9898270

When is gossip good? When is gossip bad?

Lovely piece from the NYT on a moral dilemma I face all the time.

Is gossip good? Gossip it makes cooperation easier. Gossip makes the gossipers feel emotionally closer. And gossip gives people a game-theoretic reason to be nice to each other. People who are not very nice tend to be the wrong end of negative gossip.

Or is gossip bad? People find it easier to believe the gossip rather than the hard facts, even when hard facts are easily accessible. People get hurt for no fault of their's because of gossip. That feels terribly unfair.

There seems to be truth on both sides of the argument. One thing both sides agree on is that gossip is something evolution hard-wired us to do. We're human. We can't live with gossip, can't live without gossip.

This article reports on some really elegant behavioural experimentation about gossip.

http://www.nytimes.com/2007/10/16/science/16tier.html?ex=1350878400&en=51649aec31cb2ecc&ei=5124&partner=permalink&exprod=permalink

True terror lies in the futility of human existence

Conceptual Terrorists Encase Sears Tower In Jell-O

Sick Leave

Very topical post. Wasn't feeling good this morning. Have taken the afternoon off: 4 hours of sick leave.

Brings to mind some interesting stats. At the company I work for, call center staff are sick about 5% of the time. The same metric never crosses 1% among professional staff. I'm pretty sure our call-center staff are as healthy as the professionals, their average age is about 22. So why the gap?

The first effect is measurement. Call center staff are tightly monitored. Lawyers, project managers and financial analysts are not. So lawyers going home at lunch time may not show up in the sick leave stats only because nobody is watching.

Fortunately, some professionals in the IT department log their time very precisely. Sick leave in the IT department breaks the 1% mark, but only just. So there still is a big gap to explain.

The best explanation I've come across for the remaining gap is work piling up. If I'm not at work, nobody else can quickly step in and do my job for me. So my work just piles up. I'll have to work extra hard tomorrow because I'm at home this afternoon. In the call center, I would handle exactly the same number of calls tomorrow, regardless.

I like the Shadow of the Future part of this argument. A lot of good behaviour is created by the Shadow of the Future. Just like a lot of good outcomes are created by the Invisible Hand.

The mental game: squash

Played a competitive game of squash last week. After a pretty long break.

Was playing a 14 year old. I'd played him before about a year and a half ago, when I'd just got back into the game. He was about a foot shorter then. We were playing in league 5A. He's fought his way up to league 3A since.

I won the first game easily. The 14 year old was just not concentrating. I started thinking about how I would write a post on my blog about how mental strength is a huge advantage for older, more experienced players. I promptly found myself down 0-6 in the second game. Delicious irony. I was feeling positive enough to smile to myself even as I tried to focus.

Three techniques I try while on court. I focus energy on my center between points. That helps me feel balanced and breathe deeper. I visualize fire to get the energy and competitive spirit going. When the point starts concentrate on just watching the ball, trusting my body and instincts to know where to move to and where to place the ball. Over-thinking each point is potentially fatal. Too much imagination can be an obstacle on-court. Visualization keeps the imagination out of the way.

Focusing the mind worked. I won a close game 3-1.

Let's see which league this kid in playing in next year.

Namesake

Watched Namesake this week. Loved it. Strongly recommend.

Somehow it doesn't feel quite right to review this film. It doesn't feel like some pretty little lemon souffle that has been put out in front of me for my delectation. It feels too visceral, too personal, too close to my own life, to my own family for an analytical review.

Some little things I loved (don't read this list if you plan to watch the film):

- Ashima reciting Wordsworth. The care with which she pronounced o'er instead of over

- Ashok explaining the difference between a dak naam and a bhalo naam

- The sacred fire at the hotel. If the American hotel didn't allow fire on the premises, were they really married?

- From the credits. Jhumpa Mashi played by Jhumpa Lahiri

- From the credits. Gogol played by Kal Penn. Nikhil played by Kalpen Modi

What's special about Cambridge?

"My classmates from Cambridge believed the sky was their limit. And they were willing to work their tails off to reach that limit. My classmates from the University of Birmingham believed they would get what they deserved. And they waited for their just rewards to come to them."

This comment by a colleague who attended undergraduate programs at both Cambridge and the U of Birmingham. The context was a bunch of friends from work at the pub on a summer evening talking about what they got out of an education.

This comment cuts deep. I heard it last summer and it's still in easy-access memory. The start of the recruiting season just brought it to the top of my mind.

The most talked about and researched aspects of an elite education are selection, training and access. Yet, quite possibly, the most important value derived from an education is in shaping these deeply-held, pre-cognitive notions of identity and destiny. These deeply-held notions of self are what shape behaviour, and therefore learning, and therefore achievement.

A sense of one's identity and destiny need not come from education. But the only equally powerful source of that sense of self, of that source of integrity, is probably family.

The spirit of cricket

Extract from the cricinfo story about today's ODI between India and Australia: "With Kartik bowling and the ball spinning away from the right-handers, it was pretty hard to score boundaries," Ponting said. "I spoke to Hodge later and he said he thought Kartik bowled very well. You have to give credit where credit's due."

Ricky Ponting found it in his heart to praise the opposition? And he picked Murali Kartik - one of my favourite India players - to praise? There still is hope in this world.

As captain of the world's best team, Ponting has to set the bar for on-field behaviour. He has been doing a terrible job so far, and the game as a whole is poorer for it. Hopefully Ponting can find the middle ground of being graceful and playing hard.

Tax farming?

Paul Krugman thinks the Bush Administration using specialist collections shops to raise tax revenue is a scandal. His key point is that the collections shops charge 20% commissions, while it costs to IRS 3% to collect. Does that actually mean something bad is happening?

http://krugman.blogs.nytimes.com/2007/09/30/tax-farming/

This is a topic I'm close to professionally. Using collections agencies to raise taxes is completely consistent with responsible governance. Comparing this practice to tax-farming is just wrong; mis-leading economic analysis. He is making a mistake that he has probably told thousands of undergraduates to avoid: he is confusing the average with the margin.

A better economic analysis would recognize that:

(i) The most skilled collectors out-perform the average collector by a factor of about 3x. This is not surprising. The most skilled economists, baseball players and computer programmers are more productive than the average by even bigger factors.

(ii) The most skilled collectors tend to migrate to organizations where they get paid more for their skill. This is also not surprising. So, the best collectors tend to move to specialist collections shops. And the IRS is left with a pool of ever-less-skilled collectors.

(iii) Most people don't need collectors to make them pay taxes. The IRS needs collectors to deal with just a small slice of the population.

Given these very believable assumptions, it could be more effective and more efficient to use professional third-party collectors. Collectors on 20% commissions would work only with a thin slice of delinquent tax-payers. And would more than pay for their higher costs by collecting more money then the IRS collectors.

Clearly, it takes management skill to make this skills-matching happen. But if the author really wants to claim that something bad is happening, he needs to show that this perfectly plausible story is not playing out. Until then, comparisons with the Romans or with the ancien regime are just rhetorical smoke and mirrors.

Of course, Krugman could still be right about the scandal.

The populists are winning

Got into a discussion on Greg Mankiw's blog. Mankiw's post was about how even Republicans are turning protectionist.

http://gregmankiw.blogspot.com/2007/10/populists-are-winning.html

Politicians understand that protectionism makes nations poorer. They also understand that lumping blame on foreigners is easy.

The real question that needs answering is: how do politicians make free trade a vote-winning position? Even when times are not all that good.
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An interesting response to my comment was: "the responsibility for educating the public lies with those companies and those workers who would be harmed by restrictions on trade."
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It's a good thought, and is a beginning. But it's not going to win the war for the good guys who want all of humanity to live better lives.

The first problem is rhetorical. Corporations claiming the free trade will be no more credible than snake-oil salesmen claiming to cure erectile dysfunction. The fact that, in this case, the corporations are telling the truth will not matter.

The second problem is that most corporations are not for free trade. They like nothing more politicians shielding them from the tough world of real competition. Read Raghuram Rajan's "Saving Capitalism From the Capitalists" for a nice riff on this topic. One of the Bush government's failings is that it does not distinguish capitalism from the capitalists. Sweetheart deals for buddies who own companies is corruption, not capitalism.

The third, and possibly the deepest reason why this does not work is that corporations generally will not have the resources to do this important work. Most companies fail. Or just about survive. And even the few wildly successful ones like Walmart or Microsoft will become vulnerable. Because of capitalism. Talk to people who worked at Microsoft when Netscape had an 80% share of the browser market to know what that felt like. General Motors bosses haven't been shy about lobbying Washington for tariffs or handouts.

When the going gets tough, corporations inevitably look to friends inside the Beltway to help them out. Companies are fair weather friends of capitalism. Can't be trusted.

So who will fight the good fight?

Universities. It is not a coincidence that we are talking on an economist's web site. Ambitious academics looking for political appointments can have surprisingly convenient views. But in general, academic's standards of intellectual honesty are higher than those of businesses.

And politicians. Al Gore has done his share of 360 degree pandering. But he did sell NAFTA with passion and conviction when it mattered. John McCain took on the might of Mississippi catfish farmers to fight for Vietnamese farmers who can supply the same catfish cheaper. Tony Blair (on the left) and Kenneth Clarke (on the right) have sold the case for the Polish plumbers who might breathe some life into Britain's building trades. Vaclav Havel in the old Czechoslovakia and Chandrababu Naidu in Andhra Pradesh, India, have tried to sell a case for trade to their people. Anders Borg, Sweden's 39 year old pony-tailed finance minister is selling his people radical market oriented messages like "make work pay", if welfare is too generous people have less reason to work.

It can be done. The case for trade has to be made in the public sphere. It has to be digested and accepted by the public for trade and its soul-mate, democracy, to co-exist. Unfortunately, this takes more political skill than pandering to xenophobia.

Blogger Econometrics

Greg Mankiw thinks he has had 3,000,000 visitors to his blog.

http://gregmankiw.blogspot.com/2007/10/3000000.html

This was my comment on his blog...with a helpful link to direct some traffic to my blog:

Sitemeter also measures the time each visitor spends on your site. Fifteen of the last twenty visitors had spend zero seconds. And the other five had spent less than a minute.

Sure, this blog is great. And fellow bloggers like me spend a lot of time here. But 3 million visitors is a huge over estimate of your effective reach.

Learning from Jews

Indian-Americans looking to Jews for inspiration. I love this parallel.

http://www.nytimes.com/2007/10/02/us/02hindu.html?ex=1349064000&en=fcef565a371c4cfe&ei=5124&partner=permalink&exprod=permalink

The Indian diaspora becoming powerful advocates for the Indian state is a big story. Absolutely. But the even bigger story is about identity.

Jews have also been astonishingly successful in retaining a deep sense of Jewish identity for over 2000 years, even while integrating with and absorbing from the cultures they're embedded in. Being able to maintain this hyphenated identity over many generations is the key. If this dual identity is maintained, the political influence and the cultural creativity will naturally follow.