Posts Tagged ‘incentives’

“Despite all my rage, I am still just a rat in a cage”

Tuesday, December 14th, 2010

Rachel Strohm links to an interesting piece in the Boston Globe on the trend toward using randomized controlled trials in developing regulations and legislation. Set aside the fact that it sounds ethically monstrous to deny people homelessness-prevention services for the sake of an experiment. What we really don’t get is how incentives work in a situation like this when the subjects are able to know that they’re subjects. The article mentions business owners who would act a certain way during the experiment to get the regulation they want. Duh. The other way that people are different from rats (besides, uh, not being rats) is that they can read the Internet. No way this kind of thing flies once the right-wing blogo-talko-sphere gets a hold of it. They’d be singing the Smashing Pumpkins song quoted in the subject line….

Two things though: one is the difference between monitoring and evaluation. One of the proponents of experimentation says in the article:

We study regulations only at “the very moment when we know least about the consequences,” Greenstone says. “There is no culture of trying to understand ex post what the consequences are.”

I would be happy if we studied the consequences of regulations and tried to figure out from there what the mechanisms are that lead people to act in certain ways. In other words, map out the incentives. What do businesses end up doing in terms of providing health care for employees as a result of different pieces of health-care reform? We don’t even get that in many cases; what exactly are we going to experiment on? What’s being evaluated? Let’s start by monitoring and go from there.

The other is the difference between laws and regulation. Laws are passed by democratically elected bodies like legislatures and executives; regulations are drafted by appointed bodies in the civil service. It would seem there would be more incentive to test laws because of the greater potential accountability. Perhaps all the more reason for there to be testing of regulations, to build in greater accountability?

There’s a lot of interest in philanthropy and the nonprofit sector in the use of RCTs in evaluation and the design of programs, so this debate is worth following.

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Baby did a bad, bad thing

Tuesday, December 7th, 2010

An intriguing blog I’ve started reading (HT to Marginal Revolution) is A Fine Theorem, which pithily summarizes economics articles (and other writings that bear on economic motives) while advancing the author’s interesting views on the discipline. A recent post brings up a problem that I don’t believe we think about enough in philanthropy: the joy of doing the wrong thing. Here’s AFT on Dostoevsky:

Economics, inherent in its methodology, is a normative science. Even when an econ article is deliberately positive – “if people act as if they have a utility function, then the following choices will result” – the overwhelming majority of articles make assumptions such as “utility is increasing in money”. These types of assumptions are not controversial within the class of rationalist theories of human action. Indeed, many economists…considered deviations from rationalism…to be mistakes when they occur, and further to be mistakes which ought be cured with better education. [Dostoevsky’s] Notes from the Underground famous[ly] suggests an alternative, existential argument for human action: the very existence of a rational utility function which might be maximized causes people to act contrary to that function. There is a great word in German expressing this sentiment: Weltschmerz, literally “world-ache”, or the ennui which sets in when a person feels that their actions are too intentional, too preordained. Here’s the relevant quote from Dostoevsky….

“What is to be done with the millions of facts testifying to how people knowingly, that is, fully understanding their real profit, would put it in second place and throw themselves onto another path, a risk, a perchance, not compelled by anyone or anything, but precisely as if they did not want the designated path, and stubbornly, willfully, pushed off onto another one…And what if it so happens that on occasion man’s profit not only may but precisely must consist in sometimes wishing what is bad for himself, and not what is profitable?” (Part I, Section VII)

Despite recent attempts to introduce the insights of behavioral economics into the discussion about philanthropy, I think we still operate almost exclusively on a rationalist model when it comes to understanding the beneficiaries of giving. Motivations for givers, as I’ve discussed on this blog, we’re starting to understand in a diverse set of ways, but I fear we often think about recipients of services as consumers of widgets whose motivations should be obvious: offer someone a way to improve their lives, and they’ll take it.

One reason to demur from this point of view is, maybe they don’t see it as an improvement. We’re starting to get this, as the concept of the “nudge” attests: make 401k contributions opt-out rather than opt-in, for example, and rates of participation will go up.

But another reason, as AFT and Dostoevsky point out, is that recipients of services may see the service as an improvement, but may choose not to take it anyway “just because.” AFT uses the word “existential.” Poe called it “The Imp of the Perverse,” in a story of that title (thanks Wikipedia):

We have a task before us which must be speedily performed. We know that it will be ruinous to make delay. The most important crisis of our life calls, trumpet-tongued, for immediate energy and action. … It must, it shall be undertaken to-day, and yet we put it off until to-morrow, and why? There is no answer, except that we feel perverse, using the word with no comprehension of the principle. … [Then] The clock strikes, and is the knell of our welfare. At the same time, it is the chanticleer-note to the ghost that has so long overawed us. It flies—disappears—we are free. The old energy returns. We will labor now. Alas, it is too late!

I think the Imp is at work far more than we care to acknowledge in philanthropy. As Poe illustrates, he’s not a permanent presence – people do act in their own self-interest most of the time. But he’s always there, and we ignore him at our peril.

“Get Off My Lawn” vs. “I Gave at the Office”

Tuesday, November 23rd, 2010

Last week, I developed the idea of needlessly fragile equilibria, states of political balance that are thrown out of whack by false beliefs, which generate unreasonable expectations. Faith in government is one of these, and it’s way out of balance these days.

Jeff Weintraub has a recent post on related issues, “Can democracy work when people are idiots?” It talks about patently false beliefs American voters have about the nature and size of different government expenditures, and how these generate self-contradictory expectations about how to reduce the size of government.

This is related to the idea that people hold unreasonable expectations about their fellow citizens, assuming there are shirkers all about who are leaching off government largesse. You dislike them, and you think the government is either stupid for believing their sob stories or actively complicit in rewarding their shirking. In either case, the needlessly fragile equilibrium of faith in government is thrown out of balance.

How is one’s view of philanthropy and the nonprofit sector affected in such a scenario? Is the problem really the shirking or the public largesse? If it’s the shirking, then you wouldn’t be inclined to give to charity. Call this the “Get Off My Lawn” position: go away taxman, go away charity fundraiser. If the problem is public largesse, and you don’t object to those in need receiving help, but just to having public funds appropriated for that purpose, then you’d probably be generous to charity. Call this the “I Gave at the Office” position: go away taxman, c’mon over charity fundraiser.

For these types of (non)givers, the depersonalized nature of charity in the contemporary world reinforces their positions. If people’s experience of the need for which funds are being raised is arm’s-length, this does nothing to change the (false) beliefs they hold about those in need. Not that that’s any particular charity’s job, necessarily, to change those beliefs, but it points to the role philanthropy can sometimes play in a democratic society. Done a certain way, it reinforces the needless fragility of the equilibrium of faith in government.

What might be another way? Tomorrow, I’ll consider some alternatives, in the context of the “season of giving” that’s coming upon us.

Needlessly fragile equilibria (or, faith in government)

Thursday, November 18th, 2010

Continuing from yesterday about where the pathological hatred of government comes from: the thing that economics tries to teach you is that all organizations are fundamentally the same – the state, a gang, a corporation; they’re all more or less effective solutions to the collective-action problem, and their dynamics can all be understood in similar terms. From this perspective, it’s not surprising that governments are corrupt, because the urge to shirk is so hard to resist that any time there’s the slightest breakdown in the equilibrium that holds an institution together, there’ll be shirking, i.e., corruption. Life is hard because many equilibria are fragile; it takes a lot to create relatively stable ones.

“All organizations are fundamentally the same – the state, a gang, a corporation.” What political science teaches you is that can’t possibly be true, because of the beliefs people hold about each of those kinds of institutions, and the expectations that they hold about them. Expectations shape incentives, and expectations are fundamentally psychological, social, relational, and above all malleable. Talk to a politician or PR pro. From this perspective, it may not be surprising that governments are corrupt because the urge to shirk is so hard to resist, but it’s also not surprising that people get bent out of shape when a government is corrupt than when a gang is corrupt or a corporation is corrupt. Because our expectations about those three types of organization are fundamentally different, based on beliefs and experience.

And experience. The remarkable thing about American democracy is how often people actually experience getting a fair shake. This is a tremendous reinforcement of beliefs. But the equilibrium, going back to economics, is a very fragile one. If people think that others are shirking and getting away with it, it really gets their goat.

Here we come to a reason why people dislike the government so much. They think it rewards shirkers, that people are getting away with it. But if beliefs shape expectations shape incentives, then someone please tell me where ordinary folk in this country got the idea that poor folks who need help from the safety net are getting away from something. Why is the default assumption that having a hard time means you’re shirking? It seems like the equilibrium supporting faith in government has been made more fragile than it needs to be by what are almost surely completely false ideas about our fellow citizens. To understand why people hate the government so much, we’d have to understand where those beliefs come from.

Next week, I’ll get into what implications this has for philanthropy, the depersonalized nature of charity in the contemporary world, and the season of giving that’s about to come upon us.

Just two entries next week, Tuesday and Wednesday, before Thanksgiving, then I’m on vacation for a week.

Influence and incentives

Tuesday, July 20th, 2010

Previously on TBBKA”DP?”, I wondered about the difference between having impact and having influence. Impact sounds like two independent bodies colliding; influence suggest two streams coming together. Another buzzword that’s a euphemism for power is “incentives.” The gradual invasion of economic thinking into every corner of life continues apace; the power of incentives is one of the signal contributions of the dismal science to popular discourse in the past several years (witness the success of “Freakonomics”).

If impact is hard power, and influence is soft power, what are incentives? They’re relational and structural. Incentives are a function of a situation: the importance of grades and test scores for admission into competitive colleges incentivize students to cram for tests. They’re relational both synchronically (at a given moment) and diachronically (over time). Someone or something incentivizes you at a given moment (study hard and you’ll get a good grade on the test) and/or over a period of time (keep studying hard over the years and you’ll eventually get into a good school). Because they’re structural or situational, incentives can be nested: study to get grades, get grades to get into school. In fact, incentives may be most powerful when they’re most embedded. Tocqueville said revolutions would be increasingly less likely in America because more and more people had a stake in the functioning of the system. If you own property, you have the obligation of a mortgage and need money to keep coming in; there are multiple sets of incentives that link up in straightforward ways.

The thing about all these incentives is that they’re visible and relatively easy to understand. Influence can be quieter, work behind the scenes. When two rivers converge, you can’t tell where one starts and the other ends. (Well, except for the black and sandy Amazon Rivers.) Incentives are visible and accessible to all; influence is either so dispersed as to be essentially invisible (What determines whether a movie ends up being popular? We see it happen, but no one can really explain why, so the mechanism of influence remains mysterious.) or hidden out of public sight (whatever happened to the climate bill?).

So maybe impact is hard power, incentives are visible soft power, and influence is invisible soft power. How might these concepts be useful for understanding the way nonprofits and philanthropy do or do not make a difference on the issues they care about?