To All the Incentive Haters

The essence of economics is its focus on incentives, and how they affect consumers’ utility maximization and firms’ profit maximization to generate price and quantity outcomes. This is such a powerful engine for predicting behavior!

It’s what makes non-economists hate us and seek to find reasons to ignore standard economic analysis. No doubt behavioral economics has something to offer; and the attraction of culture — the role of social norms — is appealing too. Certainly without resorting to something like social norms it’s hard for me to explain why Germans will not cross a street when the “Don’t Walk” sign is lit and give me dirty looks when I act like an American and blithely proceed to cross.

Indeed, even a dyed-in-the-wool Chicago-type economist like me is willing to explain some phenomena as being culturally determined when all else fails.

Nonetheless, in the end the essence of the economic approach and economic research, and an extremely powerful way of analyzing behavior, is our standard analysis. It can use fixing, but it certainly isn’t broken; and those who fail to heed it while devising policy are likely to make our country, and the world, worse off.

(It isn’t just Germans who are reluctant to jaywalk; Dubner found the same to be true in Vancouver.)


Greg

I lived in Germany for a few months in the 90's and took a perverse pleasure in jaywalking diagonally across intersections.

I still don't understand the whole anti-jaywalking culture.

chris

Well, as a German student studying in Germany I am used to ignoring traffic lights, but it is true that one get nasty looks for this (especially from parents who try to teach their kids that you should not cross the street if the light is red).

Sol

It's not all Germans. In Berlin crossing the street with a non-walk is standard practise. And chaos.

Economist

Only Chicago economists go around talking like this -- "Chicago type economist like me". The rest of us just think we're economists.

Bobby G

What is the reason behind the law against jaywalking? To prevent accidents and to protect pedestrians? If that is the case, why get upset when someone else decides to take that responsibility into his own hands and cross the street? If an accident is avoided and the pedestrian is safe, why even get upset?

People are absurd sometimes.

Hunter

Not too many jaywalkers in Salt Lake City either.

And I will agree/disagree with you on incentives - just because economists have difficulty *quantifying* incentives based on psychological constructs or sociological forces doesn't mean they don't have a real impact on economic choices. Is human frailty endogenous to the model or exogenous? Nature or nuture? Can one fully separate human decisions from the "x factor" that makes us human?

Steve

Jaywalking culture varies from city to city in the U.S. In Los Angeles it's rare. In DC, it's common. (Those are the only cities I've lived in, so I can't comment about anywhere else.)

I think the main difference is whether police enforce anti-jaywalking laws. If I jaywalk in Los Angeles, I risk receiving a $100+ fine and a possible $1000+ increase in my insurance rates over a few years. Even if there are no cars coming, there may be a cop somewhere that I'm not seeing, so I don't do it.

In DC, jaywalking is either not illegal or the laws aren't enforced, so there isn't that risk.

That means that the difference is a case of people responding to incentives.

Ben D

I don't know about Germany, but in Vancouver, the little walk man is shaped funny, so you have to take that into account.

not-a-jaywalker

I'm confused...

I thought jaywalking was crossing anywhere but a cross-walk.

If you're at a cross-walk and the sign is recommending you don't walk, crossing there isn't jaywalking. In Virginia and most other US locales, a pedestrian in the cross-walk has right-of-way, regardless of what the Walk/Don't Walk sign says.

Like the NYC jingle goes:

"Don't cross the street in the middle in the middle

In the middle in the middle in the middle of the block"

Jeff Darcy

I don't think most people hate the idea of incentives so much as they disagree with the assumption that all perceptions of value can be expressed in privately traded dollars and cents, and especially the Chicago-school assumption that markets somehow magically manage to express such perceptions without intervention. Back here on my planet, many externalities - the very name is telling - are routinely ignored. Many more are not adequately reflected in the market for many reasons, but most often due to the fact that information does not flow immediately and perfectly to everyone who might use it to make market decisions (another silly assumption too many economists still make).

The German anti-jaywalkers might value orderly behavior and adherence to rules not just as a social norm but as a route to prosperity. Whether it actually does provide such a route is immaterial since it's their perceptions and not some elitist blogger's that are at issue. To the extent that even seemingly trivial violations of social order might be seen as erosions of the value that social order is perceived to create, and creates a legitimate sense of having been harmed even in economic terms. Yes, I know we've already been over the "broken window theory" but, again, market participants should be allowed to determine for themselves what it is that they value and how much.

Economic thinking is valuable. Limiting its applications to the things that are easy to express or manage in monetary terms throws away much of that value.

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Mark Wolfinger

Incentives for people who lack integrity destroys the system.

When a trader is rewarded with a $20 million bonus, he's going to take whatever risk he must take to reach the plateau that makes him that $20 million. If he bankrupts his firm along the way, why should he care?

If a CEO is rewarded with cash plus stock options for earning $x per share this year, he's going to take all kinds of risk to achieve that number - even if he knows it's bad for the future of the company. His incentive is to earn that money this year. There is no incentive to make the company proper.

These incentives are asinine and the boards who allow such contracts to exist have no shame.

Mike B

Jaywalking is not not giving motor vehicles the right of way where they are entitled to it. Outside of crosswalks motor vehicles have the right of way. At least in New York City if there are no cars coming one is free to cross the street at any point.

As a New Jersey resident I found Canada bizarre. Cars will like slam on the bakes when you try to dart across the street in a gap in traffic. That's completely inefficient!! In New Jersey pedestrians fit through the holes in the traffic flow and nobody has to slow down or stop.

Caliphilosopher

So this blog entry is one big statement saying "big ups to all my haters"? Hilarious.

If articles like "The plight of mixed race children" (Roland Fryer Jr., et al) and the recent post on the Freakonomics blog regarding the "Obama Effect" stopped coming out, then the discipline would get less flak.

Also, the assumptions that economics makes about individuals (that they are rational; that the prefer certain things over others, that they aim to maximize their utility) are HIGHLY problematic.

Predictive power? That seems to get undermined if, like Roland Fryer Jr. et al in their paper note that "The marginal man hypothesis is not readily falsifiable".

Not saying that economics as a discipline doesn't do anything; like other enterprises that aspire to be scientific in nature, there are serious problems. The ones in economics seem to be quite glaring to those with sociological/philosophical training - well, at least to me.

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Mark

As a anthropologically minded scholar of religion, I suppose I'm the essence of the "non-economist" who hates economics (of course I don't!) I agree that incentives can be a very powerful tool for analyzing human behavior, especially in the context of designing effective policy. Incentives however may not be the best means of answering certain questions. Why for instance, do African American gang members set such a low value on life (or are so unrisk-adverse)? Why do tastes change (for instance the rise, then fall, then rise again of evangelical protistentism in the US)? Why do people vote? All of these questions seem, though interesting (at least to me!) seem difficult to answer in terms of incentives.

When push comes to shove, all that really matters is whether economists or anthropologists\sociologists have the higher R squareds. It seems that the real methodological advantage to incentives is not that they have better explanatory power, but that they a more easilly rendered in a mathematical format suseptable to statistical analysis.

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X

Mark, #11: I think you make a fine argument that incentives do work. You are pointing out that solely rewarding return sacrifices risk-management. The simplified incentive system you describe produced exactly the results one might have predicted.

Integrity could be defined as the receipt of psychic benefit for making "moral" choices. Those who have high integrity receive a larger benefit and thus make more "moral" choices.

You would "fix" this simplified system by replacing everyone in it with high-integrity people. Wouldn't it just be easier to devise a measure of risk and penalize people for incurring too much?

erik de koster, brussels

well, it's not just americans who are so un-german. A radio show in Belgium a couple of weeks ago performed its own little study: they posted for one day anonymous observers at 5 traffic lights in Belgium. They found a whopping mean of 1/3 of pedestrians crossing at red, up to 2/3 on crossroads with light traffic. Remark from one of the listeners on the show's blog: these are just automobile drivers who parked their cars and now behave as they always do, dangerously.

JT

As a die-hard jaywalker in laced up Vancouver, I can identify. I was recently chided for jaywaliking with my son across a completely empty boulevard on my way to, of all things, vote, in the recent federal election.

I thought I was teaching my son responsible risk-taking AND civic responsibility in one act, but others obviously take a different view!

LL

As a proficient jaywalker, I have had the opportunity to challenge lumbering hunks of metal many times my size in a number of American and international cities. Here are my findings:

LA: very safe, even for ducklings on freeways

Calgary: safe except on black ice

DC: fine if there are no black SUVs in sight

New Orleans & Memphis: great because there are so few cars

Boston: blithely tolerated

Toronto: pursed lips

London: frowns aplenty

Paris: Wildly unpredictable; scooters a particular menace

Miami: too many coked-up motorists

Houston: drivers will accelerate to hit you.

Eric M. Jones

After I got a ticket in LA for jaywalking, I inquired as to the law. "Jaywalking" is legally defined as crossing between two CONTROLLED intersections. Controlled mean "having a traffic light or a traffic-control officer", not a stop or yield sign. This clarifies one's options considerably.

DJH

First, I lived in west LA for a while and I can tell you that I saw very little jaywalking there. It was a surprise to me since I'm from the Northeast, have spent a lot of time in Boston and NYC, and saw plenty of it. So jaywalking is NOT an "American" thing to do -- there are LOTS of Americans who do NOT jaywalk. If you think jaywalking is "American" that's only because you've only been to parts of America where jaywalking is common.

Second, the assumption that all behavior can be incentivized is problematic for several reasons. It assumes that there is a "price" for everything, even behaviors which cannot in any normal sense be priced, because they have no value. One can, of course, assert that everyone can be "bought" for some price ... however, this is not certain, and that "price" can vary widely. Also, the idea that one can purchase people's behavior is a dicey proposition; in some cases the price may be high -- especially when they get the idea that their behavior is being bought and they think they can hold out for more. Or worse, they might simply rebel against the manipulation and refuse to cooperate at all.

This may be the "soft white underbelly" of incentivizing things. Once enough of the population is aware they're being manipulated, they gain the ability to manipulate back ... by bargaining the incentives higher, or refusing to play the game at all. It can becomes a game of escalation, and one that might end up being too expensive, or if people refuse to cooperate, it could make a situation much worse than it was previously.

Isaac Asimov's "Foundation" series postulated a fictional science called "psychohistory" which predicted the future to a degree. But one of its basic postulates was that the population being predicted could not be aware of the workings of psychohistory (although they could know its existence), because such knowledge would affect their decisions and invalidate the predictions.

Besides, many "incentives" end up being detrimental. Back when mergers first happened, bonuses were issued to executives to cooperate with the merger process itself. This surely seemed a reasonable "incentive" at the time. As more mergers happened in the 80s the executives held out for larger bonuses, knowing their cooperation was being bought.

These bonuses quickly became a custom that executives exploited for personal gain ... e.g. the boards of some conglomerates which purposely went out looking for companies to swallow up so they could write themselves handsome bonuses. Most of these mergers did no one any good and ended up failing. Some of the failures were massive and catastrophic (anybody remember the once-ubiquitous Beatrice Foods?).

Those "incentives" all worked out pretty well, eh? (Not!)

Incentives are very similar to the fictional psychohistory. They work only when people are unaware of them. However, incentive tricks are now in the public eye and people are becoming increasingly aware of them. People are increasingly inclined to see when they're being manipulated and are more able now to detect manipulation when it occurs.

In short, using incentives is based on suppositions that may appear to be true, but which might not be. And some incentive schemes may backfire in ways that no one expects (such as the custom of executive bonuses in merger agreements).

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