• We have many purposes when we talk about “what to do”, and making deals is only one of our purposes.
• Getting what we want is only one of many reasons we try to achieve deals; we also want to signal our features, for example.
• Analysis aids are only one of many sorts of aids that can help us to make deals; aids can also to organize negotiations, enforce deals, etc.
• Most useful deal aids are relatively specific to a particular context, such as real estate sales, or marriages; when available, more specific tools tend to be more useful.
• Deal aids can specialize in what groups that they best assist.  A particular aid might be best suited for couples, club, firms, or nations.  Wider aids specialize in assisting larger groups.

Economic efficiency is our best wide general analysis tool for finding win-win deals that get people what they want.  That isn’t everything, but it is a lot.  I’m glad I mastered this tool and am eager to apply it.  Efficiency can:

• Suggest Deals – Efficiency analysis suggests policies to make “the biggest pie.” A deal also needs folks to agree on a way to divide the pie, such as via cash transfers between the parties.  Even so, knowing better ways to make bigger pies should make parties more eager to agree to deals to lock in such gains.
• Be Part Of A Deal -  Groups can make explicit deals to adopt the results of efficiency analysis.  For example, legal systems can adopt a general accident rule that puts responsibility on the least cost accident avoider, and government agencies can be instructed to make policy decisions on a cost-benefit basis.  Most can reasonably expect to gain from such policies, even if we do not expect to gain from each particular application.

Admittedly:

• Efficiency analysis is a rough guide, and does not determine exact implications with certainty for each possible situation.
• The policies efficiency recommends depend on particular modeling assumptions and parameter estimates, for example, and those depend on particular analysts and sources used.
• Even when negotiators have access to solid analyses, deals can fail for many other reasons; good analysis doesn’t ensure good deals.
• Most deals are not between all possible parties, and each deal may well disadvantage those not included in the deal.
• People may expect to gain from a deal, but end up not actually benefiting.
• As a wide general tool, efficiency is less useful for small deals or for contexts where specialized tools are available.
• Efficient deals may well be immoral, or unattractive for other purposes of deal-making, or of “what to do” talking.

Few deals can guarantee to get everyone more of what they want, but by encouraging and enabling more better wider deals, the use of efficiency analysis sure seems to me to tend to get most everyone more of what they want.  Isn’t that good enough?

OK, now that I’ve tried this exercise of explicitly listing many possible disclaimers, when is this sort of exercise actually worth the effort?

The uninsured, it’s said, use emergency rooms for primary care. That’s expensive and ineffective. Once they’re insured, they’ll have regular doctors. Care will improve; costs will decline. Everyone wins. Great argument. Unfortunately, it’s untrue.  A study by the Robert Wood Johnson Foundation found that the insured accounted for 83 percent of emergency-room visits, reflecting their share of the population. After Massachusetts adopted universal insurance, emergency-room use remained higher than the national average, an Urban Institute study found. More than two-fifths of visits represented non-emergencies. Of those, a majority of adult respondents to a survey said it was “more convenient” to go to the emergency room or they couldn’t “get [a doctor's] appointment as soon as needed.” … Medicare’s introduction in 1966 produced no reduction in mortality; some studies of extensions of Medicaid for children didn’t find gains.

HT Tim Starr.

]]> http://www.overcomingbias.com/2010/03/uninsured-er-fallacy.html/feed 9 http://www.overcomingbias.com/2010/03/efficient-isnt-moral.html http://www.overcomingbias.com/2010/03/efficient-isnt-moral.html#comments Mon, 15 Mar 2010 16:00:32 +0000 Robin Hanson http://www.overcomingbias.com/?p=22210 Efficiency isn’t morality, and it is a serious confusion to think it should be. Let me try again to explain.  I said:

Economic welfare cares not about giving people experiences but about satisfying their preferences. … If we do something a dead person would have wanted, that counts as a benefit.

Adam Ozimek responded:

But we care about satisfying people’s preferences because, unlike the dead, they can know that those preferences being satisfied. … If were going to count the preferences of the non-existent, then it would seem that the number one priority of all society would be to bring as many of them as possible from non-existence into existence. The easiest way to do this is to mandate pregnancy. … If we care about satisfying the preferences of the dead even though they won’t know their preferences are satisfied, does that mean we should not be concerned with whether or not living people know when their preferences are satisfied?

Adam reminds us of Tyler’s position:

Dead people don’t count in the social welfare function. (If they did, how many of them would prefer non-democratic or racist outcomes?  And would we count that?  We shouldn’t and we don’t.)

When our distant ancestors sat around debating if to change locations, expel a troublemaker, or attack neighbors, they were often ambiguous about whether they were choosing what they wanted or what was moral; they preferred to pretend these were the same.  We similarly prefer ambiguity when we argue policy today.

So it is important to clarify: As an analysis tool, economic efficiency is designed and well-suited to finding win-win deals that [added: tend to] get us all more of what we want. It is not well-suited to achieving moral outcomes, except when morality happens to coincide with getting people what they want.  Otherwise, win-win deals will predictably not achieve morality when many involved do not want to be moral.

Many of us want things we will never experience directly; we want our children to prosper after we are gone, for example. This is especially true of our moral wants; we want our donations to Africa to actually help real Africans. So we are understandably wary of deal-making frameworks which explicitly suggest that they seek only to achieve the appearance, not the substance, of our wants.  So yes, a deal-finding analysis tool should definitely count unseen wants!  Furthermore, observers concerned that deals might neglect morals should be especially eager for our deals to achieve unseen wants.

Frameworks for finding win-win deals should also try to include as many things as possible that can have wants and participate in deals.  This includes racists, pedophiles, slaves-owners, robots, animals, distant past and future folk, and future folk who may or may not end up existing.  Yes many may be morally offended if racists get what they want, but that offense counts in what other folks want, and therefore enough offense will ensure that win-win deals will not give racists much of what they want.

Limits on contract may distort prices and interfere with the ability of efficiency analysis to help us find useful win-win deals.  But that is a good reason to enforce more kinds of deals, not to try to distort efficiency for a task to which it is poorly suited: choosing moral acts.

Added: Bryan Caplan responds.

The economic welfare of a proposed change is the benefits minus the costs of that change, translated into cash terms, though of course changes don’t have to actually be cash transactions.  When available, market prices are commonly accepted as estimates of the benefits and costs of things gained and lost.  Economic welfare is a powerful heuristic for finding win-win deals: in many kinds of situations, the strategy of consistently making the changes that increase economic welfare tends to be usefully close to an actual win-win deal that gives most everyone more of what they want.

The efficient ancestor worship problem arises from two key facts:

1. Economic welfare cares not about giving people experiences but about satisfying their preferences, i.e., giving them what they want.  And even long dead people still have (or “had” if you prefer) preferences that we could now better satisfy.  If we do something a dead person would have wanted, that counts as a benefit.
2. At standard market interest rates, the magic of compound interest quickly gives astronomical priority to the preferences of folks who lived long ago.  For example, in historical records near risk-free interest rates (e.g., land rents over prices) consistently exceeded 9%/yr from 3000BC to 1350AD, for a total factor of over 10¹⁶².

Together, these facts suggest we would increase economic welfare if we spent less than 10¹⁶² dollars today to do anything for which a 3000BC ancestor would have been willing to pay a dollar (equivalent in their currency).

Clearly we would quickly bankrupt ourselves if we tried to implement such “efficient” changes, and doing so would not be remotely close to a win-win deal with our ancestors.  What goes wrong here?

Our contract law system refuses to enforce many win-win deals between distant generations.  Many folks would be willing to create trusts that accumulated funds long after their death and then paid distant descendants (perhaps indirectly) to do things like remember their ancestor’s name, pray to his gods, etc.  Unless stolen, such funds would eventually come to dominate the world economy and dramatically lower interest rates.  With lower interest rates, economic efficiency would count the preferences of distant ancestors as far less valuable, and as a bonus businesses and governments would have far stronger incentives to attend to the interests of distant future folks, such as via global warming policies.

But we in fact refused to enforce a great many such long term deals.  For example:

The rule against perpetuities at common law … prevents a person from putting qualifications and criteria in his will that will continue to control or affect the distribution of assets long after he has died, a concept often referred to as control by the “dead hand.”

Our unthinkingly repugnance at being controlled by the dead, and our eagerness to grab their resources, prevents us from enforcing long-term win-win deals.  This refusal to enforce deals increases interest rates, which distorts all our trade-offs across time, bringing economic welfare estimates into stark conflict with intuitive moral judgments about time trades (as in global warming), which then encourages people to turn to non-economic frameworks for policy analysis.

When policy distorts prices, it distorts calculation of economic welfare, which encourages people to ignore economic welfare when choosing policy, which reduces their reluctance to intervene to further distort prices, which leads to a sad spiral of increasing confusion.  Please, let’s enforce long-term win-win deals!

Added: A fascinating alternate history might start from a year 1300 English legal precedent enabling flexible growing long term trusts.  By 1800 early trusts grew a billion-fold, and trusts dominate the economy.  What else changed?!

While no objects could move from their side of the hole to ours, small items (but not humans) could move from our side to theirs.  Furthermore, the hole had the amazing property of multiplying everything we sent through by a factor F of a million!  That is, if you tossed a gold coin through the hole, a million identical coins would come out the hole on the other side.

How tempted would you be to toss useful items, like food, through the hole?   Remember, the cost to you, relative to the benefit to them, is 1/F, only one part in a million.  When considering the following variations, and their various combinations, consider not only F = a million, but also ponder what fraction F would make you indifferent to tossing or not:

1. Your gift goes to a random person on the other side.
2. Your gift goes to a government on the other side, which controls the hole.
3. You can specify to whom your gift will go, using some simple descriptors like “poor”, “smart” etc.
4. We could also do other things to help them, such as by studying a problem of theirs and sending them a report with suggested solutions.  But these other actions don’t get multiplied by F; a million copies of the report doesn’t help more than one copy.
5. The hole isn’t very reliable, and only one time in a thousand does what you toss through the hole actually get to the people on the other side.  But when the hole does work 1000*F items come out the other side.
6. You have very good theoretical reasons to think that most likely there are people much like us on the other side of the hole, but you can’t actually see through the hole (though they can see us).

The point of this parable is that interest rates would also greatly leverage any gift you gave the distant future folks.  For example, in 1785 a French author wrote a satire about Ben Franlkin, the most famous American to Europeans.  While Franlkin was famous for his Poor Richard’s Almanac, the satire mocked American optimism by having “Fortunate Richard” leave money in his will to be invested for 500 years before being given to charity.

Franklin responded by leaving £1000 each to Philadelphia and Boston in his will to be invested for 200 years.   He died in 1790,  and by 1990 the funds had grown to 2.3, 5M$, giving factors of  35, 76 inflation-adjusted gains, for annual returns of 1.8, 2.2%.  Why has Franklin’s example inspired no copy-cats?  Does no one care to help distant future folks through the multiplier hole of compound interest?

We … [did] research to discover if courteous clerks fueled sales.  … We ultimately found little if any evidence that courtesy increased store sales. …The main finding … was that clerks in stores with more sales were actually less courteous.  Apparently, the crowding and long lines in busy stores make clerks and customers grouchy. (p.39)

A survey of more than 200 human resource professionals from companies employing more than 2500 people … found that even though more than half of the companies used forced rankings, the respondents reported that forced ranking resulted in lower productivity, inequity and skepticism, negative effects on employee engagement, reduced collaboration, and damage to morale and mistrust in leadership. (p.107)

Individuals believe that others are motivated by money, even as they know that they are much less so. … A survey … of almost 500 prospective lawyers … revealed that 64 percent … said they were pursuing a legal career because it was intellectually appealing or because they were interested in the law, but only 12 percent thought their peers were similarly motivated.  Instead 62 percent thought that others were pursuing a legal career for the financial rewards. (p.115)

A survey of 205 executives from diverse industries found that 68 percent reported their companies had executive bonus plans because senior management believed tthat such plans would motivate executives.  These same executives reported, however, that they did not make daily business decisions based on how such decisions would affect either their bonus or those of other people. (p.116)

Students who are in school or who have chosen a major for instrumental reasons – in order to get a better job or to make more money – are much more likely to cheat than students who have chosen a course of study because of their interest in in the subject matter.  (p.124)

In hospitals, outside of these clinical trials, just half of doctors and nurses regularly clean their hands before patient care, despite widespread publicity. More worrisome: In hospitals where massive educational efforts have increased hand-washing rates from 40 percent up to 70 percent, there has been no overall reduction in infection rates. Even in highly regulated places like hospitals, the promising benefits of hand-washing remain largely unrealized.

More here; HT Tyler.

Added 12Mar: Yvian lists may pro-washing studies here.

Harvard Business Review has published at least three articles on incentive pay and organizational performance in the past decade.  … Each makes a similar point: compensating people for only individual performance creates more problems than it solves, so rewards should emphasize organizational, not just individual, performance. … Not one of these articles refers to the prior article, because HBR precludes footnotes and … discourages references to prior work. (pp.43,44)

James March … put it “Most claims of originality are testimony to ignorance, and most claims of magic are testimony to hubris.” … Knowledge isn’t generated by lone geniuses who magically produce brilliant new ideas in their gigantic brains.  This is a dangerous fiction. … Hackman was troubled because he could only find published success stories about companies that had redesigned work to be more motivating and meaningful.  Yet in his experience most redesign efforts were failing. … a study found no significant performance differences between Peters and Waterman’s “excellent” companies and a representative sample of Fortune 1000 companies.  (pp.46-48)

Bloodletting was used routinely until 1836 when French physician Pierre Louis conducted one of the first clinical trials in medicine.  Louis compared pneumonia patients whom he treated with aggressive bloodletting and those he treated without it.  Louis found that bloodletting was linked to far more deaths. … George Washington, the first president of the United States, … died two days after a doctor treated his sore throat by draining almost five pints of blood.  … A remarkably high percentage of medical decisions still reflect the often-obsolete practices that a doctor learned in medical school, the ingrained traditions of a hospital or region. (p.13) …

What she thought was a straightforward study of how leader and coworker relationships influence errors in eight nursing units. … [She was] flabbergasted when nurse questionnaires showed that the units with the best leadership and best coworker relationships reported making 10 times more errors than the worst. … Better units reported more errors because people felt psychologically safe to do so. …

Nurses whom doctors and administrators saw as most talented unwittingly caused the same mistakes to happen over and over.  These “ideal” nurses quietly adjust to inadequate materials without complaint, silently correct others’ mistakes without confronting error-makers, create the impression that they never fail, and find waits to quietly do the job without questioning flawed practices.  These nurses get sterling evaluations, but their silence and ability disguise and work around problems undermine orgainzational learning.  (pp105,106)

Clearly most med errors are not reported, and docs reward nurses more for covering doc asses than for improving patient outcomes.