Tag Archives: economics

Covert virtue – the signal that doesn’t bark?

An attitude I often come across is that if you do a virtuous thing, it is impolite to blow your own trumpet about it. ‘Give privately!’ is the catchcry. Even those who are open about their good deeds are likely to hold a special admiration for anyone they discover has been secretly helping others for years, and never even mentioned it.

I asked around and apparently this norm exists because when you go on about your altruism, it calls into question  your motivation. Perhaps you made that donation just to be able to show off your virtue and wealth to everyone else, rather than being motivated by ‘pure’ compassion. Someone who only cared about helping others would apparently keep their hands busy, and their mouth shut.

I think the reality is the complete reverse. A culture of ‘private altruism’ has some seriously perverse effects, and anyone who really cares about doing good in the world should be working to undermine it.

Firstly, it means we are less inclined to talk about and share the information we have about which causes are most valuable and effective. Given that donations to charity and other approaches to making the world a better place vary in cost effectiveness across many orders of magnitude, this is a huge loss.

Secondly, if people can’t gain social acceptance from altruistic acts, those acts will tend to be crowded out by alternatives that are unavoidably conspicuous – impressive cars, holidays, degrees and so forth – that will do a better job of signalling how rich, noble and interesting they are. On top of this, people will become biased towards conspicuous but ineffective ways of helping others. It’s easy to keep a (very valuable!) bank transfer secret, and pretty gauche to post the receipt on social media sites. But flying to Africa to help build a school, or signing up to a Facebook group? Everyone will find out about that! Sadly, signalling ‘arms races’ over conspicuous consumption and slacktivism, rather than ‘effective altruism’, are exactly what I observe around me.

In light of this, private giving, far from being consistent with a pure and virtuous motivation, is actually deeply suspicious. Someone who really cared about helping others as much as possible, and was making substantial sacrifices to do so, would want to bring up the fact whenever they could get away with it, in order to draw attention to the merits of their cause and prompt others to join in. Those who ‘give privately’, must care more about blindly following harmful social norms – or more likely, getting extra admiration for their deeds when people ‘accidentally’ discover what they have secretly been up to. This could be a ‘signal that doesn’t bark.’

So next time you do something good, find a way to shout it from the rooftops, especially if the act is particularly big, valuable or easy to do discreetly. If anyone tries to call you out for ‘showing off’, politely explain why the pure of heart have no choice.

Update: Here’s an amusing video on the topic. (HT David Barry)

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Surplus splitting strategy

When negotiating over the price of a nice chair at a garage sale, it can be useful to demonstrate there is only twenty dollars in your wallet. When determining whether your friend will make you a separate meal or you will eat something less preferable, it can be useful to have a longterm commitment to vegetarianism. In all sorts of situations where a valuable trade is to be made, but the distribution of the net benefits between the traders is yet to be determined, it can be good to have your hands tied.

If you can’t have your hands tied, the next best thing is to have a salient place to split the benefits. The garage sale owner did this when he put a price tag on the chair. If you want to pay something other than the price on the tag, you have to come up with some kind of reason, such as a credible commitment to not paying over $20. Many buyers will just pay the asking price.

This means manipulating salient ways to split benefits could be pretty profitable. This means people should probably be doing it on purpose. I’m curious to know if and how they do.

Often the default is to keep the way the benefits naturally fall without money (or anything else ‘extra’) changing hands. For instance suppose you come to lunch at my place and we both enjoy this to some extent. The default here is to keep the happiness we got from this, rather than say me paying you $10 on top.

So in such cases manipulating the division of benefits should mostly be done by steering toward more personally favorable variations on the basic plan. e.g. my suggesting you come to my place before you suggest that I come to yours. A straightforward way to get gains here is to just race to be the first to suggest a favorable option, but this is hard because it looks domineering to try to manipulate things in your favor in such a way. Unless you have some particular advantage at suggesting things fast and smoothly, such a race seems costly in expectation.

If in general trying to manipulate a group’s choice seems like a status-move or dominance-move, subtle ways to do this are valuable. Instead of a race to suggest options, you can have a prior race to make the options that you might want to suggest seem more suggestible. For instance if you’d prefer others come to your place than you go to others’ places, you can put a pool at your place, so suggestions to go to your place seem like altruism. If you know a lot of details about another person, you can use one of them to justify assuming that a particular outcome will be better for them. e.g. ‘We all know how much John likes steak, so we could hardly not go to Sozzy’s steak sauna!’. None of this works unless it’s ambiguous which way your own preferences go.

On the other hand if your preferences are very unambiguous, you can also do well. This is because others know your preferences without your having to execute a dominance move to inform them. If their preferences are less clear, it’s hard for them to compete with yours without contesting your status themselves. So arranging for others to know your preferences some other way could be strategic. e.g. If you and I are choosing which dessert to split, and it is common knowledge that I consider chocolate cake to be the high point of human experience, it is unlikely that we will get the carrot cake, even if you prefer it quite strongly.

So, strategy: if it’s clear that you have a pretty strong preference, make it quite obvious but not explicit. If you have a less clear preference, make it look like you have no preference, then position to get the thing you want based on apparently irrelevant considerations.

Even if the default is to transfer no cash, there can be a range of options that are clearly incrementally better for you and worse for me, with no salient division. e.g. If I invite you over for lunch, there are a range of foods I could offer you, some better for you, some cheaper for me. This seems quite similar to determining how much money to pay, given that someone will pay something.

In the lunch case I get to decide how good what I offer you is, and you have to take it or leave it. You can retaliate by thinking better or worse of me. You can’t very explicitly tell me how much you will think better or worse of me though, and you probably have little control over it. Your interpretation of my level of generosity toward you (and thus your feelings) and my expectations of your feelings are both heavily influenced by relevant social norms. So it’s not clear that either of us has much influence over which point is chosen. You could try to seem unforgiving or I could try to seem unusually ascetic, but these have many other effects, so are extreme ways to procure better lunching deals. I suspect this equilibrium is unusually hard to influence personally because there’s basically no explicit communication.

There are then cases where money or peanut butter sandwiches or something does change hands naturally, so ‘no transfer’ is not a natural option. Sometimes there is another default, such as the cost of procuring whatever is being traded. By default businesses put prices on items rather than consumers doing it, which appears to be an issue of convenience. If it’s clear how much surplus is being split, a natural way is to split it evenly. For instance if you and I make $20 busking in the street, it would be strange for you to take more than $10, even if you are a better singer. This fairness norm is again hard to manipulate personally, except by making it more or less salient. But it’s a nice example of a large scale human project to alter default surplus division.

When there are different norms among different groups, you can potentially reap more of it by changing groups. e.g. if you are a poor woman, you might do better in circles where men are expected to pay for many things.

These are just a random bunch of considerations that spring to mind. Do you notice people trying to manipulate default surplus divisions? How?

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No theory X in shining armour

A frequent topic on this blog is the likely trade-off between a higher population and a higher quality of life at some point in the future. Some people – often total utilitarians – are willing to accept a lower quality of life for our descendants if that means there can be more of them. Others – often average utilitarians – will accept a smaller population if it is required to improve quality of life for those who are left.

Both of these positions lead to unintuitive conclusions if taken to the extreme. On the one hand, total utilitarians would have to accept the ‘repugnant conclusion‘, that a very large number of individuals experiencing lives barely worth living, could be much better than a small number of people experiencing joyous lives. On the other hand, average utilitarians confront the ‘mere addition paradox’; adding another joyous person to the world would be undesirable so long as their life was a little less joyous than the average of those who already existed.

Derek Parfit, pioneer of these ethical dilemmas and author of the classic Reasons and Persons, strived to,

“develop a theory of beneficence – theory X he calls it – which is able to solve the Non-identity problem [1], which does not lead to the Repugnant Conclusion and which thus manages to block the Mere Addition Paradox, without facing other morally unacceptable conclusions. However, Parfit’s own conclusion was that he had not succeeded in developing such a theory.”

Such a ‘theory X’ would certainly be desirable. I am not keen to bite the bullet of either the ‘repugnant conclusion’ or ‘mere addition paradox’ if neither is required. Unfortunately, if like me, you were hoping that such a theory might be forthcoming, you can now give up waiting. I was recently surprised to learn that What should we do about future generations? Impossibility of Parfit’s Theory X by Yew-Kwang Ng (1989) demonstrated many years ago that theory X cannot exist. Continue reading "No theory X in shining armour" »

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Good friends can make bad business partners

A new NBER working paper suggests that similar venture capitalists (VCs) are worse at making or managing shared investments:

This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people’s desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision-making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based “birds-of-a-feather-flock-together” effects in collaboration can be costly.

Given that homophily rather than heterophily remains the norm, it seems these investors are not learning this lesson, or value working and affiliating with similar peers over maximising profits. All very well for them. But if you have a project that you truly want to succeed, you may be better off doing it with a talented stranger rather than the college mates you clicked with on day one. And if you are letting others invest on your behalf, you should beware of handing your money over to a homogeneous friendship group.

I wonder if this kind of research influences the institutional investors who often fund VCs? If not, it would suggest that even this highly competitive investment market is falling short of its potential to fund and grow promising new companies.

Some research suggests that corporations with more female board members perform better, though the direction of causality is disputed. I doubt females are innately more talented board members, so the causation, if real, could be the result of female ‘outsiders’ generating better management than a clique of natural friends. Shareholders don’t share the benefits of board members enjoying each other’s company, so if they had effective control of  the companies they owned you might expect then to appoint a diverse ‘team of rivals’ to the board to closely scrutinise one another’s ideas.  My impression is that precisely the opposite is the norm.

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