Opinion: Incentives

POSTED: 10/6/11 12:49 PM

People’s behavior is driven by incentives. At least that is the opinion of Steven D. Levitt, co author of Freakonomics and in his own words, a cold-blooded economist.
If someone asked a hundred people to work sixty hours a week in a dirty factory and told them that they would not get a penny for it, nobody would take up the offer. Offer the same hundred people a million dollars and a stampede would surely follow.
Neither of these scenarios is very likely. In Freakonomics, Levitt, together with his co-author Stephen J. Dubner, trains his guns on Al Gore and his noble efforts to save the planet from global warming effects. Gore’s efforts are expensive, Levitt points out, and they will never work.
That’s because Gore is asking the world to please consume less and pollute less. If the world fails to obey, disaster will be upon us one day.
The thing is, nobody knows on what day that disaster will strike, and there are also people who firmly believe that that day will never come. Martin Weitzmann for instance, an environmental economist at Harvard, claims that there is a roughly 5 percent chance that global temperatures will rise enough to destroy planet Earth as we know it.
That certainly takes the fun out of what we consider environmental responsible behavior for all poker players who will take a bet that something will not happen 95 percent of the time in a heartbeat.
If someone asked fifteen people to sit in a meeting room for, say, sixty hours a month and told them that they would get paid $125,000 a year before taxes plus approximately $20,000 worth of fringe benefits that include first class healthcare insurance, nobody would refuse that offer. Right?
Right. But once these fifteen people have accepted the offer, the rules of the game change slightly. Not much, but enough to make all fifteen a bit uneasy.
Not only are they asked to sit in that meeting room for sixty hours a month – sometimes a bit more, sometimes a bit less – they are also asked to take decisions and, when circumstances warrant this, to take initiatives. Also, once they have accepted the offer, there is no penalty for not showing up. They still are entitled to their $125,000 a year plus fringe benefits.
If the fifteen take a decision, 40 percent of the people in their community will be satisfied, and sixty percent will get mad at them – or the other way around. If they do not take any decision, all people grumble, but that is as far as it goes.
How many decisions will these fifteen people take in a year on average? If we asked economist Levitt this question his answer would most likely be zero or a number real close to that.
What if we changed the rules of the game again and told the fifteen people in the meeting room that their $125,000 would double for every decision they took?
True, this is an unlikely scenario, but the effect is highly predictable. The group of fifteen would be taking decisions all day long.
Unfortunately, this is not how a democracy works. The benefits that come with taking decisions that benefit the community are the same as the benefits that come with doing absolutely nothing. So maybe it is time to take a page from Levitt and Dubner’s book and start applying economics to politics.
This would inspire any parliament to become enormously pro-active to the benefit of all. Unfortunately, the decision about such a change of approach is in the hands of – you guessed it – politicians.

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