Rationality, Optimum Crime, Individualism vs. Collectivism, and the Gambler’s Fallacy

UnknownThe Economist’s 5/10 issue* had a piece about the recently deceased Gary Becker – an economist and, really, sociologist. His work centered on the idea that “individuals maximize welfare as they conceive it.”

This “homo economicus” concept has taken a beating lately. Books like Dan Ariely’s Predictably Irrational show how our decision-making is skewed by illogical biases; and Daniel Gilbert’s Stumbling on Happiness how we’re bad at foreseeing what will make us happy. imagesThus, some trash free market economics because it supposedly assumes an economic rationality by market participants that doesn’t exist. And nanny-state policies are often premised on people not knowing their own best interests.

However, while of course we aren’t perfectly rational, nor are we perfectly irrational; we do have some idea of our own interests and desires, and the means to advance them. Hence one’s welfare is more likely enhanced by making choices to serve those interests and desires than if there is no choice. Moreover, Gary Becker importantly argued that maximizing welfare doesn’t just mean income. People understand that money isn’t everything. Health counts 10%.

images-3That was a joke. Actually, health counts a lot, and so do many other things (though money does help getting them). Again, people understand all this and live accordingly – even if not with computerlike rationality.

One sphere to which Becker applied this paradigm was crime. He doubted all crime is deviant or sociopathic, reckoning that some at least represents rational weighing of costs and benefits. While moral inhibitions do come into play, for many they’re not absolutes and can be overridden if the balance of payoff versus risk seems sufficiently favorable.

Unknown-1Becker also pondered crime’s costs. Crime, he realized, is akin to what economists call “rent seeking”—contending over the spoils of productive activity rather than creating new wealth. Conversely, rent-seekers trying to get government subsidization, to others’ cost (trade protectionism, for example) can be likened to robbers. The resources invested in all such activities (whether doing them or combating them) would be better spent on wealth producing efforts. And Becker also suggested there’s an optimal amount of crime in society – while it pays to get crime down to a low level, the cost of eradicating the last bit surely exceeds the benefit. (Certainly in the war on drugs, that excess is huge.)

Unknown-2Two pages later The Economist reported on a study suggesting why Westerners have a more individualistic psychology than collectivist-minded Asians. Led by Thomas Talhelm at the University of Virginia, it focused on whether the main crop has historically been wheat or rice. The relevant difference is that rice required about double the labor per calorie. This forced rice farmers to share labor, evolving a deeply rooted collectivist cultural ethos. And sure enough, the study found that, based on attitudinal questionnaire answers, a collectivist mentality in a locale correlates strongly with an agricultural history centered on rice as opposed to wheat.

Unknown-3The next page: gambling. Many believe in “winning streaks;” and also that bad luck is bound to reverse itself so that losses are recouped. The latter is known as the gambler’s fallacy; because statistics would instead predict reverting to the mean – i.e., “normal service resumed.” And in casinos, “normal service” means the house wins more than it loses (how else would they profit?).

Well, comes a study by Juemin Xu and Nigel Harvey finding, counter-intuitively, that winning streaks are real, while losing gamblers do even worse than reversion to the mean. That is, compared to what pure probability would predict, a win is more likely to be followed by a win, and a loss by a loss. How could that possibly be? The answer lies not in laws of probability, but in behavior. A winning better’s next bet has a tendency to be slightly more conservative and a loser’s next bet a little more reckless.

images-2This is why I read The Economist.

* I’m a little behind in posting these things, I have a backlog.

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5 Responses to “Rationality, Optimum Crime, Individualism vs. Collectivism, and the Gambler’s Fallacy”

  1. Andrew Semeiks Says:

    Maximizing one’s welfare is a tough concept, clear in the abstract but opaque in detail, especially when one does not have enough disposable income. One then has to continually weigh short term benefit versus long term benefit and usually short term wins out. How do you save for retirement when the baby needs new shoes or the roof needs repairing? Similarly, do you take the no future job that pays more now and forego the job with a future that pays less to start? These complexities abound when one discusses maximizing welfare or societal utilitarianism.

    Regarding retirement income, is there a role for the government, known as “we the people”, to force the public to save, knowing that many will not be able to sufficiently save on their own? Might there be room for a defined retirement benefit plan for all where all pay in, some die early and never collect, others live to a ripe old age and collect way more than they ever could have saved on their own. Or would it be better to force everyone to save their own bucket of money and decide individually how to invest it? Do libertarians (possibly even conservatives) believe that there is no role for the government in addressing old age security?

  2. rationaloptimist Says:

    Re your first paragraph, life is all about choices and trade-offs, for everyone. The point is that we bring a certain amount of rationality to these decisions — imperfect, to be sure, but not PERFECTLY imperfect. Giving people more scope to decide things for themselves must improve overall net welfare.
    Re your second paragraph, a good model is Chile, which some time back adopted a “private account” pension system (somewhat like what G.W. Bush proposed for U.S. Social Security), in which people have ownership of the assets (unlike current U.S. Soc. Sec.) and get to determine how they are invested. This seems to be working extremely well and the great majority of Chileans are pleased with it. Bush’s proposals were shot down in a firestorm of foolishness, full of hatred toward Wall Street (nobody would have been forced to invest their pensions in the stock market!), so this is probably a non-starter politically in America forevermore. Americans just don’t seem to understand that they do not have ownership of their Social Security “accounts” and what they are paid is entirely up to Congress.

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