Tuesday, January 10, 2006

The Economics of Vice and Virtue

(Condensed from my Hidden Order)

Suppose I am strong, fierce, and known to have a short temper with people who do not do what I want. I benefit from that reputation; people are careful not to do things that offend me. Beating someone up is expensive; he might fight back, and I might get arrested. But if my reputation is bad enough, I may not have to beat anyone up.

Most of the time I get my own way; once in a while I have to pay for it. I have no monopoly on my strategy; there are other short-tempered people in the world.

I get into a conversation in a bar. The other guy fails to show adequate deference to my opinions. I start pushing. He pushes back. When it is over, one of us is standing there with a broken beer bottle in his hand and a surprised expression on his face. The other is lying dead on the floor.

If almost nobody follows this strategy, such confrontations are unlikely, so on average the strategy pays. Since it pays, other people adopt it. As the number increases, the risk of lethal brawls rises and the payoff to being a bully falls. Equilibrium is reached when the risk from opponents who do not back down just balances the gain from opponents who do, making the alternative strategies–bully and wimp in my story, hawk and dove in the version told by evolutionary biologists–equally profitable.

So far I have assumed an involuntary association between the bully and his victims; he is simply an unpleasant part of their environment. As long as that is the case, there is a payoff to an aggressive personality–provided that there are not too many of them. That is not true for voluntary associations; someone who can choose whether or not to associate with the bully will choose not to. Informing a potential employer that if, having hired you, he fails to treat you right you will beat him up is not likely to get you the job.

In voluntary associations, there is a payoff to a different commitment strategy. Someone known to be considerate, courteous, the sort of person who never takes advantage of other people, who would never steal even if nobody was watching, is a desirable employer, employee, partner, or spouse. To the extent that other people can correctly read your personality, it is in your selfish interest to train yourself to be a nice guy. Hiring honest people saves not only the cost of theft but also the cost of guarding against theft–and that saving will show up in the difference between what honest and dishonest people get paid.

Here again, we would expect something like a hawk-dove equilibrium, although for a different reason. If almost everyone is honest, it is not worth paying much attention to how honest any particular person is, so a strategy of hypocrisy–appearing to be honest but cheating when you think you can get away with it–is profitable. As the number of hypocrites increases, so does the care other people take to identify them. The equilibrium ratio of hypocrites to honest men is reached when the two strategies have the same payoff.

This approach to understanding why people are–or are not–nice has an interesting implication. Being a bad person, an aggressive personality, is profitable in involuntary interactions. Being a good person is profitable in voluntary interactions. We would expect to see nicer people–more honesty and fewer bullies–in a society where most interactions are voluntary than in one where most are involuntary.

Another implication is that crimes of passion, such as the barroom brawl described above, are deterrable. I will leave the argument as an exercise for my readers.


Michael Yuri said...

Of course, this raises the nature/nurture question. To what extent is the choice of strategy (bully vs. wimp) driven by genetics vs. environment?

This makes a big difference on the timescale over which we would expect this change to occur.

Anonymous said...

Hmmm. The trivial answer is that punishment raises the cost of bar brawling, but there must be more to it than that.

Anonymous said...

You created just two categories in order to make your point clear, but many others exist. I have always taken pride in being the nice guy who took on bullies. I don't understand why, but I always got a great deal of satisfaction beating up known bullies. The more people feared them, the greater the satisfaction. But I worked hard to be as nice as possible to others.

Anonymous said...

Harsher punishment raises the cost of adopting the bullying strategy. This is true whether it's based on a higher portion of other bullies who fight you, a higher portion of non-bullies who won't back down from a fight with you, or policemen that show up immediately upon your shoving someone around and drag you off in irons.

I suspect this is a place where bounded rationality changes the conclusions, though. I don't have much evidence for this, but I've always suspected (and occasionally observed) that budding young criminals will slowly develop their bullying and predatory strategy over years, and the authorities usually mostly ignore it until someone gets killed and badly hurt. So you get some sequence where this guy is constantly getting into fights, beating people up, hurting them, slapping around his girlfriend, etc. And he periodically gets into moderate amounts of trouble, but nothing too harsh. And then one day, he kills someone in a fight, or instead of just slapping around some girl who won't put out, he rapes her. Then, he goes to prison for twenty years.

I suspect that most people adopt their strategy over many years, and so harsh punishments for the wrong strategy early will deter much worse behavior and punishments later. If the penalty for those early steps were really unplesant--maybe several months at hard labor, or a public flogging, or some such genuinely harsh thing--I think we'd deter people from adopting that strategy.

I also suspect one reason why rehabilitation of criminals is so hard is that once you've fallen upon a strategy that works, it's just always hard to completely abandon it. This is probably a good general strategy in an evolutionary sense (once someone had invested the energy to become a good hunter or fisherman or flint knapper or whatever, it must have almost always been a good idea to resume those practices as soon as they were available). But it's not such a great strategy for people trying to stop eating like 18 year old football players, or trying to stop using cigarettes to punctuate their lives, or trying to "go straight" after a reasonably successful criminal career.

Anonymous said...

This comments an essay of mine, "Why it is Foolish to Treat Good People Badly", very nicely.

If you (say, a state) begin "punishing" honest people, you switch them from a voluntary situation to an involuntary one. At this point they maximize their utility by becoming dishonest. Oops!

David Friedman said...

"Hmmm. The trivial answer is that punishment raises the cost of bar brawling, but there must be more to it than that."

Essentially correct, but one can make it more precise. Do the algebra to calculate the equilibrium fraction of hawks. If you raise the cost of a hawk/hawk interaction, the equilibrium number of hawks goes down.

John Cowan said...

The trouble with this punishment strategy is that there are no neutral punishers; the only place to look for people who can deliver punishment efficiently is among the bully population. So what you end up with is two kinds of bullies, those who belong to a union, and those who don't. In general the former will be far worse than the latter.

John T. Kennedy said...

What does this have to do with vice and virtue? Are the hawks less virtuous than the doves? Is a virtue "whatever works for you" or is there another standard implied?

Anonymous said...

"Do the algebra to calculate the equilibrium fraction of hawks."

Do algebra? I can barely spell it. Still, a challenge is a challenge ....

Anonymous said...

Two related points. First, another good example of strategies whose correctness varies in different situations is the reputation/honesty connection. That is, in place where reputations are widely known, it pays to be honest. Hence why Romani cheat strangers but not each other, and why people from small towns are more honest than those from big cities.

The second, and related to the question of nature/nurture, is that there seems to be some evidence of "tuning knobs" built into our personalities, that set behavior based on the child's environment. This is partially in agreement with standard economics, as these knobs are set so as to exploit the environment, but only partially, as they are then fixed for the individual's adult life.

Which has interesting policy implications...

Anonymous said...

One shouldn't forget the important issue of time preference. Many short tempered, violent people know that violent behaviour can lead to trouble, but they don't care due to high time preference. To them beating the hell out of the other person now more than compensates for the possibility of a prison sentence in the future.
The only way to deal with high time preference criminals is through self defence and swift retaliation. If a rapist sees a possible target, he doesn't care about the possibility of being caught in the future, all he cares is his immediate gratification. However, if his target sprays him with pepper spray causing him considerable pain, after which he is arrested and held without bail, he may think twice about doing it in the future.
Unfortunately much of Europe, especially the UK, follows the opposite approach. Most basic self defence weapons are outlawed. Violent criminals, if caught, face short prison sentences some time in the distant future.

Anonymous said...

If you raise the cost of a hawk/hawk interaction, the equilibrium number of hawks goes down.
Allowing concealed carry would certainly have this effect.