Incentive Traps

There are two kinds of traps.

One relies on stealth – like pits covered by vines and branches.  Another involves some kind of bait, like a mousetrap.  No matter the type, we generally believe a trap is a bad thing.

I think we can ignore the stealthy traps as self-evident, (someone is taking advantage of us) but the baited traps are interesting.  Especially the ones that do not appear to be traps, or ones that have a long-term effect.

Is smoking harmful?  Yes.   Do some people smoke?  Also yes.  Why?

Because of hyperbolic discounting.  The satisfaction is immediate and the cost is far away so not very relevant.  We need to learn how to better value long-term costs.

Some are subtle.  Suppose you and I have a VISA card with no limit.  We each pay half the bill regardless of who spends the money.  In the beginning, it might work, but eventually one of us will discover that they can “win” by spending more than half.  Soon the other of us learns it and a catastrophic spending spree ensues.  We will both go broke. With certainty. That looks very much like how the government and the opposing parties behave once the voters find out that they can vote themselves goodies.

It is a trap with an incentive.  It looks like we can get something for nothing.  That never happens for long.  Like the mouse and the cheese.

There are many incentive traps.

  • Drug abuse
  • Teenage sex
  • Indolence and welfare
  • Gun violence and gangs
  • Despoiling the environment
  • Disrespect for each other

All work on the basis that there is a reward to participate, and a heavily discounted long term cost.

How should we deal with things like these?  Some insight from history might be useful.  An old incentive trap and its solution.

Semitic religions prohibit pork.  Why?

Trichinosis is the accepted reason, but trichinosis is a non-issue in arid places.  There must be another reason.  How about, pigs use lots of water and water is scarce.  There is a cruel choice.  Pork and despoiled, scarce water resources, or no pork.

The no pork option is hard to enforce because pork is a delicacy and some will avoid the rule unless the cost of doing so falls fully upon them alone.  If society bears most of the cost, then they will chance it.  Creating a law, by itself, does not guarantee compliance.  You may have noticed that cocaine and hand guns are prohibited and yet still readily available.

There must be a big prohibition.  One where the entire cost falls upon the miscreant.  Will, God says “NO!,” work.

Even if you do not believe in a supreme being, you can understand the idea that religious laws arose to suppress some behavior that was harmful to society as a whole and difficult to enforce upon individuals by conventional means.  Whether God delivered the laws is open to debate but they would likely have arisen anyway, but with some other, probably less effective, form of punishment.

Technology and culture have changed the background for the old laws.  For example, it is difficult today to tell for sure when a person is dead.  The technology creates some issues that ancient religious belief did not consider.  Is “pulling the plug” a violation of “Thou shalt not kill”?  More recently, consider the law involving whether a life insurer should pay the death benefit to the one who caused the death.

The problem is that society’s governing ethics and morals have not caught up to the technology.  We are stuck in political mode.  We have moral relativists.  You can pick your friends but you are stuck with your relativists.  (Sorry, the devil made me say it.)

We presently ignore that you get more of what you reward and less of what you punish.  We are entitled.  To our delusions if nothing else.

As in ancient times, could solutions derived from, or implemented through, religion help us?

Possibly.  Religion has been around for a long time.  Evolution promotes the survival of what works and promotes the destruction of what does not.  Religion must work or it would have disappeared.   Things that don’t work don’t last.  Therefore, evolution proves that religion has value.  How ironic.

Let’s at least start the discussion and recognize all the possible viewing points.  Religious thinkers should be at the table, but if they see the problem in an old context, we will ignore them.  Maybe “God says NO!” is the answer, but maybe not.  Will you be surprised if the religious solution turns out to be the method that works?

In the interim, be nice.  Do no harm.  That is what all the laws boil down to, anyway.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Follow on Twitter @DonShaughnessy

3 Comments on “Incentive Traps

  1. Pingback: No One Party Can Govern All Of The Time | moneyFYI

  2. Pingback: Change Ahead? | moneyFYI

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