69. Selfishness, Altruism and Rationality, Part 2

Note: This post is the sixty-ninth in a series about government and commercial ethics. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs which inspired this series.

This week's topic is a continuation of last week's post on the book, Selfishness, Altruism and Rationality, by Howard Margolis

In the last post, we talked about how Margolis explained the failings of the traditional rational choice theory to explain human behaviour in situations where self-interest conflicted with group interest. This is a pretty common observation, generally taken for granted outside of economic circles, but Margolis goes a step further and proposes an alternative model of human motivation.

Margolis calls his model the Fair Share model and it is based on the notion that people feel a desire to 'contribute their fair share' to the public welfare. He describes the underlying motivation of people in this model as follows:

"The larger the share of my resources that I have spent unselfishly, the more weight I give to my selfish interests in allocating marginal resources. On the other hand, the larger the benefit I can confer on the group compared with the benefit from spending marginal resources on myself, the more I will tend to act unselfishly."

Margolis imagines that a person (who he calls 'Smith') contains two separate components, 'G-Smith' who values (Smith's perception of) the general welfare, and 'S-Smith' who values only Smith's personal welfare. Smith stays in equilibrium by adjusting the level of his spending on the public interest so that the marginal value of more public spending by Smith (to G-smith) equals the marginal value of more selfish spending (to S-Smith).

Margolis argues that, from an evolutionary point of view, it would be easier for this sort of limited, 'fair share' altruism to be maintained over time, because it would be less vulnerable to being exploited by selfish people than an unlimited altruism that didn't keep track of how much a person had already sacrificed their personal interests for the public good.

Margolis further notes that,

"The notion that human beings might have the kind of dual preference structure posited by this study is very old, going back at least to Plato's distinction between man as a private individual and man as citizen."

In chapter 6, Margolis goes into more detail on how his model differs from the classical rational choice model, and helpfully unpacks some of the assumptions which are embedded within the rational choice model (but often go unstated or unnoticed):

1. Smith can be treated as narrowly self-interested
2. Smith's utility function is a goods function (i.e. he only cares about what goods people possess, not how they got them or what role he played in determining the allocation)
3. Smith chooses in conformity with the principle of consumer sovereignty (i.e. Smith thinks what's best for society is that everybody get what they wants, as opposed to Smith having a vision of what's best for society which might conflict with what other people want).
4. Smith has only one utility function (as opposed to having one for his own interests and one for the social interest).

As Margolis explains, economists, if confronted with these assumptions might deny that they are a necessary part of the model, but after their denial, they will then go right back to building models and making predictions that only make sense if those assumptions are there.

He also explains how, in the marketplace, where the public interest and private interest are in alignment (subject to all the caveats he have discussed in this series), the difference between the predictions of his 'fair share' model and a traditional rational choice model that posits self-interested behaviour by all participants is not that big. It is primarily in political situations where the differences will be clearer, because here the contrast between private and social objectives is sharper.

If you've had the same struggles as I have over the years trying to pin down how economists come to the (often wrong-headed) conclusions they do, this chapter is a must read. Margolis is that rare bird who knows enough economics to be able to explain things clearly using the language of economics but has still retained enough common sense to be interested in models of people as they actually are as opposed to making unrealistic assumptions so as to have a model that is easier to work with mathematically.

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Later on, Margolis talks about how his fair share model explains why people might act differently in different circumstances, pursuing their own interest in one and the public interest in another,

"If I am a producer facing reasonably competitive markets (even the experience of Ford in trying to promote safety features in automobiles in the mid 1950-s is instructive here), then I will scarcely be in a position to do anything very different than produce what the market seems to want. Even if my choices affect only me and my customers, I will not have any customers to benefit unless I offer them things they want at a price they are willing to pay. If there are external effects (environmental side-effects), the dilemma is even worse.

However, if I am in a senior position in my government, my decisions on public matters often affect society in a large way. This being so, there will be no necessary inconsistency between my behaving as a narrow profit maximizer (to a good approximation) as a private businessman; as a rather casual decision maker, as a voter, and as a very serious decision maker, working very hard and feeling great personal responsibility for the social effects of my decisions as a high public official.

...I wish to say enough here to indicate why [James] Buchanan's and [Gord] Tullock's 'paradox of bifurcated man' seems, from the [Fair Share model] view, to reflect a mistaken assumption that an internally consistent model could not account for a disposition for the same individual to behave in a very public spirited way in some circumstances and as a profit-maximizing economic man in other contexts."

Now this just seems like common sense to me, but then consider the surprise in the reactions of experimenters when they found, exactly as Margolis and his model would have predicted, that when they ran the exact same Prisoner's Dilemma experiment on the same people and only changed the name (in one case 'Wall Street Game' in the other 'Community Game') that people behaved very differently. As the abstract states,

"The results of these studies showed that the relevant labeling manipulations exerted far greater impact on the players’ choice to cooperate versus defect—both in the first round and overall—than anticipated by the individuals who had predicted their behavior." (emphasis added).

My one disagreement with Margolis in the passage above is that after stressing the role played by competition in preventing public interested behaviour in the marketplace, he then fails to note how the lack of competition in the public sector is an essential component of allowing the pursuit of the public interest there (although to be fair, it is somewhat implied in the text).

Finally, Margolis offers some interesting speculation on how caste might be partially explained by the fair share model. In the early stages of society, people who are more disposed towards public action would be more willing to undertake key tasks such as organizing irrigation schemes or a defensive army. In successful societies, these actions lead to large gains for the whole society, and those who were among the early organizers of the action would claim some of that gain for themselves, leading to greater wealth and influence. But under the fair share model, the more wealth you have, the more resources you will donate to the public interest. Richer people have more resources to donate in the first place, plus they donate a higher proportion of their resources, so there is a positive feedback whereby people with more power put more effort into the public realm which gets them more power in return and so on.

As Margolis says,

"As generations pass, the resulting division between those who manage and defend the state (often enough at real personal cost and risk) and those who labor comes to seem to accord with the natural order. What gives that presumption special potency is that there is some substance - something more than a self-serving myth - in the presumption that the noble and commoner are motivated in different ways. In terms of [the Fair Share model], that presumption is false at its root [because all people have an interest in their own welfare and the public welfare] but nevertheless consistent with observed behaviour. Our modern colloquial usage of words like 'noble' and 'peasant' is an anachronism but not necessarily a libel."

If you like economics but generally find economists irritating, and you are interested in the public welfare and the interaction between the two topics, this is a great book.

68. Selfishness, Altruism and Rationality, Part 1

Note: This post is the sixty-eighth in a series about government and commercial ethics. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs which inspired this series.

This week's topic is the book, Selfishness, Altruism and Rationality, by Howard Margolis

Margolis' goal in this book is to extend the Economic Theory of Rational Choice so that it covers political situations as well as Economic ones.

He opens the book with a quote from James Coleman which eloquently outlines the problem, while also covering our now familiar choice between two versions of self-interest,

"Classical economic theory always assumes that the individual will 'act in his interest'; but it never examined carefully the entity to which 'his' refers. Often, as when households are taken as the unit for income and consumption, it is implicitly assumed that 'the family' or 'the household' is the entity whose interest is being maximized. Yet this is without theoretical foundation, merely a convenient but slipshod device. In this case, as in many others (e.g. when a man is willing to contribute much, even his life, to national defense, rather than use a strategy that will push the cost onto others), men act as if the 'his' referred to some entity larger than themselves. That is, they appear to act in terms, not of their own interest, but of the interest of a collectivity or even of another person. Indeed, if they did not do so, the basis for society could hardly exist.

Yet how can this be reconciled with the narrow premise of individual interest ... we could simply solve the problem by fiat, letting 'his' refer to whatever entity the individual appeared to act in the interest of. This would obviously make the theory trivially true, and never disconfirmable. A more adequate solution is one which states the conditions under which the entity in whose interests he acts will be something other than himself."

We saw in the last post that James Buchanan was willing to settle for a theory that based human motivation solely on the desire for material gain, arguing that the desire for material gain is always present to some degree in people.

But Margolis isn't willing to settle so easily,

"A satisfactory theory of social choice requires a model of individual choice that is consistent with the way human beings are observed to behave. Yet, even after a generation of work on the problem of applying the economic 'rational choice' perspective to social choice, often leading to striking results, this fundamental problem remains unresolved. We still lack a model that accommodates (without fudging) such obvious observations as that citizens bother to vote and do not always cheat when no one is looking. A resolution of this difficulty can be expected to require some departure from conventional assumptions."

Margolis goes on to indicate that, in his opinion, the main difference between situations which can modelled fruitfully using the traditional model and situations requiring a new model is that situations where the old model works are economic in nature whereas situations where a new model is required are political in nature (echoes of Mancur Olson specifically indicating that this theories on collective action only applied to economic groups, not groups formed for no-economic reasons.

Says Margolis,

"This classical model is profoundly shaped by its root concern with the problems of the marketplace. But in politics we are dealing with goods allocated largely through some coercive process, not through voluntary market transactions; and political 'goods' (such as justice) are often inherently unmarketable. Nonmarket effects (externalities) which are aberrations - market failures, which one seeks to correct - for most economists are the central feature of political life for political scientists.

We can expect that Samuelson's notion of public goods (which can best be understood as a generalization of the notion of externalities) would play a central role in any viable formal theory of politics, and indeed that is the case. It is not too strong a statement to say that societies, and hence politics exist because public goods exist."

Margolis spends a chapter illustrating his argument that the classical rational choice models fails to handle political situations via a series of 3 examples:

* Voting
* Repeated Prisoner's Dilemmas
* Public Goods

In the case of voting, the rational choice model fails to explain why people might go the trouble of voting even when they know their vote won't affect the outcome.

In the case of the repeated Prisoner's Dilemma, the model fails to explain why people will generally cooperate even though on any given iteration they could gain by defecting against the other player in the dilemma.

In the case of public goods, the model fails to explain why people will make contributions to things that are publicly available to everyone. Margolis asks us to imagine a hypothetical man named Smith who is planning a $10 donation to his favourite charity. The classical economic model says that Smith would do this because he wants the charity to have $10 more available to it than it does currently.

But now imagine Smith finds out that someone else has just donated $10 to the charity. Under the classical model, Smith, realizing that his favourite charity is now $10 richer just as he wanted it to be, no longer feels a need to make a donation.

Of course in reality there may be some relationship between how much money a charity has raised and how much people contribute, but it is nowhere near this strong a relationship. Clearly there must be something more to Smith's motivation than simply wanting the charity to be $10 richer, but the classical model has no answer to what that might be.

Margolis argues that there are two altruistic motivations that need to be taken into consideration. We have an altruistic motivation based on wanting other people to have more, and an altruistic motivation based on wanting to contribute our fair share (what Margolis calls 'participation').

Margolis also notes that all of his examples are prisoner's dilemma type situations, which is not surprising since the Prisoner's Dilemma is the formalization of situations where what is in the self-interest of participants is opposed to the group interest.

In the next post we will look at the solution that Margolis proposes in order to create a model of rational choice that can model human behaviour accurately in the case of prisoner's dilemma / public goods type situations.

25. Hyperbolic Discounting

"The first beast that will appear
will entice us with money and fame.
If you listen long enough
you'll forget there's anything else.
Tie me to the mast
of this ship and of this band.
Tie me to the greater things
the people that I love."



The prototypical hyperbolic discounter was Odysseus. Ahead of time, he knew that he preferred being alive to hearing the song of the sirens, but he knew that once he heard the siren's song, his preferences would switch and he would be lured to his death by their singing. The only way to hear their song and not fall into their trap was to take preventative measures, tying himself to the mast and instructing his shipmates not to set him free.

Here is how Wikipedia defines 'hyperbolic discounting':

"In behavioral economics, hyperbolic discounting refers to the empirical finding that people generally prefer smaller, sooner payoffs to larger, later payoffs when the smaller payoffs would be imminent. However, when the same payoffs are both more distant in time, people tend to prefer the larger outcome, even though the time lag from the smaller to the larger would be the same as before."

As always, an example is helpful.

Say I offer you a choice between $50 now, and $100 one year from now. A lot of people will take the $50 now.

Now say I offer you $50 in five years or $100 in six years. A lot of the people who took the $50 now instead of $100 one year from now, will decide in this case to wait the extra year for the extra $50, choosing the $100 in year 6.

Even though the difference in the payout ($50) and the difference in time (one year) is the same, people have different preferences depending on how imminent the choices are.

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It's generally accepted that given a choice between getting something sooner vs. later, sooner is better - after all, you could die before later comes! (plus, a bird in the hand is worth two in the bush). This process of putting less weight on things that are further into the future is known as 'discounting'.

Where there is disagreement is in the pattern of preferences - i.e. how people discount. It has been typical to model people's discounting using an exponential distribution.

In this model, the amount you discount for a certain size of time period always remains the same, regardless of how far into the future that time period is. So if I discount something that happens one year from now vs. something that happens now by 5%, then I will discount something that happens 10 years from now by 5% vs. something that happens 9 years from now (because in both cases, there is a one year time window between the two choices).

This type of discounting is so common (particularly in the world of finance) that it's sometimes a surprise to realize that there is any other way to do it.

However, experience with, and experiments on, people have demonstrated that many people actually employ a 'hyperbolic discounting' model (just ask the CEO of Money Mart!). The difference with the hyperbolic model is that you place a much higher discount rate on time periods that are near, and a lower discount rate on time periods that are far. One of the interesting consequences of this type of discounting is that ahead of time, when two potential events are at a distance, you may prefer one to another (going for a run, vs. eating a bag of potato chips, for example). However, once the events get closer in time, the short term payoff from the bag of chips may come to outweigh the longer term gain from going for a run. If you are self-aware enough to know your vulnerabilities, it may be possible to, like Odysseus, take preemptive measures (e.g. prayer - 'Lord, lead us not into temptation', or, more practically, not buying chips while at the grocery store).


Mathematically, the exponential function reads as: y = e^-rt

(note that isn't just any old e, it's this e)

t represents time and as it gets bigger, the negative exponent gets larger, meaning the value of the function gets smaller - this is the mechanism through which the future payoffs (with a larger t value) are valued less than more current payoffs (with a small t value).

r represents the rate at which the future payouts shrink in importance - the higher the r value, the more you value the present vs. the future.


The hyperbolic function looks like this: y = 1 / (1 + rt)

t again represents time, this time in the denominator of a fraction, so again as t gets bigger the payout gets smaller.

It's easier if you see both curves plotted on a chart.



Note how the hyperbolic function drops off suddenly and then levels out, while the exponential function is much steadier. It is the sharp change in slope of the hyperbolic function which leads to the pattern where you do something in the short term (when the curve is steep, and you just need to do something now and damn the consequences) but come to regret it later once you are no longer on the steep part of the curve.

On the off chance that anyone actually made it to the bottom of the post, you might be wondering what this has to do with ethics. If so, thinklink back to the model of rational behaviour that David Gauthier sketched out where whatever a person decided to do must be rational, given that that was their preference. Hyperbolic discounting muddies the waters considerably since it means that not only will a person's preferences not be stable over time, but they will be predictably unstable. I know that there are actions I can take ahead of time to prevent myself from falling victim to temptation or short term thinking.

Furthermore, it seems that ethics often seem connected to this type of behaviour. What is patience but an attempt to place more weight on the future instead of the present? What is courage but an attempt to place more weight on the distant future instead of the very near future? What is procrastination but a failure to place more weight on the future than the present? Unlike Gauthier, we can't simply dismiss this running battle between the present and the future in any consideration of ethics.


Note: Lots more reading on the topic here.

19. Morals By Agreement

This is the first of what should be a few posts on the book Morals by Agreement, by David Gauthier. Basically, it is a 'contractarian' attempt to show how rational self-interested utility maximizers in the standard economic mould would find it rational to agree to set of morals, or impartial constraints upon their actions.

Chapter 1 of Morals By Agreement by David Gauthier is an overview, which I'm going to skip. Instead, I'll start with chapter 2: 'Choice: Reason and Value', in which Gauthier sets out the basics of the view of the world that he is using for this book, a view that goes by the name 'rational choice theory'.

As Gauthier says,

"the theory of rational choice takes as primary a conception even more clearly subjective and behavioural than interest, the relation of individual preference"

The theory centres on individuals (as opposed to groups, or society as a whole) who take actions in order to achieve a certain outcome.

"the theory of rational choice defines a precise measure of preference, utility, and identifies rationality with the maximization of utility. ... "the theory of rational choice implicitly identifies value with utility"

"we shall develop a set of conditions for considered preference, which must be satisfied if utility, as a measure of preference, it to be identified with value, and the maximization of utility with rationality."

Utility is defined such that if a person prefers one outcome to another, the preferred outcome has greater utility. In this theory, the causation runs form preference to utility, meaning that you don't prefer one action to another because it has greater utility, one action has greater utility than another because it is preferred by you.


Gauthier spends the rest of the chapter on three notions:
1)What it means for a person's preferences to be 'considered'
2) What is means for a person's preferences to by 'coherent'
3) Why it is right to consider value as a subjective, relative measure.

1) Considered preference

Gauthier argues that a person's preferences are not rational if they say one thing and do another because their values are confused. As long as they do what say they want to do, we can assume that their preferences as revealed by their behaviour (the way that economists measure preference, typically) and their preferences as revealed by what they say, are in alignment, and rational (where rational means maximizing utility, and utility is maximized by doing what you prefer to do).

He then notes some of the ways that people's choices may fail to maximize their utility:
a) They might be misinformed. Someone might intend to drink a glass of wine but end up killing themselves because they didn't know the glass was poisoned.
b) They might be uninformed. Someone might choose a poor wine to go with his dinner because he has not experienced the more preferable combination of wine and food before.
c) Someone might agree to a proposal, only to instantly regret their impetuous agreement.

Gauthier then argues that if a preference is such that is is correctly informed and considered and that the action taken aligns with a person's stated intentions, then we can treat their actions as showing a 'considered preference' and meeting the demands of rational choice.

He then discusses and rejects three counter-arguments to this notion of rational choice as expressed via preference:

1) People may have preferences that contradict their interests
2) People may have preferences that cause them unhappiness
3) People may have preferences that cause them to maximize their present utility at the cost of their future utility.

Really, in my mind, these are all really the same objection, expressed in different ways, with the third expression being the clearest and most general. With that in mind, I will just repeat Gauthier's counter-argument to the consideration of prudence (i.e. not doing things you know you're going to regret later - the third point above).

"To maximize on the basis of one's present preferences need not be to ignore one's future preferences; one may take an interest in one's future well-being now, preferring a satisfying life to immediate gratification. But also, one may not. Our view is that prudence is rational for those who have a considered preference for being prudent, but not for those who on full reflection do not.

Our disagreement with the defender of prudence does not turn on whether future preferences are to be taken into account, but on how they are to be considered. We both agree that the unreflectively heedless person, who takes no thought about the morrow, chooses irrationally. One's considered preferences for possible outcome's of one's choices must take into account the expected outcomes on oneself. But one may choose to ignore those effects in what one does; one may choose to take no thought for the morrow. And this reflective heedlessness is not irrational on our view. The defender of prudence insists that rational choice must be directed to the maximal fulfillment of all our preferences, present and future, in so far as we are able to determine what they are. On our view, rational choice must be directed to the maximal fulfillment of our present considered preferences, where consideration extends to all future effects in so far as we may now foresee them."

The requirements for a person's preferences to be coherent in the sense that they will support a person's attempt to maximize their utility via their preferences are well-known and fairly prosaic. Wikipedia explains:

"Rational choice theory makes two assumptions about individuals' preferences for actions:

* Completeness – all actions can be ranked in an order of preference (indifference between two or more is possible).
* Transitivity – if action a1 is preferred to a2, and action a2 is preferred to a3, then a1 is preferred to a3.

Together these assumptions form the result that given a set of exhaustive and exclusive actions to choose from, an individual can rank them in terms of his preferences, and that his preferences are consistent."

Once we allow uncertainty into the results of our actions, there are some more requirements for coherent preference, the most questionable of which is that people are indifferent to uncertainty. i.e. if you offer me $10 for sure, or alternatively you will flip a coin and if its heads, you'll give me $21, and if its tails I get nothing, the theory assumes that people will always take the coin-flip, since the expected return (on average) is $10.50, which beats $10.

Finally, Gauthier defends his relative, subjective viewpoint.

There are two contrasts here:

1) A relative view in which what is 'good' or 'right' varies from person to person vs. an absolutist point of view in which what is 'good' or 'right' is the same for every person.

2) A subjective view in which the idea of 'rightness' or 'goodness' only exists in the presence of sentient beings vs. an objective view in which 'rightness' and 'goodness' are concepts that exist independently of whether there are any people around to actually act in a 'good' or 'right' way. In the objective view, the independent 'goodness' notion acts as a constraint upon the actions of the sentient beings (or ought to) whereas the subjective view sees no such independent constraint as existing.

Gauthier spends a few pages defending his contention that the 'true' viewpoint is the subjective and relative one, but to be honest, it's a bit too abstract for me to grasp, let alone summarize in a blog post.

Taking all this together, Gauthier note that under this rational choice framework, as long as a person's preferences are coherent (i.e. they don't prefer apples to pears, pears to peaches, and peaches to apples) and considered then we can't say that a person's preference is irrational. Even if a person preferred destroying the world to getting a bruise on their finger, that preference is still considered rational in this theory.

He concludes as follows,

"Value then, we take to be a measure of individual preference - subjective because it is a measure of preference and relative because it is a measure of individual preference. What is good is good ultimately because it is preferred, and it is good from the standpoint of those and only those who prefer it. ... Our concern is to demonstrate the possibility and the characteristics of a rational morality, given that value is itself subjective and relative."