The Tragedy of the Commons

JDN 2457387

In a previous post I talked about one of the most fundamental—perhaps the most fundamental—problem in game theory, the Prisoner’s Dilemma, and how neoclassical economic theory totally fails to explain actual human behavior when faced with this problem in both experiments and the real world.

As a brief review, the essence of the game is that both players can either cooperate or defect; if they both cooperate, the outcome is best overall; but it is always in each player’s interest to defect. So a neoclassically “rational” player would always defect—resulting in a bad outcome for everyone. But real human beings typically cooperate, and thus do better. The “paradox” of the Prisoner’s Dilemma is that being “rational” results in making less money at the end.

Obviously, this is not actually a good definition of rational behavior. Being short-sighted and ignoring the impact of your behavior on others doesn’t actually produce good outcomes for anybody, including yourself.

But the Prisoner’s Dilemma only has two players. If we expand to a larger number of players, the expanded game is called a Tragedy of the Commons.

When we do this, something quite surprising happens: As you add more people, their behavior starts converging toward the neoclassical solution, in which everyone defects and we get a bad outcome for everyone.

Indeed, people in general become less cooperative, less courageous, and more apathetic the more of them you put together. K was quite apt when he said, “A person is smart; people are dumb, panicky, dangerous animals and you know it.” There are ways to counteract this effect, as I’ll get to in a moment—but there is a strong effect that needs to be counteracted.

We see this most vividly in the bystander effect. If someone is walking down the street and sees someone fall and injure themselves, there is about a 70% chance that they will go try to help the person who fell—humans are altruistic. But if there are a dozen people walking down the street who all witness the same event, there is only a 40% chance that any of them will help—humans are irrational.

The primary reason appears to be diffusion of responsibility. When we are alone, we are the only one could help, so we feel responsible for helping. But when there are others around, we assume that someone else could take care of it for us, so if it isn’t done that’s not our fault.

There also appears to be a conformity effect: We want to conform our behavior to social norms (as I said, to a first approximation, all human behavior is social norms). The mere fact that there are other people who could have helped but didn’t suggests the presence of an implicit social norm that we aren’t supposed to help this person for some reason. It never occurs to most people to ask why such a norm would exist or whether it’s a good one—it simply never occurs to most people to ask those questions about any social norms. In this case, by hesitating to act, people actually end up creating the very norm they think they are obeying.

This can lead to what’s called an Abilene Paradox, in which people simultaneously try to follow what they think everyone else wants and also try to second-guess what everyone else wants based on what they do, and therefore end up doing something that none of them actually wanted. I think a lot of the weird things humans do can actually be attributed to some form of the Abilene Paradox. (“Why are we sacrificing this goat?” “I don’t know, I thought you wanted to!”)

Autistic people are not as good at following social norms (though some psychologists believe this is simply because our social norms are optimized for the neurotypical population). My suspicion is that autistic people are therefore less likely to suffer from the bystander effect, and more likely to intervene to help someone even if they are surrounded by passive onlookers. (Unfortunately I wasn’t able to find any good empirical data on that—it appears no one has ever thought to check before.) I’m quite certain that autistic people are less likely to suffer from the Abilene Paradox—if they don’t want to do something, they’ll tell you so (which sometimes gets them in trouble).

Because of these psychological effects that blunt our rationality, in large groups human beings often do end up behaving in a way that appears selfish and short-sighted.

Nowhere is this more apparent than in ecology. Recycling, becoming vegetarian, driving less, buying more energy-efficient appliances, insulating buildings better, installing solar panels—none of these things are particularly difficult or expensive to do, especially when weighed against the tens of millions of people who will die if climate change continues unabated. Every recyclable can we throw in the trash is a silent vote for a global holocaust.

But as it no doubt immediately occurred to you to respond: No single one of us is responsible for all that. There’s no way I myself could possibly save enough carbon emissions to significantly reduce climate change—indeed, probably not even enough to save a single human life (though maybe). This is certainly true; the error lies in thinking that this somehow absolves us of the responsibility to do our share.

I think part of what makes the Tragedy of the Commons so different from the Prisoner’s Dilemma, at least psychologically, is that the latter has an identifiable victimwe know we are specifically hurting that person more than we are helping ourselves. We may even know their name (and if we don’t, we’re more likely to defect—simply being on the Internet makes people more aggressive because they don’t interact face-to-face). In the Tragedy of the Commons, it is often the case that we don’t know who any of our victims are; moreover, it’s quite likely that we harm each one less than we benefit ourselves—even though we harm everyone overall more.

Suppose that driving a gas-guzzling car gives me 1 milliQALY of happiness, but takes away an average of 1 nanoQALY from everyone else in the world. A nanoQALY is tiny! Negligible, even, right? One billionth of a year, a mere 30 milliseconds! Literally less than the blink of an eye. But take away 30 milliseconds from everyone on Earth and you have taken away 7 years of human life overall. Do that 10 times, and statistically one more person is dead because of you. And you have gained only 10 milliQALY, roughly the value of $300 to a typical American. Would you kill someone for $300?

Peter Singer has argued that we should in fact think of it this way—when we cause a statistical death by our inaction, we should call it murder, just as if we had left a child to drown to keep our clothes from getting wet. I can’t agree with that. When you think seriously about the scale and uncertainty involved, it would be impossible to live at all if we were constantly trying to assess whether every action would lead to statistically more or less happiness to the aggregate of all human beings through all time. We would agonize over every cup of coffee, every new video game. In fact, the global economy would probably collapse because none of us would be able to work or willing to buy anything for fear of the consequences—and then whom would we be helping?

That uncertainty matters. Even the fact that there are other people who could do the job matters. If a child is drowning and there is a trained lifeguard right next to you, the lifeguard should go save the child, and if they don’t it’s their responsibility, not yours. Maybe if they don’t you should try; but really they should have been the one to do it.
But we must also not allow ourselves to simply fall into apathy, to do nothing simply because we cannot do everything. We cannot assess the consequences of every specific action into the indefinite future, but we can find general rules and patterns that govern the consequences of actions we might take. (This is the difference between act utilitarianism, which is unrealistic, and rule utilitarianism, which I believe is the proper foundation for moral understanding.)

Thus, I believe the solution to the Tragedy of the Commons is policy. It is to coordinate our actions together, and create enforcement mechanisms to ensure compliance with that coordinated effort. We don’t look at acts in isolation, but at policy systems holistically. The proper question is not “What should I do?” but “How should we live?”

In the short run, this can lead to results that seem deeply suboptimal—but in the long run, policy answers lead to sustainable solutions rather than quick-fixes.

People are starving! Why don’t we just steal money from the rich and use it to feed people? Well, think about what would happen if we said that the property system can simply be unilaterally undermined if someone believes they are achieving good by doing so. The property system would essentially collapse, along with the economy as we know it. A policy answer to that same question might involve progressive taxation enacted by a democratic legislature—we agree, as a society, that it is justified to redistribute wealth from those who have much more than they need to those who have much less.

Our government is corrupt! We should launch a revolution! Think about how many people die when you launch a revolution. Think about past revolutions. While some did succeed in bringing about more just governments (e.g. the French Revolution, the American Revolution), they did so only after a long period of strife; and other revolutions (e.g. the Russian Revolution, the Iranian Revolution) have made things even worse. Revolution is extremely costly and highly unpredictable; we must use it only as a last resort against truly intractable tyranny. The policy answer is of course democracy; we establish a system of government that elects leaders based on votes, and then if they become corrupt we vote to remove them. (Sadly, we don’t seem so good about that second part—the US Congress has a 14% approval rating but a 95% re-election rate.)

And in terms of ecology, this means that berating ourselves for our sinfulness in forgetting to recycle or not buying a hybrid car does not solve the problem. (Not that it’s bad to recycle, drive a hybrid car, and eat vegetarian—by all means, do these things. But it’s not enough.) We need a policy solution, something like a carbon tax or cap-and-trade that will enforce incentives against excessive carbon emissions.

In case you don’t think politics makes a difference, all of the Democrat candidates for President have proposed such plans—Bernie Sanders favors a carbon tax, Martin O’Malley supports an aggressive cap-and-trade plan, and Hillary Clinton favors heavily subsidizing wind and solar power. The Republican candidates on the other hand? Most of them don’t even believe in climate change. Chris Christie and Carly Fiorina at least accept the basic scientific facts, but (1) they are very unlikely to win at this point and (2) even they haven’t announced any specific policy proposals for dealing with it.

This is why voting is so important. We can’t do enough on our own; the coordination problem is too large. We need to elect politicians who will make policy. We need to use the systems of coordination enforcement that we have built over generations—and that is fundamentally what a government is, a system of coordination enforcement. Only then can we overcome the tendency among human beings to become apathetic and short-sighted when faced with a Tragedy of the Commons.

How following the crowd can doom us all

JDN 2457110 EDT 21:30

Humans are nothing if not social animals. We like to follow the crowd, do what everyone else is doing—and many of us will continue to do so even if our own behavior doesn’t make sense to us. There is a very famous experiment in cognitive science that demonstrates this vividly.

People are given a very simple task to perform several times: We show you line X and lines A, B, and C. Now tell us which of A, B or C is the same length as X. Couldn’t be easier, right? But there’s a trick: seven other people are in the same room performing the same experiment, and they all say that B is the same length as X, even though you can clearly see that A is the correct answer. Do you stick with what you know, or say what everyone else is saying? Typically, you say what everyone else is saying. Over 18 trials, 75% of people followed the crowd at least once, and some people followed the crowd every single time. Some people even began to doubt their own perception, wondering if B really was the right answer—there are four lights, anyone?

Given that our behavior can be distorted by others in such simple and obvious tasks, it should be no surprise that it can be distorted even more in complex and ambiguous tasks—like those involved in finance. If everyone is buying up Beanie Babies or Tweeter stock, maybe you should too, right? Can all those people be wrong?

In fact, matters are even worse with the stock market, because it is in a sense rational to buy into a bubble if you know that other people will as well. As long as you aren’t the last to buy in, you can make a lot of money that way. In speculation, you try to predict the way that other people will cause prices to move and base your decisions around that—but then everyone else is doing the same thing. By Keynes called it a “beauty contest”; apparently in his day it was common to have contests for picking the most beautiful photo—but how is beauty assessed? By how many people pick it! So you actually don’t want to choose the one you think is most beautiful, you want to choose the one you think most people will think is the most beautiful—or the one you think most people will think most people will think….

Our herd behavior probably made a lot more sense when we evolved it millennia ago; when most of your threats are external and human beings don’t have that much influence over our environment, the majority opinion is quite likely to be right, and can often given you an answer much faster than you could figure it out on your own. (If everyone else thinks a lion is hiding in the bushes, there’s probably a lion hiding in the bushes—and if there is, the last thing you want is to be the only one who didn’t run.) The problem arises when this tendency to follow the ground feeds back on itself, and our behavior becomes driven not by the external reality but by an attempt to predict each other’s predictions of each other’s predictions. Yet this is exactly how financial markets are structured.

With this in mind, the surprise is not why markets are unstable—the surprise is why markets are ever stable. I think the main reason markets ever manage price stability is actually something most economists think of as a failure of markets: Price rigidity and so-called “menu costs“. If it’s costly to change your price, you won’t be constantly trying to adjust it to the mood of the hour—or the minute, or the microsecondbut instead trying to tie it to the fundamental value of what you’re selling so that the price will continue to be close for a long time ahead. You may get shortages in times of high demand and gluts in times of low demand, but as long as those two things roughly balance out you’ll leave the price where it is. But if you can instantly and costlessly change the price however you want, you can raise it when people seem particularly interested in buying and lower it when they don’t, and then people can start trying to buy when your price is low and sell when it is high. If people were completely rational and had perfect information, this arbitrage would stabilize prices—but since they’re not, arbitrage attempts can over- or under-compensate, and thus result in cyclical or even chaotic changes in prices.

Our herd behavior then makes this worse, as more people buying leads to, well, more people buying, and more people selling leads to more people selling. If there were no other causes of behavior, the result would be prices that explode outward exponentially; but even with other forces trying to counteract them, prices can move suddenly and unpredictably.

If most traders are irrational or under-informed while a handful are rational and well-informed, the latter can exploit the former for enormous amounts of money; this fact is often used to argue that irrational or under-informed traders will simply drop out, but it should only take you a few moments of thought to see why that isn’t necessarily true. The incentives isn’t just to be well-informed but also to keep others from being well-informed. If everyone were rational and had perfect information, stock trading would be the most boring job in the world, because the prices would never change except perhaps to grow with the growth rate of the overall economy. Wall Street therefore has every incentive in the world not to let that happen. And now perhaps you can see why they are so opposed to regulations that would require them to improve transparency or slow down market changes. Without the ability to deceive people about the real value of assets or trigger irrational bouts of mass buying or selling, Wall Street would make little or no money at all. Not only are markets inherently unstable by themselves, in addition we have extremely powerful individuals and institutions who are driven to ensure that this instability is never corrected.

This is why as our markets have become ever more streamlined and interconnected, instead of becoming more efficient as expected, they have actually become more unstable. They were never stable—and the gold standard made that instability worse—but despite monetary policy that has provided us with very stable inflation in the prices of real goods, the prices of assets such as stocks and real estate have continued to fluctuate wildly. Real estate isn’t as bad as stocks, again because of price rigidity—houses rarely have their values re-assessed multiple times per year, let alone multiple times per second. But real estate markets are still unstable, because of so many people trying to speculate on them. We think of real estate as a good way to make money fast—and if you’re lucky, it can be. But in a rational and efficient market, real estate would be almost as boring as stock trading; your profits would be driven entirely by population growth (increasing the demand for land without changing the supply) and the value added in construction of buildings. In fact, the population growth effect should be sapped by a land tax, and then you should only make a profit if you actually build things. Simply owning land shouldn’t be a way of making money—and the reason for this should be obvious: You’re not actually doing anything. I don’t like patent rents very much, but at least inventing new technologies is actually beneficial for society. Owning land contributes absolutely nothing, and yet it has been one of the primary means of amassing wealth for centuries and continues to be today.

But (so-called) investors and the banks and hedge funds they control have little reason to change their ways, as long as the system is set up so that they can keep profiting from the instability that they foster. Particularly when we let them keep the profits when things go well, but immediately rush to bail them out when things go badly, they have basically no incentive at all not to take maximum risk and seek maximum instability. We need a fundamentally different outlook on the proper role and structure of finance in our economy.

Fortunately one is emerging, summarized in a slogan among economically-savvy liberals: Banking should be boring. (Elizabeth Warren has said this, as have Joseph Stiglitz and Paul Krugman.) And indeed it should, for all banks are supposed to be doing is lending money from people who have it and don’t need it to people who need it but don’t have it. They aren’t supposed to be making large profits of their own, because they aren’t the ones actually adding value to the economy. Indeed it was never quite clear to me why banks should be privatized in the first place, though I guess it makes more sense than, oh, say, prisons.

Unfortunately, the majority opinion right now, at least among those who make policy, seems to be that banks don’t need to be restructured or even placed on a tighter leash; no, they need to be set free so they can work their magic again. Even otherwise reasonable, intelligent people quickly become unshakeable ideologues when it comes to the idea of raising taxes or tightening regulations. And as much as I’d like to think that it’s just a small but powerful minority of people who thinks this way, I know full well that a large proportion of Americans believe in these views and intentionally elect politicians who will act upon them.

All the more reason to break from the crowd, don’t you think?