What is a Perverse Incentive?

The fundamental lesson of economics is that people respond to incentives, while the driving insight of psychology is that people respond to positive or negative reinforcement. The two conclusions are very similar in their implications, but economics is focused primarily on money while psychology places its emphasis on love and attachment. Both incentives and reinforcements depend on the logic of cause and effect. Do this and get that.

The desire for money, love, respect, and leisure are some of the most powerful drivers of behavior that any of us will ever experience.  No one would disagree that the need to avoid the opposites of these rewards, being death, neglect, scorn and thankless toil, is an equally powerful motivator. The incentives structure of positive and negative reinforcements drive our behavior in just about any situation we’ll find ourselves in.

Given the corollaries between incentives and reinforcements, it’s tempting to assume that a perverse incentive would be the same thing as a negative reinforcer. It’s a bit more complicated than that. With negative reinforcement, you deter a behavior by punishing it. A perverse incentive, on the other hand, is an incentive to do something that has an unintended result that is contrary to the interest of the person naming their terms.

If I reward you for doing something a lot, you will be incentivized to inflate that number at all cost, outcome be damned. Your incentive to do the right this is perverted by the incentive to do the expedient thing. In business, an unfortunate example of this is a CEO’s whose salary is tied to the stock price company initiating company-wide lay-offs in order to revive a faltering stock price. In history, an illustrative example took place in Hanoi, under French colonial rule, where a program that paid villagers a bounty for each rat tail handed in was intended to exterminate rats led instead to the farming of rats by those citizens.

Economics is particularly bad at teaching empathy, and that’s the attitude you need to avoid setting up a perverse incentive for someone. Before deciding how you’ll reward or punishing someone else’s behavior, it’s helpful to think about how you’d react to the given reinforcers if you were the person you’re incentivizing. Chances are, your needs aren’t that much different from theirs.

 

What is a Meme?

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In 2015, you’re likely to think of a ‘meme’ as a photo with a funny caption that you see on the internet. The word was actually coined in the mid-70’s by the evolutionary biologist Richard Dawkins to describe any idea that’s worth imitating.

Dawkins came up with the word ‘meme’ by shortening the Greek word mimeme (to imitate) to sound like ‘gene’. Just as the DNA molecule of the gene is the smallest unit of biological replication, the meme is the simplest unit of cultural replication. Some examples are tunes, ideas, catch-phrases, clothing fashions, and ways of making pots or of building arches. The ‘catchiness’ of any given idea over other related ones is the analogue to biological natural selection.

Any idea that transmits culture from one mind to another is a meme: Joining Facebook is a meme. Having a smartphone is a meme. Vegetarianism is a meme. Nationalism is a meme. Racism is a meme. Political correctness is a meme. Philosoraptor is a meme.

Passing on our genes and ideas is the closest we can come to immortality:

I have been a bit negative about memes, but they have their cheerful side as well. When we die there are two things we can leave behind us: genes and memes. We were built as gene machines, created to pass on our genes. But that aspect of us will be forgotten in three generations. Your child, even your grandchild, may bear a resemblance to you, perhaps in facial features, in a talent for music, in the color of her hair. But as each generation passes, the contribution of your genes is halved. It does not take long to reach negligible proportions. Our genes may be immortal but the collection of genes that is any one of us is bound to crumble away. Elizabeth II is a direct descendant of William the Conqueror. Yet it is quite probable that she bears not a single one of the old king’s genes. We should not seek immortality in reproduction.

But if you contribute to the world’s culture, if you have a good idea, compose a tune, invent a sparking plug, write a poem, it may live on, intact, long after your genes have dissolved in the common pool. Socrates may or may not have a gene or two alive in the world today, as G.C. Williams has remarked, but who cares? The meme-complexes of Socrates, Leonardo, Copernicus and Marconi are still going strong.

 

What Is The Great Man Theory of History?

Some men are born great, others just talk fancy.

The Great Man Theory of History says that history can be explained by the larger-than-life supermen at the helm of world events. These men aren’t only made by their times, these men make their times.

In many ways, the theory of a ‘Great Man’ at the heart of each historical era is a preposterous oversimplification but I think there’s an important truth at the heart of it: you can understand history by studying these people. After all, John D. Rockefeller is meaningless in a vacuum. Looking back, these men and their times make sense when studied as a whole. They were the focal point on which newsworthy events centered. The figureheads of mighty industries. Retrospectively, dozens of fantastic books have been written that explore these men within the context of their time and place, to the point that the two seem inseparable. Some suggestions, in roughly chronological order:

Read about Socrates to learn about ancient Greece and philosophy.

Read about Jesus Christ to learn about ancient Rome, religion and celebrity.

Read about Michel de Montaigne to learn about medieval France and to ponder what it means to live a good life.

Read about George Washington and Ben Franklin to learn about the American Revolution and the ideas and events our founded The United States.

Read about Abraham LincolnGeneral William T Sherman, and “Stonewall” Jackson to learn about the intricacies of the Civil War (reading about Lincoln will also teach you something of clinical depression).

Read about Frederick Douglass to learn of the brutality of slavery; Malcolm X, and Martin Luther King, Jr. to find out about the Civil Rights Movement.

Read about Andrew Carnegie, John D. Rockefeller, and J.P. Morgan to learn about the origins of modern industry and finance.

Read about Charles Darwin to learn about Victorian society and the power of ideas.

Read about Samuel Zemurray to find out about United Fruit, shipping and commerce.

Try to understand Hitler and what it means to be evil.

Read about Winston Churchill because he’s a hilarious badass and mobilized the English language for war.

Read about William Randolph Hearst and Edward Bernays to learn about the origins of modern media and advertising.

Read about Robert Moses to understand why New York City is such a clusterfuck. More lastingly, you’ll learn something about the mechanics of politics and what it takes to get stuff done.

Read about Bill Gates and Steve Jobs to get a grip on the personal computing industry.

Of course, this selection suffers from a massive selection bias (“Success has many fathers but failure is an orphan”) but that’s the point of the theory. The stories of the great outliers of the time describe their times. these aforementioned men are a great starting point for grasping the vagaries of Western civilization.

What is Moral Hazard?

Ahh…a life without consequence.

Moral hazard is created by a law or situation that incentivizes someone to take on risk with the assumption that someone else will pay the expected cost of that risk. It doesn’t remove the downside, but defers it to someone else. Without fail, this encourages the people who won’t be negatively effected to act irresponsibly. In removing concern for the consequences of a risky behavior, a moral hazard entices someone to act without regard to the consequences of their actions.

Examples can be found in large and small groups, from the doctor defrauding Medicare and pocketing the taxpayer money (when you steal from everybody you steal from nobody in particular) to the child carelessly making dirty dishes because he knows his mom will clean them.

Although it’s typically used to describe the unintended and undesirable side effects of a rule, some moral hazards can have a net benefit on society. In 1970, for instance, Congress imposed a fifty-dollar cap on consumers’ liability for unauthorized credit card use. This shifted responsibility for secure credit transactions to the credit card companies and in time made the Internet a safer place to go shopping.

Unfortunately, there are many more negative examples of morally hazardous corruption: student loans that encourage well-intentioned students to overpay for degrees they’ll spend the remainder of their youth paying for, and health insurance programs that subsidize treatments for smoking-induced emphysema or organ transplants for heavy drinkers.

Moral Hazard isn’t a ‘thing’ in itself, which confused me for a long time, but quality of a given circumstance. It’s always prudent to consider the moral hazard of any situation you orchestrate, whether it be in the rules you come up with or the way you treat other people.

Source:  Why Government Fails So Often: And How It Can Do Better

 

“Moral hazard is when somebody takes your money and is not responsible for it.”

–Gordon Gekko, Wall Street: Money Never Sleeps

What Was The Industrial Revolution?

World economic history in one picture.

Between the mid-1700’s and the early 1800’s, a remarkable number of innovations took place in transportation, machinery, chemical engineering, mining, manufacturing and agriculture in Europe and the Americas. This was The Industrial Revolution. People immigrated to the cities in massive droves, revolutionizing daily life and morality shifted from being incentivized by a rural to an urban mentality.

It was the birth of the modern world, and none of the technology or standards of living we now take for granted would’ve been possible without it. The Industrial Revolution is important to understand because “the dead hand of that past still exerts a powerful grip on the economies of the present,”–and it’s effects continue to govern our lives today.

The groundwork for the coming shift was laid in 1440’s by Johannes Gutenberg’s printing press. Before then, books were not widely written or read. There were many reasons for this: education was hard to attain, the Church preserved ancient writing but squelched creative thought; and books were prohibitively expensive, with each one having to be written out by hand. The going rate in Italy was about one florin (a gold coin worth about $200 in today’s dollars) per five pages. Because of this, knowledge was destroyed or forgotten easier than it was accumulated. But almost overnight, the cost of producing a book fell by about 300%. Printing presses spread rapidly throughout Europe; almost every European city had one within 30 years. The span of human knowledge grew rapidly as books became more numerous with each passing year.

Gutenberg’s invention made information accessible to more people. Over time, the Church and the Crown ceded power to the merchant and the miller. The Western World emerged from the Middle Ages into an age of Enlightenment, thanks in no small part to the greater accessibility of ancient and new ideas. As the Age of Reason gave way to the Age of Science, a revolution in technology was inevitable.

The Industrial Revolution is commonly associated with the invention of Eli Whitney’s cotton gin. In fact, that was only one innovation among many, but it did make cotton production feasible on a massive scale, not to mention incredibly profitable. Within a few decades, cotton was America’s leading export–the cash crop was the pillar of innumerable Southern plantations, Northern textile mills, Wall Street and shipping fortunes made possible by the horror of slavery.

Meanwhile, workers in the Northern United States slogged away in factories converting raw cotton into textiles. Improvements in Gas and oil lighting permitted factories to be open after dark. The population in northern cities grew exponentially every year, with immigrants coming from overseas and rural families coming looking for work.

In short, the new technologies were innovations that exploited resources more efficiently than ever before, from coal mining, steam locomotion, and agriculture to metalworking, glass making, and cheap labor.

Of course, I’m oversimplifying. There are too many technological advancements and side-effects reverberating down from this time to cover in a simple blog post (please refer to Wikipedia for an exhaustive list, as well as the sources below for a more nuanced discussion). Nonetheless, the good and the bad parts about modern life are rooted in this time period. Among other things, we can thank the industrial successors of the early 19th century for the abundant food and consumer goods that we take for granted today; as well as less desirable things like income inequality, pollution, and the 9 to 5 work week. Despite the ills, more people enjoy a higher standard of living today than ever before.

 Sources: A Farewell to Alms: A Brief Economic History of the World
100 Diagrams That Changed the World
The Signal and the Noise: Why So Many Predictions Fail–but Some Don’t

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What Is A Mismatch Disease?

An evolutionary mismatch disease is a sickness caused, at least in part, by an environment that is vastly different from those that our bodies are best suited for. Humanity has changed the world in innumerable ways over the past thousand years, and our bodies are slow to catch up. Of course, not everything about modern life is a curse; but mismatch diseases are typically caused by stimuli that are too much, too little, or too new.

For some perspective: human beings have been around for about roughly 200,000 years, while agricultural communities were first settled about 12,000 years ago. Meanwhile, consider that the in 1883 the Brooklyn Bridge was the tallest man-made structure in the Western hemisphere, cars are only 130 years old, and the internet as we know it is barely 30 years old. Our bodies are far behind the evolution of our environment. This sort of rapid technological progress is called cultural evolution, as opposed to the much slower and naturally occurring biological evolution.

Along with ageing, the leading cause of most mismatch diseases is a long-term positive energy balance. Your energy balance is in equilibrium if over time you are neither gaining nor losing weight. However, cheap calories are now readily available and sitting still is incentivized by school and most jobs. Because a negative energy balance is maladaptive (bad for reproductive success), we tend to consume more calories than we spend. Over time, the tendency toward a surplus of calories leads to obesity and all of the corresponding complications (including increased cardiovascular blockage, and a higher risk of reproductive cancer). Considering the rule of the Axemaker’s Gift, negative consequences of many aspects of modern life can be inferred, from foot problems from ill-fitting sneakers to anxiety brought on by planes and automobiles.

If anything, the best actionable advice to counteract the effects of environment and heredity are to follow a regular regimen of varied physical activity and to maintain a balanced diet while avoiding an excess of sweets and alcohol. Easier said than done, I know.

Below is a list of maladies thought to be most aggregated by this tension between genes and environment. Click the links to find out more about any given disease. Please note that this list is by no means definitive–many of the online resources admit only vague understanding of the condition’s root causes.

Hypothesized Noninfectious Mismatch Diseases
Acid reflux/chronic heartburn Flat feet
Acne Glaucoma
Alzheimer’s disease Gout
Anxiety Hammer toes
Apnea Hemorrhoids
Asthma High blood pressure (hypertension)
Athlete’s foot Iodine deficiency (goiter/cretinism)
 Attention deficit hyperactivity disorder Impacted wisdom teeth
 Bunions Insomnia (chronic)
 Cancers (only certain ones) Irritable bowel syndrome
 Carpal tunnel syndrome Lactose intolerance
 Cavities Lower back pain
 Chronic fatigue syndrome Malocclusion
 Cirrhosis Metabolic syndrome
 Constipation (chronic) Multiple sclerosis
 Coronary heart disease Myopia
 Crohn’s disease Obsessive compulsive disorder
 Depression Osteoporosis
 Diabetes (type 2) Plantar fasciitis
 Diaper rash Polycystic ovarian syndrome
 Eating disorders Preeclampsia
 Emphysema Rickets
 Endometriosis Scurvy
 Fatty liver syndrome Stomach ulcers
 Fibromyalgia

Source: The Story of the Human Body: Evolution, Health, and Disease