"Punish and Perish"

I've been wondering why people are so eager to punish the bad actors who helped bring on the mortgage mess even if it comes at a personal cost in terms of higher interest rates, a slower economy, higher inflation, etc. People must perceive some personal net benefit from the punishment - from preventing moral hazard in the future - otherwise, why would they want to see others pay for their actions when there is nothing to gain personally?

One answer is easy, people believe that the non-social or bad behavior of others caused the economy to have problems, and that imposes costs on individuals who had nothing to do with creating the problems. By adding an extra cost - the cost of punishment - and reducing this behavior in the future, the present value of future costs is reduced by more than the cost of the punishment, so it is worthwhile. An expression of this idea can be found in explanations of the experimental results from cooperation games where people are willing to take actions that are personally costly in order to enforce behaviors that benefit the group as a whole, i.e. to punish in order to reduce behaviors that are individually beneficial, but costly to the group. So I thought the results from these experiments might provide an explanation for the willingness to endure costs in order to see others punished. But maybe not:

Punishment does not earn rewards or cooperation, EurekAlert: Individuals who engage in costly punishment do not benefit from their behavior, according to a new study published this week in the journal Nature...

The group, led by Martin A. Nowak of Harvard's Program for Evolutionary Dynamics, Department of Mathematics, and Department of Organismic and Evolutionary Biology, examined cooperation among subjects playing a modified version of the Prisoner's Dilemma. This game captures the fundamental tension between the interests of the individual and the group, and is the classic paradigm for cooperation. The study found that the use of punitive behavior correlates strongly with reduced individual payoff, and bestows no benefit on the group as a whole.

"Put simply, winners don’t punish," says co-author David G. Rand of Harvard's Program for Evolutionary Dynamics and Department of Systems Biology. "Punishment can lead to a downward spiral of retaliation, with destructive outcomes for everybody involved. The people with the highest total payoffs do not use costly punishment."

"Costly punishment," the type of punitive behavior studied by Nowak and his colleagues, refers to situations where a punisher is willing to incur a cost in order to penalize someone else. Other researchers have suggested that costly punishment can compel cooperation in one-time interactions where individuals need not worry about reputation or retaliation -- a scenario Nowak and his colleagues found unrealistic, since, as they write, "most of our interactions are repeated and reputation is always at stake." ...

The study shows that punishment is not an effective force for promoting cooperation. The unfortunate tendency of humans to engage in acts of costly punishment must have evolved for other reasons such as establishing dominance hierarchy and defending ownership, but not to promote cooperation. In cooperation games, costly punishment is a detrimental and self-destructive behavior.

"Punishment may be a tool for forcing another person to do what you want," Dreber says. "It might have been for those kinds of dominance situations that the use of punishment has evolved."

"Our finding has a very positive message: In an extremely competitive setting, the winners are those who resist the temptation to escalate conflicts, while the losers punish and perish," concludes Nowak.

Comments

[Bruce Wilder]

I am going to send Angelo Mozilo $10 and a thank you note. I'm sure he'll be much nicer to everyone next time.

Anybody got an address?

[Robinia]

Playing Prisoner's Dilemma among single college students is an acceptable model of individual behavior for some purposes.

In terms of those of us who define "personal gain" as including the health and well-being of our families as well as ourselves, we may have a desire to heap shame or punishment on those who steal as a means of teaching our children that such behavior does not pay (under current conditions it does, and perps are admired).

Unfortunately, I can't think of a way that you can structure a study of this kind of behavior using college students and game theory; here's hoping parents will want to teach their children morals anyway.

[TigerPaw]

There's also the frustration factor that the average Joe feels of "FINALLY!!!!!!!!!" when one of the fat cats gets nailed to the wall. Yeah, we loose a bit of blood in the process but the admittedly juvenile release sure feels good. It's irrational but ... it's definitely part of what is going on.

[billy]

Actual study - Altruism is good.

Economist's take- Criminals should go scot free, because punishment does not pay.

I am all for it. Let us open the prisons and free everyone. Forgive and forget.

What is it with economists? Do they feed them some special kool-aid?

[Bernard Yomtov]

I'm dubious. Aside from all the other problems, I don't think a repeated Prisoner's Dilemma really captures the dynamics here.

Take an extreme case. It is costly to send a criminal to prison. Does that mean we shouldn't? Isn't being willing to impose costly punishments necessary, to some degree, to maintain order?

IIRC someone (Schelling?) said that this idea is behind some notions of honor. Retaliation for a wrong may be costly, but it establishes a deterrent.

[IdahoSpud]

Does 'game theory' take all-out class warfare into account?

Does it take into account the deep disconnect and distrust between the elites/political class and the fearful-of-being-poor middle class? The poor of course don't count in this 'game', as they have no clout.

Long live righteous anger and backlash.

[dissent]

I think a punishment mentality is the flip side of American individualism. Something goes wrong, blame the individual, and PUNISH. Look at our incarceration rate, death penalty, etc.

Also, the extensive, long standing middle class squeeze intensifies resentment and the desire to punish. As it becomes harder to keep the roof and the bread, let alone afford health insurance, people want to strike out.

[billy]

So the classic "pitchfork and torches" punishment is also not worth it, eh?

We should have all been better off as serfs in the middle-ages.

Should I expect Mark Thoma to soon advocate a return to monarchy? It was not worth the Magna Carta, the Revolution, the Reformation...

On the flip side, at least the Inquisition was bad. Let us be thankful for small mercies.

[esb]

As touched on by Paul Volker in his Charlie Rose interview yeaterday, the lesson the the American people must learn, and I suspect will learn in the next thirty six months or so, is that a society that attempts, through intentional public policy, to consume in excess of what it produces, is fatally flawed.

That fatal flaw constitutes something of a cultural character disorder, the Argentines had it, and so do we.

Correcting it, of course, will be extraordinarily painful, not for some, but for most, possibly nearly all.

In all of this what bothers me most is that the Treasury and Fed (intellectually enabled by the community of university-based economists) seem to be absolutely content with promoting the "consume more than you produce" model, inflate "something," borrow against it (with the partially valueless paper being sold to some sucker), spend the borrowed specie on imported toys.

Today, 19March2008, with all that is understood regarding the corrosiveness of this construct, it is the preferred construct of the governing elites.

The question is why?

If this is the only model that they can construct, perhaps we should just sell the whole damned place to the SWFs and see what they can come up with.

Anything would be better than the next tapestry of this bubble and crash illusory fiction currently being woven.

[robertdfeinman]

The word schadenfreude wouldn't have been coined if this wasn't a universal characteristic of human nature.

It does seem that those who refuse to harbor lasting hate have more effect as a moral force - Gandhi, ML King and Nelson Mandela are good examples. But they are the leaders, the followers have only hate and revenge to fall back on.

The other side of the equation is why people are more willing to spend money on punishment then on rehabilitation or prevention. Perhaps humans haven't outgrown their caveman background, quite yet. Cost benefit analysis seems not to encompass strong emotions.

[Jim Harrison]

Personal ruin needs to be the foreseeable consequence of white collar crime. If we simply single out a handful of malefactors at rare intervals in order to appease the public, the others will simply regard the rather notional risk of being chosen as the scapegoat in one of these public relations exercise as an acceptable cost of doing business.

[odograph]

Are you sure I, a saver, without debt, will be feeling a greater hurt without these "new liquidity" actions?

My paid-for condo has lost $80K value, and my savings now earns negative interest.

[billy]

It does seem that those who refuse to harbor lasting hate have more effect as a moral force - Gandhi, ML King and Nelson Mandela are good examples.

That misses the entire point. What is being alleged here is -why people are so eager to punish the bad actors who helped bring on the mortgage mess

It is akin to this:

The British have bought civilization and railways and what not to India - why did Gandhi want to punish them by asking them to give up their empire?

The whites gave the slaves a much better life than they could ever have in Africa - why did MLK want to punish them by asking them to give up their property, and work?

A change is always a punishment, especially for the privileged who are asked to give up their unjust privilege and ill-gotten wealth.

Do you think that the people who followed Gandhi and MLK did not pay for this "punishment"?

[Worker]

The best solution is a time machine to properly regulate those deserving of punishment now.

In lieu of that, ESB makes an excellent case for the social value and necessity of corrective punishment.

[ken melvin]

I too have long been puzzled by the punishment thing and by the need of some to assign blame for forest fires, etc. Being of Scot Irish decent, I can say that I think they are amongst the worst. Religion seems to play some role. Brain washing at an early age – definitely.

I don’t think that the perps, in this case the scam artists, should be allowed to keep their ill gotten gains, and, I think that they should be precluded from doing it again. These, preclusion and deterrence, are the objective, are they not? While most humans have a well developed sense of right and wrong punishment, there are those who think that it is whatever you can get by with (this includes folks like Nixon and most libertarians), there are sociopathic/pathological criminals, and there are the mentally disturbed. I suspect that the ‘whatever you can get by with’ group believes in punishment because it would seem to fit into their reasoning, though I am not sure how it’s going to solve their underlying psychosis. Perhaps therapy would work better for this group. Seems most of the sociopathic/pathological criminals are so because of abuse, so I must question the choice of punishment as remedy. In re the mentally disturbed, I think most could agree that punishment is not the solution.

[Jack]

There are many possible explanations for the activity of punishing wrong-doing--producing a deterrent effect, revenge, meeting the standards of justice. I'm don't think any one of them is primary (and certainly not every individual at any one time is going to agree on what justification is the best one, or if there is more than one, or how many there are), and I don't think it matters if there is no "super-justification" that trumps the rest in every situation. Philosophers obsess about such things, but what they obsess about should, as a rule, be ignored.

Incidentally, in regards to moral hazards, I'm wondering about the claim that we should bail out those, immoral and stupid, who got us into this mess because not bailing them out might hurt other, innocent people. Wouldn't that simply create an incentive for those who cause bubbles--speculators, hucksters, etc--to do so in markets where there will be collateral damage, so to speak, if they are forced to suffer when the mess they make needs to be cleaned up? In other words, isn't this encouraging hostage-taking?

Remember, when it comes to financial markets, a good portion of the people involved are the sucm of the earth (though they call themselves 'libertarians,' at least when they're on top) and would have no problem doing such unconscionable things as conning innocent people into putting themselves into such a vulnerable position.
It seems like we must deal with these people and the companies they create in as ruthless a manner as possible, and also, of course, do all we can to save the hostages. But the latter must be a secondary concern, otherwise the problem will simply get worse.

[Nicholas Weaver]

Punishment may be non-optimal, but it does serve its purpose.

EG, in multiround prisoner dilemma, one of (if not the) best strategy is tit-for-tat.

Additionally, there is the joy of retribution.

I hurt a little, but those bastards hurt a LOT, the feeling of joy that the bastards are taking it in the A*)* has to count for at least something in balancing the books.

Finally, there are precidents. Without retribution on the bad actors, you get more bad actors. So you might have the case where in the long run, you are served well even if the short run cost is high.

[Organic George]

If this was the first time the taxpayers have bailed out the financial system I too would be wondering. But it is the second time in about a decade that we have to clean up the mess caused, not by greed alone, but criminal actions.

Wall St will soon be flush with big bonus again and all the bad payers will be OK. In the real world we are responsible for our actions, if we fail we fail. If we cheat, we get in trouble and if we break the law we go jail.

But in the world of "To Big to Fail" and now "To Rich to Fail" the abstract between wall and mail st is getting ever wider.

While you look at the over health of the financial system, we see the corruption that led us to this moment and say "If you rob someone with a gun you get life, if you steal with a pen you get a government bailout.

Bailouts are a false economy. There needs to be a cleansing of the system of all the bad, phony balance sheet mumbo jumbo.

Allow me to use the Smokey the Bear analogy. For 50 years the conventional wisdom was that we have to put out any fire int the forest. So for 50 years deadwood, that normally burns out every decade or so, piled up until one day the fires were to big and hot to put out under normal conditions. We learned that some fire is not only good but that is it necessary to for the over all heath of the forest ecosystem. For the past 20 years we have not allowed failure in the US financial system. Sure there are some "special cases" but we won't even let the stock market have a prolonged bear market. We just move from mini bull to big bull.

So here we are today and the lesson from Enron was not that derivatives based on nothing was bad; the lesson was "why didn't we think of that" When you have a financial transaction that has no equity to back the trade then that is nothing more than just a Ponzi scheme in a tux.

Here's the big news; EVERYONE on the street knew it and went along with it to make big fees. How can you rate sub prime paper AAA. Yet the rating companies went right along with the scam and the interbank paper is worth even less.

The System is corrupt and we the taxpayers are left with the bill for the good of the country? NO NO NO NO NO

For the good of the country and the US financial system we must rid ourselves of this corruption and punish those who created it. It is not for personal satisfaction it is for the sake of the US financial system.

But if we continue to put out fires and never deal with the root cause of the problem one day the system will catch on fire and we will not be able to put it out.

PS Your post is condescending in the extreme. You suggest that group think for punishment is some knee jerk response of some not to bright people who don't see the big picture like you.

Maybe you can only see so far as to where you paycheck comes from and that sir, would make you a common whore

[Spectator]

The premise here is bogus. The bailout issue is not about punishment. It's about not stealing our money to let the risk takers thrive for another day. Just because it's a hidden and delayed theft, the ivory tower economists think we should just play along.

Must of the establishment, and particularly the Fed, is indulging in CYA behavior. The will not do the right thing, e.g. nationalize the banks, because it would require them to admit how badly they screwed up.

[Mark Thoma]

To answer the questions about moral hazard in the future, I've been saying from the start that the policies are contingent upon being able to implement effective regulation that prevents this behavior in the future. I think we can do much better in that area, that we can stop a lot of this from happening again, and my polices are contingent on that belief. But as I've said many times, if that is not the case, if regulation can't attenuate this behavior, then moral hazard issues become much more important.

Also, though many people have been misrepresenting my views, I've never said that anyone should get away with anything, just that the police shouldn't fire guns into a crowd to catch a thief - the collateral damage is too large. Better to separate them from the crowd and take care of them individually. But if you cannot do that, and this is no different than police giving up pursuit on a crowded street because too many innocent people get hurt, sometimes you just have to let it go as hard as it is to swallow that idea. If there's any way at all to catch them without hurting the innocent to an intolerable degree, of course we should do that. And we can change things in the future to make it harder to do at all (i.e. regulate), but punishment at all costs is not always the best idea.

[Just had a call from a radio station in Portland. I did the interview, but radio makes me nervous. I never think they go well, but this station keeps calling back anyway.]

[RW]

I share the general skepticism regarding the ability of the test used in this study to tell us anything useful. Models are not simply collections of rules, they are defined by domains wherein those rules apply and the Prisoner's Dilemma covers insufficient ground even if one grants it is an adequate representation of cooperation (personally I think there is only a case for this in the narrowest sense of that term).

Frankly if you're going to use game theory it would probably be more fruitful (and interesting) to use a stag hunt model (coordination game) since it has two 'pure' Nash equilibria (see http://en.wikipedia.org/wiki/Nash_equilibria) and one mixed equilibrium but it is not clear to me even that would cover sufficient ground.

At least that would make it clear those who fostered and profited from the current financial debacle were engaged in pack hunting (predation) or parasitism rather than social cooperation in some broader sense.

Note: In the Prisoner's Dilemma both players cooperating is Pareto efficient, the only Nash equilibrium is when both players defect; IOW the only stable configuration is no cooperation so the model represents its putative goal, cooperation, as an antithesis of its rules (or possibly someone simply has a very ironic sense of humor in regards to choice of null hypothesis).

[Andrew]

"GUIL: You lost. Well, then - one of the Greeks, perhaps? You're familiar with the tragedies of antiquity, are you? The great homicidal classics? Matri, patri, fratri, sorrori, uxori and it goes without saying -
ROS: Saucy -
GUIL: - Suicidal - hm? Maidens aspiring to godheads -
ROS: And vice versa -
GUIL: Your kind of thing, is it?
PLAYER: Well, no, I can't say it is, really. We're more of the blood, love and rhetoric school.
GUIL: Well, I'll leave the choice to you, if there is anything to choose between them.
PLAYER: They're hardly divisible, sir - well, I can do you blood and love without rhetoric, and I can do you blood and rhetoric without love, and I can do you all three concurrent or consecutive, but I can't do you love
and rhetoric without blood. Blood is compulsory - they're all blood, you see.
GUIL: Is this what people want?
PLAYER: It's what we do."

-Tom Stoppard, Rosencrantz and Guildenstern Are Dead

[esb]

This is the "trust us, we've learned our painless lesson" fallacy.

The revolving door between the Treasury/Fed and Wall Street guarantees that any controls that come will be illusory in part at best.

Regarding the repeated radio interviews, perhaps you have the hypnotic "radio voice," deep, properly paced, easy to understand.

[JRossi]

So, the authors have proven that punishment is not a good strategy in their particular laboratory setting. I'll take that under advisement but will not generalize these particular findings to other situations, where the findings might not hold up. They might hold up--they might not. Gotta do those experiments to be sure. This is psychology, not mathematics.

[billyblog]

No doubt Mark can cite some calls for punishment of the corporate predators who got us into this housing mess that a reasonable person would agree go beyond what is rational. But why assume that this is the only form of punishment that can be meted out?

Let's accept Paul Krugman's premise that some form of a bailout is unavoidable and necessary.

OK, then let's just make sure it's a bailout where executive bonuses and ill-gotten gains of both the executives and the high-flying shareholders will not be part of the bailout. And we all know that this is highly probable if there is a rush, fueled by a trahaison des clercs to forgive and forget.

And what happens if we leave these bad actors financially unaccountable – and even pay them their "severances"? Well, the taxpayers are charged with a bigger bill than they might otherwise have to pay.

I don't need retribution. I'm perfectly willing to let these neutered sharks live out their days in their modest bungalows and not in a country club prison, where I would be taxed to pay for their three squares. But, heavens, don't present me with an "economic" model which argues that it would somehow hurt me if they were forced to give up their ill-gotten gains and I could save a few pennies in the process.

And besides, hasn't no less a person than Alan Greenspan just reminded us that no model is perfect?

[quigley]

There is also a value to 'deterrence' that you are not discounting properly nor measuring adequately.

There is an interesting concept called 'justice.'

As an aside, that column would be easier to understand if it had been written by a twelve year old.

[anne]

http://shakespeare.mit.edu/Tragedy/hamlet/hamlet.1.5.html

1601

The Tragedy of Hamlet, Prince of Denmark
By William Shakespeare

Act I. Scene V.

Elsinore. A platform before the castle.

Enter GHOST and HAMLET

HAMLET

Where wilt thou lead me? speak; I'll go no further.

Ghost

Mark me.

HAMLET

I will.

Ghost

My hour is almost come,
When I to sulphurous and tormenting flames
Must render up myself.

HAMLET

Alas, poor ghost!

Ghost

Pity me not, but lend thy serious hearing
To what I shall unfold.

HAMLET

Speak; I am bound to hear.

Ghost

So art thou to revenge, when thou shalt hear.

HAMLET

What?

Ghost

I am thy father's spirit,
Doom'd for a certain term to walk the night,
And for the day confined to fast in fires,
Till the foul crimes done in my days of nature
Are burnt and purged away. But that I am forbid
To tell the secrets of my prison-house,
I could a tale unfold whose lightest word
Would harrow up thy soul, freeze thy young blood,
Make thy two eyes, like stars, start from their spheres,
Thy knotted and combined locks to part
And each particular hair to stand on end,
Like quills upon the fretful porpentine:
But this eternal blazon must not be
To ears of flesh and blood. List, list, O, list!
If thou didst ever thy dear father love--

HAMLET

O God!

Ghost

Revenge his foul and most unnatural murder.

HAMLET

Murder!

Ghost

Murder most foul, as in the best it is;
But this most foul, strange and unnatural.

HAMLET

Haste me to know't, that I, with wings as swift
As meditation or the thoughts of love,
May sweep to my revenge.

Ghost

I find thee apt;
And duller shouldst thou be than the fat weed
That roots itself in ease on Lethe wharf,
Wouldst thou not stir in this. Now, Hamlet, hear:
'Tis given out that, sleeping in my orchard,
A serpent stung me; so the whole ear of Denmark
Is by a forged process of my death
Rankly abused: but know, thou noble youth,
The serpent that did sting thy father's life
Now wears his crown.

HAMLET

O my prophetic soul! My uncle!

Ghost

Ay, that incestuous, that adulterate beast,
With witchcraft of his wit, with traitorous gifts,--
O wicked wit and gifts, that have the power
So to seduce!--won to his shameful lust
The will of my most seeming-virtuous queen:
O Hamlet, what a falling-off was there!
From me, whose love was of that dignity
That it went hand in hand even with the vow
I made to her in marriage, and to decline
Upon a wretch whose natural gifts were poor
To those of mine!
But virtue, as it never will be moved,
Though lewdness court it in a shape of heaven,
So lust, though to a radiant angel link'd,
Will sate itself in a celestial bed,
And prey on garbage.
But, soft! methinks I scent the morning air;
Brief let me be. Sleeping within my orchard,
My custom always of the afternoon,
Upon my secure hour thy uncle stole,
With juice of cursed hebenon in a vial,
And in the porches of my ears did pour
The leperous distilment; whose effect
Holds such an enmity with blood of man
That swift as quicksilver it courses through
The natural gates and alleys of the body,
And with a sudden vigour doth posset
And curd, like eager droppings into milk,
The thin and wholesome blood: so did it mine;
And a most instant tetter bark'd about,
Most lazar-like, with vile and loathsome crust,
All my smooth body.
Thus was I, sleeping, by a brother's hand
Of life, of crown, of queen, at once dispatch'd:
Cut off even in the blossoms of my sin,
Unhousel'd, disappointed, unanel'd,
No reckoning made, but sent to my account
With all my imperfections on my head:
O, horrible! O, horrible! most horrible!
If thou hast nature in thee, bear it not;
Let not the royal bed of Denmark be
A couch for luxury and damned incest.
But, howsoever thou pursuest this act,
Taint not thy mind, nor let thy soul contrive
Against thy mother aught: leave her to heaven
And to those thorns that in her bosom lodge,
To prick and sting her. Fare thee well at once!
The glow-worm shows the matin to be near,
And 'gins to pale his uneffectual fire:
Adieu, adieu! Hamlet, remember me.

[billy]

To answer the questions about moral hazard in the future, I've been saying from the start that the policies are contingent upon being able to implement effective regulation that prevents this behavior in the future

How about if we do a bit of game theory on that?

The greatest game is going on right _now_. Bailout without giving up anything. This is a cover-up of crimes without admitting anything.

Your stance requires us to take the view that after the bailout is done, the criminals will come back and support this "implement effective regulation that prevents this behavior in the future". That requires criminals to turn saints after they have been let go scot-free with the assurance that no crime was done and allowed to keep the fruits of their crime.

If they are criminals, can you cite a game theory argument about why they should turn saints like this?

They keep their gains, they are not held liable, the mess has been cleaned up. Why should they NOT use their wealth, standing and influence to oppose regulation?

The SEC has settled actions with IBs for fines, without the IB admitting to any crime, numerous times. Every single time
-the fine has been far less than the fruits of the crime
-the crime itself was never admitted; it was a non-crime
-the IB has gone back _and_ vehemently opposed any regulation that would crimp the very thing they settled with a fine.

In game theory, the time to make bargains is when you have the upper hand, not after you admit defeat.

[dd]

The conclusions are undermined by the concentrated population sample.

[ken melvin]

Anne - so, before god, it was the duty of the son, brother, etc. to avenge?

Did you check out "Essay on the Manners and Spirits of Nations"

[anne]

HAMLET

There's ne'er a villain dwelling in all Denmark
But he's an arrant knave.

HORATIO

There needs no ghost, my lord, come from the grave
To tell us this.

[POed in Portland]

Dr. Thoma, I think you've got it all wrong. I've no urge to punish anyone. I'd simply like to be able to afford to by a home without having to mortgage the rest of my life away. I've lived in Portland, Oregon, my whole life and have watched home prices double in the last 5-7 years as endless streams of Californian's cash out their equity and by a home twice as big at half the price. I sympathize with many of them, knowing that their communities have also been converted into playlands for the childless rich with endless cafes and upscale restaurants and crumbling schools. At the same time, I am angered to see the same thing happen to my community. Families, minorities, the working class, few of them can afford to live here anymore. I watch, hopefully, every month as the median price of a home in San Diego or LA plummets, hoping that soon the median will approach the hyperinflated median in Portland and that house prices here will begin to decline. You would like the federal government to buy the mortgages of recent homebuyers in these regions that are facing foreclosure. The goal of this would be to prevent the cost of these homes from falling further so that these homebuyers could refinance at lower rates, reducing the risk of foreclosure. This would harm me in two ways. First, it would work against the market forces driving house prices down to a level where I might be able to afford one. Second, my substantial savings, the savings I have accumulated over time to use as future down payment on a home will grow more slowly at the lower interest rates that current federal reserve policy is promoting. Given the high rate of real inflation, the kind of inflation measurement that includes the cost of fuel and food and housing, these savings that I have worked so hard and prudently to obtain are probably losing real value as I write this. Am I a bad actor for saving money and wanting the opportunity to by a home I can afford? My question for you Dr. Thoma is why are you so willing to punish me.

[save_the_rustbelt]

Much of what passes for behavioral and psych research at universities is conducted on sophomore Psych 101 students who are more or less coerced into being test subjects.

Not exactly a good sample of the population.

Anne:

Saw the Olivier version of Hamlet on the classic movie channel last week. Holds up pretty well.

[bakho]

Bailout may be the best course of action but who pays for it? When we ask the wealthy beneficiaries of the public largesse to step up to the plate they bellyache and cry "class warfare".

The money to pay for the bailout should come from the investor class. Capital gains should get jacked up to at least 25% until enough revenue is collected to pay for their mess.

Punishment is the wrong frame for this debate. Let's have accountability.

[groucho]

Mark, I think this study on Fairness shows the motivation that you feel is irrational:

If you expect equal pay for equal work, you're not the only species to have a sense of fair play. Blame evolution.

Researchers studying brown capuchin monkeys (Cebus apella) have found that the highly social, cooperative species native to South America show a sense of fairness, the first time such behavior has been documented in a species other than humans.

The question of whether human aversion to unfair treatment—now shown by other primates—is an evolved behavior or the result of the cultural influence of large social institutions like religion, governments, and schools, in the case of humans, has intrigued scientists in recent years.

The new finding suggests evolution may have something to do with it. It also highlights questions about the economic and evolutionary nature of cooperation and its relationship to a species' sense of fairness, while adding yet another chapter to our understanding of primates.

"It looks like this behavior is evolved … it is not simply a cultural construct. There's some good evolutionary reason why we don't like being treated unfairly," said Sarah Brosnan, lead author of the study to be published in tomorrow's issue of the science journal Nature.

Brosnan, a biology Ph. D. candidate schooled in zoology and psychology at the Yerkes National Primate Research Center and Living Links Center at Emory University in Atlanta, Georgia, said her research was inspired, in part, by studies into human cooperation conducted by Swiss economist Ernst Fehr, who found that people inherently reject unfairness.

[Patricia Shannon]

The Oneness of Being
copyright Patricia M. Shannon 1992

The Earth is our mother, and the sun is our father,
They nourish us and sustain us.
Though I stand on a mountaintop alone.
I am not alone, for I am one with all.

The oneness is a blessing, a constant source of strength;
the loneliness of being will rend your heart no more.
But in this world imperfect, it also is a curse,
I feel the pain of others as if it were my own.

Let us work together, and join our hearts as one,
to make a world where children no longer die from guns.
Throw away your hatreds, your wars and your drugs;
the highest high you'll ever know is when you feel as one.

says...

Most of the comments above have made it clear that the issue is not one of revenge but providing a way of "disincentivizing" clearly anti-social behavior that subverts the long run interests of the whole economy and the stability of the larger American polity. There are many on "Wall Street" who simply don't care if they subvert the U.S. economy as long as they make their billions. To the extent that making their billions advances the long run, stable economic growth interests of the U.S., in theory the Wall St. cowboys can be tolerated. However, we have been living in a globalized economy now for quite a while and, thanks to GOP economics, much of our economy has essentially been sold off to foreigners, many of whom share few of the values of our political heritage. This is important. But alas, neither does Wall St. share the norms and values in the Constitution. Given the anti-social behavior of much of Wall St and their ready willingness to sell out the economy for private gain, this simply means that "punishment" means increasing the regulation of Wall Street so that transparency and accountability are paramount and that they are hammered for any subversive behavior. That may well mean less of a likelihood of short-term hyper-profits from bubbles followed by inevitable collapses. But it needs to be remembered that the U.S. economy - any economy for that matter - is a social contract and those that egregiously violate the social contract eventually will get hammered. And if they don't the society eventually will collapse from internal chaos; it's really that simple. Something Ayn Rand never understood.

[Alex Tolley]

I would need to read the paper, but the brief description makes me wonder where the model applies. usually these games are played between two players and the results not shown to the other players. But in a group situation, one player may accept punishment from the other player, because it will gain other benefits from the group.

For the mortgage mess, who are the players? The principle agents and the prosecutors? The public at large? Who is going to occur the costs, and what costs? some parts of the population will gain from the fallout, others won't.

[wimpie]

"the issue is not one of revenge but providing a way of "disincentivizing" "

Punishment should be looked at as the Means to an end. Mark seemed to imply that it was the end. When a child is punished for crossing a busy road, or playing with matches or... the punishment should be the means, though at times we may want to ring their little necks "just because".

[Don Quijote]

I've been wondering why people are so eager to punish the bad actors who helped bring on the mortgage mess even if it comes at a personal cost in terms of higher interest rates, a slower economy, higher inflation, etc.

Because those are the people who made fortunes from shifting jobs from the US to third world rat-holes without a single thought about the people whose livelihood they were destroying, while stealing everything that wasn't nailed down. F*** them, they deserve no sympathy nor mercy.

[Lord]

Those in favor of punishment do not see themselves as being particularly hurt by those actions; they see the benefits, not the costs. Houses at 10 cents on the dollar, whoopee. The thought they won't have a job to pay for it, that just happens to the other guy. I will always have a job because I am good enough, I am smart enough, and doggone it, people like me. Extending the consequences through more than one step requires too much thinking.

[Kaleberg]

Who cares about punishment? How did the stagflation of the 70s end? It ended with a massive rate hike and a lot of borrowed money, a short, deep recession, and then the 80s boom.

[david]

Bruce Wilder nailed it from the start. Silly behavioral studies don't tell us much about what to do. In any case, the tan man has it coming, and deserve has everything to do with it.

Yglesias says that Meriwether has lost a few more people their fortunes. Can we single Meriwether out from the crowd yet? I just can't wait until we get back to talking about the distortions that regulations bring, and the importance of a shadow finance system that bring socially beneficial liquidity and risk management to the magical world of finance.

How can you possibly not want to punish? When you know they'll skate back around and knock you in the teeth again in 5 or ten years?

[Spectator]

Thank you POed in Portland for bringing this discussion down to earth. Earth to the ivory tower economists: Please take a moment to look at what your prescriptions have wrought. Think about whether to reward the prudent like POed, or the squeaky wheels that took on extreme risk they could not handle. Consider the fabric of the society you would promote.

And here's another clue: Consumption is not a worthy goal for an economy. Production is what creates wealth. Somebody please explain that to all those desperate to hold up consumer spending at all costs.

[Steven]

If a few investment banks go out of business, interest rates go to zero for a while until the unemployed are reabsorbed. This is good for the economy.

Slower growth? Putting non productive investment banks into bankruptcy and freeing the workers for other productive enterprises will not slow us down long term.

It would also lower the budget deficit by not allowing $300 billion in investment bank subsidies, good for overall economy as well..
And then there's moral hazard.

This is not about 'punishment' any more than General Motors losing market share to Toyota.

[gordon]

I put this up on Angry Bear a couple of days ago.

... The Federal Reserve can't solve the problem by itself. I seem to remember saying this some time ago (maybe not on this blog). The US Govt. is hiding behind the Federal Reserve, desperately hoping that their arcane manipulations can somehow save the situation without dumping it in the lap of the Executive and Congress, where public opinion will have far more influence. So far as I (a non-American) can gather, US public opinion runs strongly against bailouts of the creators of this dangerous situation, and if the Federal Reserve can't pull off a miracle (looking less likely), public outrage may well spill over into the Presidential election campaign, an outcome probably desired neither by Democrats nor Republicans.

[Mikko]

At least the quote totally misses the point of the altruistic punishment. It's called that because it incurs a cost to the one who does the punishing - a greater cost than what they might ever gain themselves (otherwise it would be called rational punishment). The real question is whether their behavior benefits the group as a whole.

Also note, that not everybody has to be altruistic punisher in a group for the group to reap the benefits. You just need large enough portion of people to be such.

This model also predicts that those on top will not punish. So even in this sense, the quote you use does not bring anything new. It just makes very funny deductions from the findings.

Whether such system can evolve for a group is another matter. And as far as I consider the issue, it still remains an open unsolved problem.

[Mikko]

Oops, I misread some portion of the text. The information that punishment does not increase the payoffs for the group is interesting news. I'll have to think about it to sort out the ramifications.

[Mark Thoma]

Here's something on altruistic punishment that's fairly recent (there maybe more buried in the archives):

http://economistsview.typepad.com/economistsview/2008/03/cooperating-wit.html

[a]

"People must perceive some personal net benefit from the punishment." Yes fairness. You seem to elide "personal net benefit" with "personal net financial benefit". If I think things are fairer, then I will be happier, even if materially I might be worse off.

[Cyrille]

I am too short of time to check if the point has been made, but prisoner's dilemma is symetrical (as is, obviously, its repeated version). Everyone has the same possibilities upfront.

Whereas Wall Street... Well, on the one side you get some people who stand to either lose their job if things turn really sour or making dozens of millions (more for the really big fish) otherwise, and even if things turn really sour, the millions they made before are kept.
On the other side you get people who have very little to hope for, who might indeed get a slightly deeper recession if the big fish are bailed out at taxpayer's expense (although that's far from sure, and requires that the lower recession is a bigger effect than the huge extra debt from the bailout), but also, rightly or wrongly, envision a slightly more equal society in the future if the idea started to emerge that pure greed is not all that great after all.

I don't think you can call them equal positions, and I don't think a symetrical game is ever going to model that situation acceptably well.

[anne]

There is much that is important and interesting to a topic and comments on punishment, including considering how bloody ghost-driven-Hamlet really was since after all there are no ghosts other than those we invest as Shakespeare understood perfectly however many years before Freud.

We have, however, been a definitively punishing people these last years no matter how self-destructive our meting out of punishment has been, and need to consider this perspective about ourselves.

[odograph]

POed said what I tried to above, better.

I've already lost paper value in my home, and reduced earnings on savings, as a result of this crisis.

And you are asking me to give up more, to pay more, to save the risk-takers? And if I don't give freely, in this charity, I'm just "punishing" them? WTF.

[save_the_rustbelt]

Very hypothethical question:

If, after the tech stock bubble, more Wall Street leaders had gone to prison for selling with tainted financial analysis, would the subprime bubble been avoided?

Discuss please.

[Callahan]

I like what IdahoSpud sez.

And I'll add, seems that the "system" punishes those who can least afford it with higher interest fees, late fees, insufficient funds fees, late charges, on and on. So if some big bad rich fat cat get's stung a little, I say what's good for the gander is also good for the goose with the golden parachute.

[Holly W.]

Haven't read all the comments yet, so I'm sorry if someone else has already said this, but --

Isn't the point of punishment partly to set an example? Maybe it won't benefit me individually now to punish greedy bankers, but if it teaches a lesson so that other bankers are not quite so greedy in the future, for fear of also being caught and punished, and repeat economic meltdowns are avoided, then I certainly consider that a benefit of well-directed punishment.

[dd]

There will be plenty of losses suffered by the wealthy now trapped in hedge funds that are getting margin calls from lenders. The increased margin is probably causing the sharp sells off in markets (gold's wild ride yesterday) and may bring commodities prices down as well. No doubt more hedge funds will fall, assets will be seized and those who benefited the most from light tough regulation will clamor for redress and so Hamlet may yet have satisfaction.

[anne]

With respect to commercial punishment, we were sold and bought a philosophy of non-oversight and non-regulation when obvioiusly needed for several decades. There is no accident that Rachel Carson is routinely vilified 40 years after dying, for having saved so much of America's waterways and bird life. This Administration has presided over a dismantling of oversight and regulatory ability that will be long in recreating sensitively.

So before punishment, we have to think again of setting systems that limit subverting use.

[bp]

"Our finding has a very positive message: In an extremely competitive setting, the winners are those who resist the temptation to escalate conflicts, while the losers punish and perish," concludes Nowak.

The Committee on Oversight and Government Reform held a hearing titled, “Executive Compensation II: CEO Pay and the Mortgage Crisis” on Friday, March 7, at 10:00 a.m., in 2154 Rayburn House Office Building.

Panel II

Mr. Charles Prince, Former Chairman and CEO, Citigroup

Mr. Richard D. Parsons, Chair, Personnel and Compensation Committee, Citigroup

Mr. E. Stanley O'Neal, Former Chairman and CEO, Merrill Lynch

Mr. John D. Finnegan, Chair, Management Development & Compensation Committee, Merrill Lynch

Mr. Angelo R. Mozilo, Founder and CEO, Countrywide Financial Corporation

Mr. Harley W. Snyder, Chair, Compensation Committee, Countrywide Financial Corporation

The losers were punished by virture of the market, as evidenced by their absence here today. We, as honorable winners, punished no one.

Likewise, our compensation packages were based on performance and regardless how high they were, they were less due to less performance ... they could have been more, but we, unlike you, face discipline and constraints.

This public flogging of the best and brightest is punishment enough, but we forgive you as government representatives, who know not what they do. You are excused. This hearing is adjourned.

[anne]

As for punishment as such, we are a wildly punishing people mostly failing to recognize just how punishing we are and are encouraged to be. Simply look to American foreign policy, and understand that we are only encourage to behave as though vengence or punishment are ours. Irtaq was the essence of a country bent on punishment, bent on punishment beyond merely inspiring shock and awe, punishment that is utterly destructive. All that we have needed is the ghost, Hamlet's ghost of an excuse.

[dd]

Soon, too the "winners" will start turning on each other. Merrill Lynch yesterday filed a lawsuit seeking enforcement of contractual obligations involving 7 CDS worth $3.1 billion against counterparty XL Capital Assurance.
http://money.cnn.com/news/newsfeeds/articles/djf500/200803201013DOWJONESDJONLINE000703_FORTUNE5.htm

[Patricia Shannon]

I agree with Anne that our culture is way too much into punishment. But, as others have noted, sometimes it is necessary for prevention of future harmful acts. This study says that "costly" punishment didn't work, within the confines of the experiment. Winners used the tit-for-tat strategy. But that does not let the cheater get off free. It does entail a certain amount of punishment (commensurate /mild/weak/ appropriate/ moderate?). We can look at several places on the planet today where costly punishment is proved counterproductive, eg., Israel/Palestinians, civil wars in several countries, Ireland until a few years ago.
The people doing this were usually not people brain-damaged from physical abuse by their parents, who grew up in neighborhoods where violence was normal and hope for a better future was absent. They are the privileged whose God is money and power, uncaring about the welfare of everybody else.

[d_rumsfeld]

Professor,

You are a smart guy. So are the other economics professors who post on the housing bust/mortgage crisis/credit crunch. There is a big disconnect between the academic view of how best to fix the situation and the dissenting rage expressed by the people who read those blogs.

I don't understand why those of us who are interested enough to read an economics professor's opinions (and are therefore probably a subset of wackos and cranks) have such a different view than the academic one. But we do.

Your opinion about bailing out the financial actors is contingent upon regulatory oversight. However, given the curent administration's incompetence and outright objection to regulation, I think that any regulation that is put in place will be either ineffective, harmful, or both (e.g., handling of Iraq). Without regulation, a bailout is just handing over taxpayer money to people who gamed the system.

So while I understand your point in theory, it would be ineffective in practice. Can you defend how the regulation of the financial and shadow financial industry would actually be implemented in an effective way, as opposed to assuming that it will be?

[cm]

One aspect of the "moral hazard" angle is that arguably the very essence of moral hazard is the (full or partial) insulation from punishment.

Perhaps "moral" is even a misnomer here -- the classical definition of moral hazard is a bailout expectation that is not based on a legal obligation, but social convention.

What we have here is more like a hostage situation -- with the financial system as the "hostage taker".

[dickeylee]

Even if the Dems take back the WH, they still won't (in all probability) have a 60 vote majority in the US Senate. The Repubs will use cloture to block any attempts at meaningful reform and oversite, and the media will prattle on and on about the do-nothing Dems.
There is a very strong 20% of the US of A that has made it to finanicial utopia, and are smart enough to hire lawyers, consultants, think tanks and the major media outlets to deluge us with lies, damn lies and statistics to pull another 20% to vote with them.
Missing blonde's and missing flag lapel pins are infinitly more inportant then missing billions from the Federal reserve!

[crack]

MT:

I think the problem with saying that future regulation will prevent moral hazard is that new regulation deals with issues that can be foreseen. If regulation would have been in place it may have prevented this specific scenario, but the mindset that took advantage of the situation would still exist. Moral hazard isn't about specific actions, its about feeling you'll be bailed out if the actions you take cause problems. It gets to the issues with hedge funds. Make big bets that can go disastrously, but rarely do, and keep the winnings. If you know that when the bet does go disastrously wrong you won't be punished then your risk has changed and it makes sense to make bets that jeopardize the entire economy.

[ken melvin]

Best to preclude; that way there is no damage done (cops on the beat work best for this). Rethugs like the catch and punish better for non-white collar crimes (something to do with the old testament, I think). True, punishment provides a form of deterrence, i.e., if you do it we'll make you wish you hadn't, and so, is in a sense, a means of preclusion. Whatever, preclusion remains the objective. First, prevent. If the crime occurs, catch the perp, take away the gains, and take away privileges (for a determinant time). Crimes can't be undone by punishment.

[Jack]

"Also, though many people have been misrepresenting my views, I've never said that anyone should get away with anything, just that the police shouldn't fire guns into a crowd to catch a thief - the collateral damage is too large. Better to separate them from the crowd and take care of them individually. But if you cannot do that, and this is no different than police giving up pursuit on a crowded street because too many innocent people get hurt, sometimes you just have to let it go as hard as it is to swallow that idea. If there's any way at all to catch them without hurting the innocent to an intolerable degree, of course we should do that. And we can change things in the future to make it harder to do at all (i.e. regulate), but punishment at all costs is not always the best idea."

We can use different metaphors to make our separate points. So, if criminals got away with their crimes provided they took hostages and police were almost always willing to let them go (and keep most of their loot) rather than see hostages hurt, that would create unwanted incentives not only to commit crime but to take hostages if you do so. We don't want to fire into a crowd, but we don't want to encourage hostage-taking either. The root problem is encouraging or discouraging a criminal mentality, and letting the deviant know only ruin awaits them if they commit a crime, especially if they take hostages, is one way to do this.
Another way is to appeal to the criminal's sense of basic human decency, but this high finance, and generally those who work in this business don't have human decency.

[paine]

the sack is costly punishment ...eh ??

"Our finding has a very positive message:
In an extremely competitive setting, the winners are those who resist the temptation to escalate conflicts, while the losers punish and perish,"

the contemporary for profit corporation
must play a dominance game within a co operative game

thus its moliere like quality

punishment or simply rewardless outcomes
for one sort or other type of employee is de rigeur ..eh ???

to step outside the corporate veil
and start to call
any economic system as a whole
built primarily out of these components
a co operative venture ....

say what ....?????

"researchers have suggested that costly punishment can compel cooperation in one-time interactions "

that's not anymore relevent here
then repeated interactions
i think many people want to
single out a few big bad thumbs
for a last time interaction

[paine]

poed portland

you sound like a fraud or a fool or both

reading your tale
leaves me kold

saving for a house
what amount how long

fear of inflation
get a non dollar fixed security

oh ya you want that all to go to hell so you can afford the house lot
with the credit props pulled out from under it

start with this simple heuristic
given the economy is so interconnected
you'll likely lose at one end what you gain at the other

[odograph]

"paine" the thing to remember is that savers, and people who have been paying down their mortgages, were minding their own business. They didn't make this trouble.

They (we) would have been just fine with steadily increasing, but non-bubble, home prices.

They (we) might now have a "plan B" if houses (including our own) get cheap, but does not in any way make this our doing.

In fact, we could ask you to consider the flip side ... if you'd leveraged and won big, beyond us timid folks, would you have shared with us?

I don't think so, and yet now you want us to cover you.

[odograph]

BTW, in terms of "get a non-dollar fixed security" ... isn't the classic next step in a situation like this: a bubble and a crash in foreign markets, as money flows beyond reason, and in panic?

[odograph]

Someone else who says it better than me: Barry Ritholtz

[paine]

"paine" the thing to remember is that savers, and people who have been paying down their mortgages, were minding their own business. They didn't make this trouble."

rule one

first
punish the innocent

hey " yet now you want us to cover you."

no i want you to put "me " in jail

[odograph]

Well alrighty then.

[ken melvin]

In these times of everything changing, 'tis amazing how many wish to pretend that all is as it used (is supposed) to be.