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Wednesday, March 19, 2008

"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.

    Posted by on Wednesday, March 19, 2008 at 01:49 PM in Economics | Permalink  TrackBack (0)  Comments (76)

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