Random Thoughts from a Restless Mind

At the root of behavioral economics is a rather simple concept: people will tend to make choices based on rational self-interest. Given the rules of any given situation, most people will behave in a manner that results in either some benefit for themselves, or one in which they are least likely to suffer some unpleasant consequence.

I first came upon this concept in the fascinating book “Non-Zero” which seeks to explain social evolution through the prism of game theory. But it was Alex Tabarrok’s introductory lecture in Econ 101 that best illustrates both the definition of rational self-interest and some of the unforeseen consequences that arise when one doesn’t remember this rule.

In the early to mid 1800’s Great Britain was suffering from the inconvenient combination of too many criminals and too few jails. In earlier times this would not have posed so much of a problem—the worst of the criminals would simply be hanged. This being a more enlightened age, however, made this an untenable situation, one that needed a more genteel solution. Enter Australia! During this time of expansion in the British Empire (despite those rascals in North America), the powers that be realized that the government was long some land just past Africa. Thus was a new nation born, populated by the misfits and miscreants shipped out of England, out of sight and hopefully out of mind.

This whole penal colony thing turned out to be pretty good business for the merchant marine industry in Great Britain. Ships were hired and captains engaged to deliver the human cargo to Australia. Indeed, large sums of money were paid to both the ownersand captains of the ships to deliver the prisoners alive, new citizens in the ever-expanding United Kingdom. After all, if your not gonna execute them at home, it made sense to get some benefit from keeping them alive;  colonizing yet another corner of the globe seemed a fair trade for avoiding execution.

A funny thing happened on the “road” to Australia: most of the prisoners died en route, and those who survived the trip arrived very much worse for the wear. This confused the British officials since they were paying top dollar, hiring only the best captains and working with the most reputable shipping companies. Both crew and cargo, human and otherwise, seemed to make the return trip with no difficulty. Fearing that this was an issue of economics the government officials increased the fees paid to the captains, theorizing that this would incentivize them to deliver the prisoners alive.

Alas, ‘twas not to be. Despite the enhanced payments the majority of the prisoners continued to die en route.

After some years of this pattern a rather low-level functionary in Australia took it upon himself to interview the surviving prisoners upon arrival. They told tales of incredible deprivation. Weeks upon weeks of rations that were below sustenance level. Horrid sanitation below deck where the prisoners were housed. Terrible beatings inflicted upon any who protested. Interestingly, all of these things seemed to WORSEN after the fees for passage were increased.

It turns out that the issue really was one of economics after all. The captains were given funds to pay the crew and to provide provisions for both crew and captives. They were paid UP FRONT! Any money left over went to the captain, and if he was smart some to the crew. No only was there no incentive to deliver their cargo alive, there was actually a strong DISINCENTIVE to do so. The less money spent on keeping the prisoners alive and well, the more money left over for the captain and crew.

Rational self-interest. Ugly? Yes. Inhumane, for sure. But irrational? Not hardly.

I know you are wondering, how is it, then, that Australia isn’t simply a huge landmass still populated only by its Aboriginal citizens? Well, armed with the knowledge that prisoners were not being fed, given exercise, or treated for any maladies that might arise, the business model of populating the penal colony was turned on its head. The ship shipping companies and their captains were given the equivalent of working capital sufficient to supply ship, crew, and cargo with the necessities to arrive alive and well, and wages were paid upon successful delivery of healthy, living prisoners to their new homes.

Voila! Problem solved. The expansion of the British Empire was saved by understanding the concept of rational self-interest.

So what’s the take home message? In most circumstances one can analyze the actions of the participants and gain a more clear understanding of why they behave in a particular manner by seeking to understand their actions through the prism of rational self-interest. For example, it always amazes me when business owners are surprised when their employees always turn out to be sick the exact number of sick days they are allowed each year.  It is certainly in the business owner’s interest for them to work if they are healthy, but when you turn that on its head and think about the worker…

Heroism and other forms of altruism do exist; they’re just really rare. People do stuff that looks crazy on first blush, but when you dig a little deeper it’s usually nothing of the sort. It’s usually rational self-interest that you simply missed.