Who Likes Simple Rules?

Some puzzles:

• People are often okay with having either policy A or policy B adopted as the standard policy for all cases. But then they object greatly to a policy of randomly picking A or B in particular cases in order to find out which one works better, and then adopt it for everyone.

• People don’t like speed and red-light cameras; they prefer human cops who will use discretion. On average people don’t think that speeding enforcement discretion will be used to benefit society, but 3 out of 4 expect that it will benefit them personally. More generally people seem to like a crime law system where at least a dozen different people are authorized to in effect pardon any given person accused of any given crime; most people expect to benefit personally from such discretion.

• In many European nations citizens send their tax info into the government who then tells them how much tax they owe. But in the US and many other nations, too many people oppose this policy. The most vocal opponents think they benefit personally from being able to pay less than what the government would say they owe.

• The British National Health Service gets a lot of criticism from choosing treatments by estimating their cost per quality-adjusted-life-year. US folks wouldn’t tolerate such a policy. Critics lobbying to get exceptional treatment say things like “one cannot assume that someone who is wheel-chair bound cannot live as or more happily. … [set] both false limits on healthcare and reducing freedom of choice. … reflects an overly utilitarian approach”

• There’s long been opposition to using an official value of life parameter in deciding government policies. Juries have also severely punished firms for using such parameters to make firm decisions.

• In academic departments like mine, we tell new professors that to get tenure they need to publish enough papers in good journals. But we refuse to say how many is enough or which journals count as how good. We’d keep the flexibility to make whatever decision we want at the last minute.

• People who hire lawyers rarely know their track record at winning vs. losing court cases. The info is public, but so few are interested that it is rarely collected or consulted. People who hire do know the prestige of their schools and employers, and decide based on that.

• When government leases its land to private parties, sometimes it uses centralized, formal mechanisms, like auctions, and sometimes it uses decentralized and informal mechanisms. People seem to intuitively prefer the latter sort of mechanism, even though the former seems to works better. In one study “auctioned leases generate 67% larger up-front payments … [and were] 44% more productive”.

• People consistently invest in managed investment funds, which after the management fee consistently return less than index funds, which follow a simple clear rule. Investors seem to enjoy bragging about personal connections to people running prestigious investment funds.

• When firms go public via an IPO, they typically pay a bank 7% of their value to manage the process, which is supposedly spent on lobbying others to buy. Google famously used an auction to cut that fee, but banks have succeed in squashing that rebellion. When firms try to sell themselves to other firms to acquire, they typically pay 10% if they are priced at less than $1M, 6-8% if priced $10-30M, and 2-4% if priced over $100M.

• Most elite colleges decide who to admit via opaque and frequently changing criteria, criteria which allow much discretion by admissions personnel, and criteria about which some communities learn much more than others. Many elites learn to game such systems to give their kids big advantages. While some complain, the system seems stable.

• In a Twitter poll, the main complaints about my fire-the-CEO decisions markets proposal are that they don’t want a simple clear mechanical process to fire CEOs, and they don’t want to explicitly say that the firm makes such choices in order to maximize profits. They instead want some people to have discretion on CEO firing, and they want firm goals to be implicit and ambiguous.

The common pattern here seems to me to be a dislike of clear formal overt rules, mechanisms, and criteria, relative to informal decisions and negotiations. Especially disliked are rules based on explicit metrics that might reject or disapprove people. To the extent that there are rules, there seems to be a preference for authorizing some people to have discretion to make arbitrary choices, regarding which they are not held strongly to account.

To someone concerned about bribes, corruption, and self-perpetuating cabals of insiders, a simple clear mechanism like an auction might seem an elegant way to prevent all of that. And most people give lip service to being concerned about such things. Also, yes explicit rules don’t always capture all subtleties, and allowing some discretion can better accommodate unusual details of particular situations.

However, my best guess is that most people mainly favor discretion as a way to promote an informal favoritism from which they expect to benefit. They believe that they are unusually smart, attractive, charismatic, well-connected, and well-liked, just the sort of people who tend to be favored by informal discretion.

Furthermore, they want to project to associates an image of being the sort of person who is confidently supports the elites who have discretion, and who expects in general to benefit from their discretion. (This incentive tends to induce overconfidence.)

That is, the sort of people who are eager to have a fair neutral objective decision-making process tend to be losers who don’t expect to be able to work the informal system of favors well, and who have accepted this fact about themselves. And that’s just not the sort of image that most people want to project.

This whole equilibrium is of course a serious problem for we economists, computer scientists, and other mechanism and institution designers. We can’t just propose explicit rules that would work if adopted, if people prefer to reject such rules to signal their social confidence.