Saturday, December 4, 2010

Trade Off #16: Impulse vs Incentives

At one of the stoplights on my drive to the gym, there is often someone walking through the cars asking for change. Let's assume, reasonably, that she needs the money more than I do. Let's also assume, somewhat less reasonably, that she'll spend the money in a productive manner. We can now break the decision down into the benefits she'd gain from leveraging my money versus the perverse incentives I'd reinforce by rewarding people for begging in traffic.

Generally, this trade-off is between the benefits from an impulse meant to rapidly improve and stabilize a condition, versus the costs of long-term instabilities that could result. Some examples:
  • Keynesian econ emphasizes the multiplier of a gov intervention, which they consider to be an impulse, whereas Austrian econ emphasizes the moral hazard (i.e., bad future incentives) of such impulses. ("in the long run we're all dead", also see here)
  • Radiotherapy has a good chance of killing tumors, and thus can be thought of as an impulse. But it also makes mutations in other genes more likely, which could develop into secondary tumors in the future, and thus can be thought of as bad "incentives." (see here)
  • WikiLeaks might incite people to speak out against or question their government, thus acting as an impulse to increase freedom, but it also incentives governments to be even more secretive and centralized, thus decreasing freedom. (see here)
The previous trade off we're most worried about conflicting with here is some now vs more later. And indeed, it is true that there is a time component to both of these trade offs. But the difference between them is that in this trade off the two possible outcomes are not quantitatively but instead qualitatively different.

Now, the previous paragraph is somewhat of a technicality, and is probably boring. But if I didn't mention it now, just imagine the kind of incentives that would introduce for sloppiness in the future.

(Kudos to Alan Grinberg for the photo)