Monday, June 8, 2009

No Pain, No Gain

Why is it difficult to get humans to act in their own self-interest at times? A combination of factors ranging from bounded rationality to bounded self-control could be the reason. Possible policy interventions can help address them.

The classic underinvestment problem in human self-potential is usually explained by referring to the positive net benefits accruing to society. Yet despite public subsidies in the provision of education and healthcare, the take-up rates of those being targeted do not always follow the logic that human capital theory suggests.

This could be because people have to weigh short-term pain against long-term gain. If all humans were perfectly rational and had consistent time preferences, this would not matter. The lack of self-control and short-term bias in some may make them unable to consistently undertake short-term sacrifices to improve their future capacity though. These inconsistencies cause them to be locked in to lower levels of human potential as a result.

David B Moss writing in The Scientist back in 2005 talked of both neurological as well as cultural ways for defining and experiencing pain, and how the narrative regarding human pain has developed over millenia in myths and other cultural carriers. According to Moss, the term “no pain, no gain” (invented by Jane Fonda in 1982)

is an American modern mini-narrative: it compresses the story of a protagonist who understands that the road to achievement runs only through hardship."

Reinforcing this narrative, policy instruments to overcome the short-term bias against this “pain” can be designed in order to bring people out of their developmental rut.

As demonstrated in Malawi , subjects who were tested for HIV were then told to travel varying distances to clinics to check their results. Roughly 30% did so. But when offered a token monetary reward (of a few US cents), a doubling of the follow through rate occurred. This demonstrates that without the slightest of nudges, such behaviour even in the person’s self-interest would be less likely to occur.

In Latin America , conditional cash transfer schemes have been tested and proven to increase school participation and attainment rates as well as lower infant mortality rates.

In the US , schemes that automatically allocate a share of annual pay increases for retirement have been shown to increase employee savings rates.

In Australia , the recently concluded Council of Australian Governments meeting announced that in order to ensure youth participation in “earning or learning” it would make training a precondition for obtaining Family Tax Benefit A and Youth Allowance benefits. Unlike the earlier examples, which offer rewards for desired behaviour, this measure makes it more difficult to receive previously held benefits.

Presumably, it will increase in efficacy the further down the income status it is applied given the principle of loss aversion (where the pain of marginal loss exceeds the pleasure of an equal marginal gain). This might seem unfair to some, even opportunistic (given that it was identified as a source of budget savings by the Treasury amounting to A$1.8 billion) but for a disengaged member of the workforce, this measure might provide the necessary jolt to reengage.

As James J Heckman shows, non-cognitive skills such as perseverance are just as important as cognitive skills (measured by intelligence) in explaining disparities in life outcomes in society. A combination of monetary rewards and cultural narratives can potentially affect the formation of such non-cognitive abilities from an early age.

No comments:

Post a Comment