Posts Tagged ‘CalTech’

That is big, really big.

The free-rider problem is simple. It describes those situations when a group of individuals would benefit from a common action, but each individual separately would prefer not to make any effort to make this action happen.

Like: as a group, we would like to have an environmental policy to stop global warming, but when asked how much tax I personally would be ready to pay to implement this policy, I refuse to declare that I’d be willing to pay much. Even if the amount that I would pay would be more than compensated by the benefits of an environmental policy! Simply because hey, if the environmental policy is decided by others and payed by others, once implemented it will also benefit me, so why would I bother paying for it? It is much easier to let others pay for it, and then, I’ll benefit from it anyway!


Another free rider

It is the eternal problem of the free rider: “I would like to have the benefits of the collective action, but I would prefer if the costs were payed by my neighbor.” The problem is, of course, that if everybody thinks like that, then everybody states that they would not pay much, and the budget for the collective action is never gathered. That’s too bad, because the collective good would have enhanced everybody’s welfare!

It has huge implications for tax policy, or any issue where a collective action would be required. And the difficulty faced has always been that when you ask people “how much would you be ready to pay for this collective good”, they tend to understate what they are really willing to pay – always hoping that the collective good will be build anyhow – but payed by their neighbors.

What if we could “read” in people’s mind what they would really like to pay for a collective good? This would allow to know how much people would each be ready to pay for the collective action. The collective action would then be undertaken, only if its benefits would be superior to the sum of the payments that each individual declared to be ready to make.

This is the experiment conducted by a team of CalTech neuroeconomists, just published in Science. They gathered groups of subjects, and scanned their brain while they stated the amount they were willing to pay for a given collective investment.

To be precise, this what not a simple lie-detector mechanism: the accuracy of the scan to detect the “honesty” of your choice was just 56%. But it is enough to act as a threat to participants: they will be punished with heavy taxes if they are found to be willing to pay very little for an investment which will repay them much. It acts as an incentive for participants to reveal their true preference each time they are asked about a potential collective investment!

Ian Krajbich, lead author of the study

Ian Krajbich, lead author of the study

The results of this “Neurally Informed Mechanism” as they call it are astounding: the total welfare achieved by this experiment is 93% of the ideal case, which means that free-riding has almost completely disappeared! This is a remarkable result, given that traditional experimental settings do not score better than 23%.

So, the free-rider problem, or the problem of collective action finally solved? Neuroeconomics made an interesting step in this direction. Huge!

The study raises some questions though. For example, the procedure followed shows that the participants were convinced with lengthy, technical arguments that the “not free-riding” strategy was the most advantageous one.  Those arguments were true, and the experimenters deduce that if the participants did not free-ride, it is because they understood it was in their best interest. But one can also object that they did not free-ride simply because they had been brain-washed about not free-riding: they simply trusted the experimenter and played in the fashion that was strongly suggested. If that is the case, then the 93% result is not so amazing.

This doubt is even greater when one wonders about the actual role played by the fMRI scan: crucial or not? At 56% of free-riding detection, just above fifty-fifty, one doubts whether the participants refused to free-ride because the threat of the scan detection made it the best strategy to play, or simply because they were impressed by this big machine and the intense strategical training they received from the researchers (see the supplement online material of the article, esp. the section “strategy” on pp. 42-45, which shows how much the participants were lectured about NOT free-riding. )

More about it? Antonio Rangel, an economist in the CalTech team reports on the Science article in an interviewed by James Hugues, from the Institute for Ethics and Emerging Technologies. Click here for the interview.

Read Full Post »

A nice summary with Colin Camerer, Ralph Adolphs, etc.

Thanks to Investing Pinoy for the link.

Read Full Post »