Transcript The Trust Game - Duke University

Preference modification vs. incentive
manipulation as tools of terrorist
recruitment: the role of culture
Michael Munger, Departments of
Political Science and Economics
Duke University
Friday, Sept 30, 2005
Problem of Acting as Society
Can a group of people who disagree come to a
consensus?
I want…you want…what do we want?
COLLECTIVE CHOICE PROBLEM
Even if they do agree, how could they coordinate
their actions?
INFORMATION /
TRANSACTIONS COST PROBLEM
Even if they all know what to do, why would they
do it?
FREE RIDER /
COLLECTIVE ACTION PROBLEM
Information and Coordination
“The peculiar character of the problem of a rational economic
order is determined precisely by the fact that the
knowledge of the circumstances of which we must make
use never exists in concentrated or integrated form but
solely as the dispersed bits of incomplete and frequently
contradictory knowledge which all the separate individuals
possess. The economic problem of society is thus not
merely a problem of how to allocate "given" resources—if
"given" is taken to mean given to a single mind which
deliberately solves the problem set by these "data." It is
rather a problem of how to secure the best use of
resources known to any of the members of society, for
ends whose relative importance only these individuals
know. Or, to put it briefly, it is a problem of the utilization of
knowledge which is not given to anyone in its totality.”
(F.A. Hayek, 1945, AER).
Problem 2--Commitment: Without
Enforcement, Can We Cooperate?
Common Knowledge Basis of
Cooperation—When I You Know That I
Know that it is in your interest to
cooperate…
Can we account for irrational acts?
Suicide bombings, sacrifice of a life? Are
the bombers duped, or confused?
We tend to think the state is the only
answer….but…..
An Example of “Cultural” Difference
“shibboleth”--The word is often combined
with the word “cultural.”
Its general meaning is mean an unspoken
but shared understanding of something
that identifies insiders, and distinguishes
outsiders because they do not share this
understanding.
Shibboleth
Judges 12, 5-7, King James 21st Ed. Bible
5 And the Gileadites seized the passages of the
Jordan before the Ephraimites; and it was so, that
when those Ephraimites who had escaped said, "Let
me go over," that the men of Gilead said unto him,
"Art thou an Ephraimite?" If he said, "Nay,"
6 then said they unto him, "Say now Shibboleth."
And he said "Sibboleth," for he could not frame to
pronounce it right. Then they took him and slew him
at the passages of the Jordan; and there fell at that
time of the Ephraimites forty and two thousand.
My Definition of “Culture”
Culture: The set of “inherited”
beliefs, attitudes, and moral
strictures that a people use to
distinguish outsiders, to understand
themselves and to communicate
with each other.
Culture Is “Inherited”
I have put quotations around the word inherited above, not
because I am quoting anyone, but because the sense of
the word is strained.
Hair texture, eye color, general build…those sorts of things
are inherited. They are hard-wired into the genetic
structure of humans, and children are directly and
entirely the product of their parents.
Culture is obviously not inherited like this. We teach it to
our children, or they learn it by tacit and perhaps
unconscious exposure over time.
But it makes sense to think of culture as an inheritance, or
legacy from the past.
Origins: Two Concepts
Spontaneous Order
Intelligent Design
Does order imply design? Strange
disconnect—Many people who believe
fervently in evolution in biology insist on the
need for design and control in social and
economic settings.
The Questions that interest me…
Are preferences tastes, truly primitive
(chocolate v. vanilla), or are they culturally
conditioned or even instrumenal?
Are moral beliefs important? Are such
beliefs best treated as preferences or
constraints?
Core values: relatively fixed, strongly held,
primitives in terms of “preference.” Policy
beliefs not held instrumentally, but as ends in
themselves. Not irrational to sacrifice for
beliefs
The Questions that interest me…
Are ideologies, or shared belief systems
about right and wrong, the key to
understanding moral beliefs? In the U.S., lots
of research to say no. But Islam, or Maoism,
may have implications for guerrilla
movements…
Are ideologies a kind of spontaneous order,
not explicitly designed but regular and
consistent across people and across time?
Ideas--like viruses? Reproduce, gain
resources, but kill their host….
Emergence of “Culture”:
David Hume has Lunch at Café Hayek
(where orders emerge)
Three claims about culture:
1. “Order” requires only regularity and consistency.
Human beings choose actions based on moral
conceptions, but also incentives and calculated gains
that accrue to one action rather than another.
2. Purposive Action: I am going to adopt the convention
that humans act purposively. (Didn’t say “rationally”)
3. People choose actions that they believe (rightly or
wrongly) will lead to a goal that they consider (rightly or
wrongly) desirable. These conceptions of right and
wrong may be Humean conventions, not transcendent
principles.
Emergence of “Culture”:
David Hume has Lunch at Café Hayek
(where orders emerge)
1. Surprising thing is that order can
emerge, even from disparate and
uncoordinated application of social
convention.
2. Survival value of practices, or fashion,
may be conscious reason for adoption.
But it is a predictable, and measurable,
consequence.
Order vs. Design:
Which is Culture?
Coyote—Evolution
Dachshund / Chihuahua—Survival
Dandelion—Evolution
Rose—Survival
Wild Turkeys—Evolution
Domesticated Turkeys—Survival
Choices Emerge….
Do Preferences?
Is there some evolutionary process that governs
preferences?
Are human political beliefs “getting better” over
time?
The key difference is the absence of any
feedback mechanism by which the merits of the
emergent order might be judged, or subjected to
modification.
Douglass North makes this point quite forcefully:
Necessary conditions for what economists think of as
efficiency almost never exist in political realm…
…Efficient markets are created in the real world when
competition is strong enough via arbitrage and efficient
information feedback to approximate the Coase zero
transaction cost conditions and the parties can realize the
gains from trade inherent in the neo-classical argument.
But the informational and institutional requirements
necessary to achieve such efficient markets are stringent.
Players must not only have objectives but know the correct
way to achieve them. But how do the players know the correct
way to achieve their objectives? The instrumental rationality
answer is that even though the actors may initially have
diverse and erroneous models, the informational feedback
process and arbitraging actors will correct initially incorrect
models, punish deviant behavior and lead surviving players to
correct models. (North, 1993).
Will Culture Disappear?
Ronald Heiner (1983) argues that as human
interaction becomes more complex and uncertain,
successful social institutions must reduce the
information needed to achieve cooperation among
individuals.
A person’s “overall behavior may actually be improved
by restricting flexibility to use information or to chose
particular actions” (p. 564).
Mom and Pop hardware store vs. Walmart
Farmers’ Market vs. Piggly Wiggly
The End of History
What is the cheapest way of achieving cooperation? Formal
rules and external enforcement, or culture and shame/guilt
“enforcement”? Heiner (1983):
“In general, further evolution toward social interdependence will
require institutions that permit agents to know about
successively smaller fractions of the larger social environment.
That is, institutions must evolve which enable each agent in
the society to know less and less about the behavior of other
agents and about the complex interdependencies generated
by their interaction” (580; emphasis in original).
In WalMart world, ideologies would disappear.
Western, market-based societies with weak parties
and decentralized democratic institutions—the end of
history?
Institutional Design:
Information….and Commitment
Institutions are the humanly devised rules of the
game that shape and direct human interactions.
Institutions reduce uncertainty by shrinking the
choice set of all of the “players.” If the rules are not
formalized, the players may spend too much time
arguing over the rules, and less time competing in
productive activities. The actual choice of
institutions, however, is hard, since there are
countless ways of restricting “bad” choices. What
makes some institutions better than others?
The Preference Store: Metapreference
Step back for a moment….
The Fundamental Human Problem
(according to Munger)
How can we construct or preserve
institutions that make individual
self-interest not inconsistent with
the common good?
Two Approaches
Madisonian
“Ambition must be made to counteract
ambition…”
Rousseauvian
Transform the self, solve the problem of
amour propre. Inscribe the law on the
hearts of men. Some preferences are
better than others.
The Problem….
The nature of exchange: gains from trade. Both are
better off.
But only if the exchange takes place: transactions costs
are the ex ante costs of negotiating and measuring, and
the ex post costs of enforcing. Transactions costs can
easily overwhelm the potential gains from exchange.
Institutions and cultural beliefs: closely related to
"common knowledge" problem in game theory. Shared
meanings, iconography, language, symbols. Not just
knowledge in the Hayekian sense, but also commitment
But also may entirely block progress, lock in institutions
that are not Pareto optimal.
Origins of culture
The literature contains two strikingly different
accounts of the origins of culture, based on two
very different conceptions of its function.
One account is based on transactions cost and
commitment, while the other rests on the
problem of excludability and “club” goods.
The two accounts are not mutually exclusive, but
they do have strikingly different implications for
our understanding of culture.
I. Commitment Device: Real Piety
Kreps (1990)
Hierarchy
Uncertainty
Requires an organizing principle as a
commitment device.
The Trust Game
Honor Trust
A +$20
B +$20
Total:
+$40
Trust B
A
Do Not Trust B
Do Not Honor Trust
A $10
B +$30
Total:
+$20
A +$0
B +$0
Total:
+$0
B
Hierarchy and Strategic Uncertainty
It is B’s behavior that is in question; somehow B must persuade A
that there is at least a high probability that B will honor A’s trust
if A offers it. And there are real gains to be made here, so
there are significant pressures at work to overcome this
commitment problem. There are two apparently different but
mathematically indistinguishable ways of solving the problem:
(1) B could post a bond, or submit to some kind of binding third
party enforcement that would punish him if he violates trust, or
(2) B could persuade A that cares so much for A, or that B cares
so much for his own honor, that he will not violate the trust,
because it would not be in his interest to do so, given B’s self
interest properly understood.
Similar in terms of analytics, but a world of difference in terms of
practical implications, and beliefs.
Hierarchy and Strategic Uncertainty
Outside enforcement: Hobbes’ “covenants, without the sword, are
but words…”
Beliefs: Rousseau: “inscribe the law on the hearts of men…”
It is common to dismiss this difference, but in fact the distinction
may be the very heart of the matter for the society.
Dead weight loss to society has two parts: (1) The size of the
“transactions cost sector” of the society, and (2) Other
exchanges precluded by an inability to reduce transactions
costs to the point where those otherwise profitable transactions
can take place
This loss is a direct function of the society’s set of moral beliefs
that condition interactions. It will surprise no one at this point
that I want to call this whole set of moral beliefs and
conditioning factors for economic and social exchange by the
vague name I mentioned earlier: culture….
II. Club Goods: Good Works
A standard set-up for the club goods approach is Berman’s
(2003):
Imagine a community for which neither government nor
markets function well. Local public goods usually
provided by government such as public safety, law and
order and welfare services are poorly provided or
absent, while neither public nor private sectors efficiently
deliver education, health services, or insurance. It would
not be surprising for individuals in such a place to band
together into communities which provide public safety,
education, welfare services, and other local public goods
through mutual insurance. (Berman, 2003, p. 2)
Game 1: Prisoner’s Dilemma
Cooperate
Cooperate
(2,2)
Defect
(1,4)
Defect
(4,1)
(3,3)
ORDINAL PREFERENCES: 1 is good, 4 is bad
Game 1: Prisoner’s Dilemma with
External Enforcement:
Defectors are Tortured & their Families Killed
Cooperate
Cooperate
(1,1)
Defect
Defect
(2,4)
(4,2)
ORDINAL PREFERENCES: 1 is good, 4 is bad
(3,3)
Game 1  : Prisoner’s Dilemma
with External Enforcement:
Defectors Feel Really Bad
Cooperate
Cooperate
(1,1)
Defect
(4,2)
Defect
(2,4)
(3,3)
ORDINAL PREFERENCES: 1 is good, 4 is bad
Game 2: Culture War
Cooperate
Cooperate
(3,3)
Defect
(1,4)
Defect
(4,1)
(2,2)
ORDINAL PREFERENCES: 1 is good, 4 is bad
Game 3: U.S. in Iraq—1992
No Equilibrium….
Anti-Saddam
Insurgency
U.S. 
Cooperate
Defect
Cooperate Defect
(2,1)
(1,4)
ORDINAL PREFERENCES: 1 is good, 4 is bad
(3,3)
(4,2)
Game 3: U.S. in Iraq—2005
Side Payments….”Be Rational”
Anti-U.S. (Sunni)
Insurgency
U.S. 
Cooperate
Defect
Cooperate Defect
(1,3)
(4,4)
ORDINAL PREFERENCES: 1 is good, 4 is bad
(2,1)
(3,2)
If Club Goods….
If participation in terrorist organizations is primarily an inkind payment for access to club goods, then policies that
reduce the marginal value of such club goods will be
most effective.
A concerted effort to break up social networks, in cases
where groups with terrorist ties (such as Hamas, or IRA)
also provide local public goods such as schools, police
services, etc., and replace those organizations with
publicly provided services, would have an immediate
impact out of all proportion to the cost.
Though the dividing line between “police services” and
“protection racket” may be blurred, it is clearly true that
the IRA (in Northern Ireland) and Hamas (in the
Palestinian territories or in other parts of the Middle East)
provided services valued by many local citizens.
If Club Goods….
Furthermore, if the problem is an incentives-based
choice, it becomes clearer why medieval
punishments have often been employed by
occupiers fighting resistance groups using terror
tactics.
The rack, drawing-and-quartering, or other public
displays of savage retribution reduce the value
of access to local public goods as a matter of
simple cost-and-benefit calculations.
While this observation does not justify the use of
such tactics, it does explain why they have been
so commonly observed throughout history.
If Preferences….
If, on the other hand, a preference for cooperation can be
inculcated or selectively recruited, then such tactics are
likely to backfire.
If the primary good is psychological solidarity with an
identifiable group, then public abuse or torture may only
harden the resolve of those committed to cooperation with
terror groups.
To the extent that abuse of some populations solidify in-group
vs. out-group psychological identifications, attempts to use
incentives can precipitate the “culture war” setting described
earlier in this paper.
In that setting, publicly uncooperative behavior becomes
valued as an end in itself, and even apparently Paretosuperior compromises on territory may be ruled out. If the
preferences are primitives, not possible to compensate or
buy out terrorists with alternative incentives.
A movie: Positive Feedback….