Why Fining People Can Actually Increase That Activity... An Economics Lesson

from the fascinating! dept

I was recently having a discussion with a friend where I pointed out one of the biggest mistakes that people make in trying to understand economics is to assume, incorrectly, that "marginal benefit" or "marginal cost" means money. And, yes, this is actually a mistake that many economists themselves make -- and, in part, it's because the marginal benefit is often measured in monetary terms. So, people seem to think that if there isn't a monetary component it doesn't count. This makes for silly statements like "economics doesn't properly understand how people act." Almost every time that's said, when you look at the details, it's wrong. It's just that people assume that because someone does something for a non-monetary reason, economics can't account for it. That's simply not true. If people do things for a non-monetary reason, it's because they're receiving marginal benefits in some other manner, whether it's attention, pride, happiness, joy or "just because I want to." Those are all marginal benefits.

In fact, Clive Thompson points us to a study that highlights this in a really strong way. It's a series of studies that show that when people overestimate the monetary benefits (or costs) and underestimate the nonmonetary ones, they often set up really bad incentives.

For example, they've found that fewer people give blood when they're paid for it. For someone who thinks only in terms of the monetary benefits, this would make no sense. Why would giving people money lead to less of the activity. But the reasoning is that the real marginal benefit that people get from giving blood is the belief that they're doing good in the world and helping to save lives. Getting paid for it, actually hinders that feeling, by making the whole thing feel like a transaction. And the money paid is apparently a lot less than the decreased "good feelings" from the marginal benefit.

On the flip side, other experiments showed that fining people over certain actions (such as picking up their kids from daycare too late), actually increased the number of tardy parents. Again, if you think of this solely in monetary terms, this makes no sense. It now costs more, monetarily, to be late to pick up a kid. But, in making it a monetary transaction, it removed non-monetary costs -- such as the "guilt" of being late. As the article notes:
The fine seems to have reduced their ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as simply a commodity they could purchase.
This is really fascinating stuff that is important for people to understand in setting up any sort of incentive structure. Money -- either on the cost or benefit side -- is not the only incentive. And thinking that it is often leads to miscalculating a series of other, potentially more important, costs and benefits. That doesn't mean that economics is wrong. It can handle all of that. The problem is when people assume that it's only the direct monetary costs and benefits that go into the equation. It is, unfortunately, a common problem, and leads to all sorts of confused thinking both about business models, but also about the economics profession itself.


Reader Comments (rss)

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  1.  
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    Matt (profile), Oct 6th, 2009 @ 12:01pm

    Another example

    Dan Pink had a good TED talk on how assigning monetary value to results can reduce performance. A good example of how the marginal benefit in self empowering employees can be valued more than monetary compensation.

    http://www.ted.com/talks/dan_pink_on_motivation.html

     

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  2.  
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    Anonymous Coward, Oct 6th, 2009 @ 12:42pm

    So what those parent's really seem to be saying is that would pay for a service that takes care of their kids for a few more hours. Perhaps that daycare should take advantage of that business opportuinty.

     

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  3.  
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    Anonymous Coward, Oct 6th, 2009 @ 12:56pm

    It's the reason the fines / punishments against file sharing are so high, because low fines (like cost of the original cd) would only encourage more thieving. The punishment has to be not only recuperative but preventative as well.

     

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  4.  
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    just this guy, Oct 6th, 2009 @ 1:10pm

    Re: Higher Fines

    The issue I see with the current fines is they are so high that they can't be paid. So if the person being fined can bankrupt nothing get's paid, so then the fine is bankruptcy.

     

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  5.  
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    Anonymous Coward, Oct 6th, 2009 @ 1:15pm

    Is it me or is that lifted directly from freakonomics? (the daycare part, at least).

     

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  6.  
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    Anonymous Coward, Oct 6th, 2009 @ 1:39pm

    A fine of say $5/min reinforces the fact that if I pick up my kids early I'm loosing $5/min of daycare I paid for. Which itself is an incentive to try to pickup as close to the deadline as possible in order to get what I paid for.

     

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    scarr (profile), Oct 6th, 2009 @ 1:43pm

    Re:

    I don't know if you can "lift" the factual results of an experiment, but you're right that a lot of this was covered in a bestseller. Sadly, that doesn't mean lots of people learned the lessons it taught.

    I think stuff like this should be taught in high school. I (who have an engineering degree) wasn't exposed to it until I read Freakonomics this year. The more people can learn about this, the better we'll all be.

     

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  8.  
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    Anonymous Coward, Oct 6th, 2009 @ 1:45pm

    Yeah, I didn't mean the "lifting" in a bad way. I find it weird that people will quote it without attribution, as the source will probably validate the results somewhat.

     

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  9.  
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    Alan Gerow (profile), Oct 6th, 2009 @ 1:49pm

    Re:

    Except that's not how the law is designed to work. You can't punish one person for what other people are doing. You can't use a person as an "example" to other people, because that's not fair to the person being made an "example" of. The ends do not justify the means, and mistreating one person to send a message to other infractioners is immoral.

    The court needs to look at one person and say "what damages did this one person cause?" And the retribution should be according to that person's situation.

    This idea of "preventative" punishment is grossly immoral and disgusting.

     

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  10.  
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    Anonymous Coward, Oct 6th, 2009 @ 1:56pm

    Re:

    Indeed.

    That's why cutting off the hands of thieves is brilliant - much harder to swipe stuff after.

     

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  11.  
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    Logo, Oct 6th, 2009 @ 1:56pm

    Re: Another example

    Reading the article made me want to link to the same TED Talk. It's quite a good talk and very interesting so I highly recommend it!

     

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  12.  
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    TheStupidOne, Oct 6th, 2009 @ 2:09pm

    Re: Re:

    I'll agree to a point. "Making an example of" is grossly immoral and disgusting. "preventative" punishment isn't what you are making it out to be. Punishments are intended to make the wronged party whole if possible and discourage the activity in the future.

    For example, if you steal a candy bar from 7-11 and get caught there is punishment. If the punishment is simply paying the cost of said candy bar then there is absolutely no motivation to actually pay in the first place. If you get caught 99% of the time then 1% of the time you'll get free candy bars and will be better off. If the punishment is paying 10x the cost of the candy bar then if you get caught just 20% of the time you would be better off paying for every candy bar than stealing any.

    Punishments have to be set such that the majority of people would rather obey the rules than risk the punishment. That is preventative

     

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    scarr (profile), Oct 6th, 2009 @ 2:25pm

    Re:

    Levitt/Dubner didn't come up with it either, they were reporting it the same as Samuel Bowles (who wrote the article Masnick references). Masnick cited his (secondary+) source, but Bowles didn't cite his. While potentially useful, many news orgs don't explicitly list the studies they reference.

     

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    Xander C (profile), Oct 6th, 2009 @ 2:35pm

    Makes sense... If being late is going to cost you, then it makes no difference if you are 1 minute late or 1 hour late. You "pay" your late fee, so there's no intensive anymore to hurry up.

    The funny part though, is if you fix this by increasing fees, or increasing the interval of fees, then people will stop using the service all-at-once.

    As Anon #2 stated, maybe it would make a better business model to offer extra time, or an insurance of fees?

     

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  15.  
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    Dave, Oct 6th, 2009 @ 2:37pm

    Thank you!

    I'm glad you wrote about that, it's a great principle. On a smaller level, I learned this lesson late in the game; I used to nickel and dime in certain situations, and I slowly learned that this wasn't getting me anywhere. My insistence on payment was isolating me.

    Once I started giving some things away for free, or doing some things simply because I enjoyed them, gradually things started opening up. I was having more fun, making more connections and friends, and, to get a little karmic and cosmic about it, attracting more positive things. Even more money, curiously enough.

     

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    Eileen, Oct 6th, 2009 @ 2:40pm

    Amazingly, TheStupidOne (should we believe him/her?) drops a perfect example of not-understanding-world-nonmonetarily right on us.

    See, most people have feelings of pride and dignity that prevent them from stealing candybars even if that would mean they were "better off" monetarily because they could get away with it and the punishment wasn't "preventative" enough. Believe it or not this works for your precious majority of people.

    Just sayin'.

     

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  17.  
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    Anonymous Coward, Oct 6th, 2009 @ 2:44pm

    Re: Re: Re:

    "Punishments have to be set such that the majority of people would rather obey the rules than risk the punishment. That is preventative"

    No, that there is a totalitarian punishment. And no, I'm not being cutesy with the buzzwords.

    If the population is only following a law because of fear of punishment, then that law is oppressive. In fact, that's basically the definition of oppression - forcing a population to act a certain way through fear.

    Laws against theft aren't effective solely because the laws are made. They're effective because the majority of the population won't steal in the first place, and you're only discouraging a small minority.

    In fact...just to disprove your point, tell me offhand the exact punishments for theft, breaking and entering, manslaughter and second degree murder. You can't argue that the level of punishment is vital to crime prevention if the average person can't even name that level, can you?

     

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  18.  
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    Anonymous Coward, Oct 6th, 2009 @ 2:48pm

    Re:

    Indeed.

    I'd be plenty interested to see a society where the majority of people had strong desires to commit crimes. That seems to fit the definition of Anarchy rather snugly.

     

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  19.  
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    Misanthropist (profile), Oct 6th, 2009 @ 3:06pm

    Re: Re:

    The entire "imaginary profitables" market is held in place solely due to a set of laws that no common man believes in, and the common man violates them on a daily basis.

    This is why the RIAA, the MPAA and the BSA cannot win in the long run. The laws are immoral and will not be accepted.

    They are just milking the cash cow before it runs out.

     

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  20.  
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    Jerms, Oct 6th, 2009 @ 3:09pm

    That's exactly the reason that the daycare my kids go to stopped charging for late pickups. It worked too.

     

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  21.  
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    Adam (profile), Oct 6th, 2009 @ 3:25pm

    "The fine seems to have reduced their ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as simply a commodity they could purchase."

    Another example is returning a book late to a research library. Given a fine, I think of it as renting the book and pay up. On the other hand, if the library sends me an email claiming that someone else is waiting for the book, then guilt kicks in and I return it pronto

     

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  22.  
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    PrometheeFeu (profile), Oct 6th, 2009 @ 3:27pm

    "If people do things for a non-monetary reason, it's because they're receiving marginal benefits in some other manner, whether it's attention, pride, happiness, joy or "just because I want to." Those are all marginal benefits."

    As much as I am a big fan of that line of reasoning Mike, I think there is a problem here which can lead to a lack of predictive power and if we go too far, the end of economics. Economics usually provides for exogenous preferences which honestly means it is easy to give in to temptation and just say: "they must like/dislike it that way" to account for any behavior. The problem is that when we do that, nothing comes of it. All we have done is repeated our assumption (actors are self-interested) in the context of a specific case. Pretty soon, we are going to have to start digging into preference formation and evolutionary game theory is where it's going to be at for heuristic research.

     

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  23.  
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    cc, Oct 6th, 2009 @ 3:34pm

    Re: Re: Re: Re:

    That of course assumes that the average person does not need to steal.

    It's the difference between the "needs" and the "wants". I may want a yacht, but I don't need a yacht enough to steal one and risk the punishment. If I need food because I may starve, I may consider stealing it, because my choice is between death or some lesser punishment.

    I think there are unwritten laws that underpin our society, which are a matter of _trust_ more than ethics. If I don't steal from my neighbor, I expect my neighbor not to steal from me. If my neighbor steals from me, I won't mind as much stealing from him.

    This implies that I oppress myself in some ways and expect everyone else to also oppress themselves in the same ways so we can all have reasonably good lives (assuming our basic needs are fulfilled). It's a form of cooperation. Q: Is this cooperation something that evolved in us, or is it learned as we grow up? I would argue we are predisposed to live in a society with rules, but the boundaries themselves are learned. And therein lies the problem -- in many ways the internet does not conform to the ethical rules of "reality" because a) it's such a cloudy, immaterial thing, and b) evolution never meant it to.

    Now, if I go and download a bunch of songs... is it because I think the music industry is selling those songs at a ridiculous price and stealing from me so I feel ok about stealing from them. Or, is it because I somehow need those songs and I couldn't otherwise afford to buy them? Or, does the impersonality of the internet let people forget that downloading copyrighted stuff is illegal?

    I would say it could be a combination of all the above. There must be other reasons as well -- laziness and sheer stupidity quickly come to mind.

     

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  24.  
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    cc, Oct 6th, 2009 @ 3:59pm

    Re:

    As I've argued above, I think the marginal benefit is society itself: if you cause me no inconvenience or discomfort, I will also make sure not to cause you inconvenience or discomfort.

    In the daycare example, money comes in as a unit for buying the carers' inconvenience, so cooperation (society) is upheld in the customer's mind by balancing things out with money as compensation. This is not what the carers intended, of course, but they can't rightly complain if they are getting paid!

    I entirely agree with you, PrometheeFeu, that evolutionary game theory is where we will eventually have to look to get real answers.

     

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  25.  
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    cc, Oct 6th, 2009 @ 4:11pm

    Re:

    Ah, but if the monetary compensation is deemed to be unreasonable, then it should be obvious the carers are trying to make a point!

    If I download a song and a lawyer comes and asks for everything I have and don't have, that's very likely to stop me downloading any more songs. People who hear of what happened to me will also be worried.

    That is scaremongery and it's wrong and I hate it.

    But it _may_ reduce illegal mp3 downloads, in theory. Clever people will stop downloading and find a different way to copy music so they don't get caught. Some will very likely stop listening to music. Yet some will say "screw it" and keep playing the game of chicken, knowing they're in a herd and only the unluckiest few will actually get caught.

     

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  26.  
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    Marcus Carab (profile), Oct 6th, 2009 @ 4:19pm

    I'd take your class

    I love your Economics Lessons Mike, and this was an especially interesting one.

     

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  27.  
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    Anonymous Coward, Oct 6th, 2009 @ 4:22pm

    Re: Re: Re: Re: Re:

    It's really the same point though.

    The one thing to be aware of is that the legal system needs to be inline with what people do already. If the average person will steal out of necessity, then no amount of punishment can change that. If the average person actively breaks a certain law, then you can't possibly enforce that law without becoming totalitarian.

    "Or, does the impersonality of the internet let people forget that downloading copyrighted stuff is illegal?"

    The average person probably doesn't even realize what they're doing is illegal. As I said above, if a law runs counter to what people intuitively view as right and wrong, it's almost assured that the law will be broken in large numbers. I'd be fascinated in seeing the percentage of people that have broken Copyright laws in some form, because I'm sure many have done it unknowingly.

     

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  28.  
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    cc, Oct 6th, 2009 @ 4:40pm

    Re: Re:

    Yes, I'm replying to my own comment... I realize there's a rather obvious plot hole. Scarcity of resources, and the fact that copyrighted stuff is only artificially scarce.

    Illegal downloads do let people live beyond their means, but they are not breaking the same moral rule as when they steal a car, for instance. In my mind, it's closer to telling a lie or eavesdropping than actual stealing.

    Downloading a song is like making a copy of a classified document -- taking information you were not meant to have. However, a song is unlike a classified document because its creators DO want you to have it, as long as you pay them.
    It is a fair transaction because it did cost them to create the song, but... Why does the music/whatever industry need to make millions in profits? The value of a song is a lot lower than its cost, and consumers feel they are being cheated.

    They should make less profits on our expense and price their product fairly. They don't necessarily need to give it all away for free.

     

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  29.  
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    Fentex, Oct 6th, 2009 @ 4:40pm

    Seems to me the use of 'marginal' is the problem here.

    Marginal has well defined meanings in English and using it to describe a benefit is to invite the benefit being dismissed as, well, marginal to the topic.

    Yet here M. Masnick argues that the marginal benefit can be important and is not neccesarily to be dismissed as something, well, er, marginal.

    Why not drop the 'marginal' and say 'benefit' where benefit is meant? Or perhaps replace 'marginal' with 'additional' when possible non-monetary benefits are emphasised?

     

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  30.  
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    Anonymous Coward, Oct 6th, 2009 @ 6:43pm

    Re: Re: Re:

    Yes, you're largely getting the consumer side of the argument. Really though, it's not a "should". "Should" makes it seem like a moral argument, which it really isn't.

    The industry is perfectly entitled to whatever millions it makes, but not at the expense of individual rights. If the only way to make a business model work is by creating laws, suing people and breaking privacy rights...well, anyone with an ounce of marketing sense is going to be banging their head on a wall.

    What this blog is largely devoted to is pointing out something that should be obvious: the more people like you, and the more they like what you're giving them, the more money they'll give you.

     

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  31.  
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    My T-Shirt Tells The World: I "Pirate" Music, Oct 6th, 2009 @ 8:32pm

    Re: Fentex

    I could be wrong, but I think Mike is using marginal here as a technical term, in the sense of marginal benefit and marginal cost.

     

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  32.  
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    Mike Masnick (profile), Oct 7th, 2009 @ 12:56am

    Re:

    Seems to me the use of 'marginal' is the problem here.

    It's the accurate usage of the term.

    Marginal has well defined meanings in English and using it to describe a benefit is to invite the benefit being dismissed as, well, marginal to the topic.

    Heh. While you are correct that marginal has well defined meanings in English, one you may not be aware of is that "marginal benefit" has a well defined meaning within economics. It is not used to mean "marginal" as in "meaningless"

    http://www.google.com/search?q=marginal+benefit

     

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  33.  
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    Anonymous Coward, Oct 7th, 2009 @ 2:49am

    http://marketsineverything.com/

    The next step of your reasoning is to turn the 'guilt' into demand and the 'fine' into supply.

     

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  34.  
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    Almost Anonymous (profile), Oct 7th, 2009 @ 9:02am

    Re:

    """
    It's the reason the fines / punishments against file sharing are so high...
    """

    Umm, no. That's just idiotic, unreasoning and unrelenting greed.

     

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  35.  
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    Matt (profile), Oct 7th, 2009 @ 6:54pm

    Re:

    There is an implicit, and wrong, assumption here - namely, that there ought to be punishment at all. Copyright is an entirely artificial construct, and a recent one. It self-evidently did not arise as a matter of natural law. Generations (hundreds of 'em) did not have it. To say the fines are high because lower fines would only encourage more "thieving" is to say that society ought not encourage distribution of its creative products. That is stupid. Of course society should encourage distribution of its creative products - society is nothing more than its distribution of creative products.

    Copyright law would not be good if the civil fine for infringement were fixed at $50, with no criminal liability. It would be better, but not good.

     

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  36.  
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    Fentex, Oct 22nd, 2010 @ 8:56pm

    Re:Marginal as a technical term

    I know I'm a little late on this but I know full well the economic technical meaning of marginal.

    My point was that when speaking to an English reading audience it's ambiguous and not likely to help further argument.

    I have in other forums argued I think it also misleads economists. One continually reads economists dismissing complaints that they don't realise how much value people attach to marginal benefits but then go on to make arguments that clearly do not consider the marginal elements of valuation properly.

    A position I would think you would appreciate given a lot of the arguments you repeat here make that point - that people are not understanding the value of benefits accruing separate fomr direct financial transactions.

    That is why many people get confused by free - they only notice the amounts of currency in direct transaction and completely miss the other benefits.

    And when trying to disucss this with native English speakers I argue your argument is done no favour by using the word marginal.

     

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