As Luck Would Have It

Paul Krugman, Brad "Deling", and James Fallows have been blogging about how the rich are different from you and me (see here, here, here, and here, and now Mike the Mad (but pretty coherent) biologist here). It is an interesting confluence of chance events, for I have been reading Roland Benabou and Jean Tirole's very thought-provoking paper, Belief in a Just World and Redistributive Politics (subsequently published in the Quarterly Journal of Economics in 2006). Here's the abstract:

International surveys reveal wide differences between the views held in different countries concerning the causes of wealth or poverty and the extent to which people are responsible for their own fate. At the same time, social ethnographies and experiments by psychologists demonstrate individuals' recurrent struggle with cognitive dissonance as they seek to maintain, and pass on to their children, a view of the world where effort ultimately pays off and everyone gets their just deserts. This paper offers a model that helps explain: i) why most people feel such a need to believe in a "just world"; ii) why this need, and therefore the prevalence of the belief, varies considerably across countries; iii) the implications of this phenomenon for international differences in political ideology, levels of redistribution, labor supply, aggregate income, and popular perceptions of the poor. The model shows in particular how complementarities arise endogenously between individuals' desired beliefs or ideological choices, resulting in two equilibria. A first, "American" equilibrium is characterized by a high prevalence of just-world beliefs among the population and relatively laissez-faire policies. The other, "European" equilibrium is characterized by more pessimism about the role of effort in economic outcomes and a more extensive welfare state. More generally, the paper develops a theory of collective beliefs and motivated cognitions, including those concerning "money" (consumption) and happiness, as well as religion.

The B&T article starts with a quote from Professor Melvin Lerner's book, The Belief in a Just World: A Fundamental Delusion:

"Individuals have a need to believe that they live in a world where people generally get what they deserve."

Here's the first paragraph of B&T:

International surveys reveal striking differences between the views held in different countries concerning the causes of wealth and poverty, the extent to which individuals are responsible for their own fate, and the long-run rewards to personal effort. American “exceptionalism,” as manifested by the widely held belief in the American Dream, is but the most striking example of this phenomenon. At the same time, ethnographic studies of the working and middle classes reveal that people do not come to these views as dispassionate statisticians. On the contrary, they constantly struggle with the cognitive dissonance required to maintain and pass on to their children the view that hard work and good deeds will ultimately bring a better life, that crime does not pay, etc., in spite of signals that life may not always be that fair. Psychologists have similarly documented the fact that most individuals feel a strong need to believe that they live in a world that is just, in the sense that people generally get what they deserve, and deserve what they get. When confronted with data that conflicts with this view they try to ignore, reinterpret, distort, or forget it—for instance, by finding imaginary merits to the recipients of fortuitous rewards, or assigning blame to innocent victims.

That last sentence got me thinking about the latest issue of American Whitewater, which contains Charlie Walbridge's semi-annual recount of whitewater deaths and near-misses.

"Maxine," you say, "what could possibly be the connection?"

Well, let me tell you.

After almost every whitewater death that involves a whitewater kayaker or canoeist, there is the obligatory postmortem in internet forums in which the details of the circumstances surrounding the death are shared, dissected, and eventually put to rest. The more experienced and expert the paddler, the more time spent analyzing what when wrong. You see, if an experienced, expert paddler who has run, say, the North Fork of the Payette, 50 times can be killed on it, it means anybody could be killed on it or on lesser rivers. But if the experienced, expert paddler can be found to have made some mistake, entering a rapid off-line, missing the micro-eddy at the top that helps set up for the drop, then we're all much safer. It just means we have to make sure we don't make the same mistake. And if he got  snagged on a barely underwater tree branch, well, then it was bad luck, but now we all know about it and we know to watch for such things in other rapids. Lesson learned. We're back in control.

The post-mortems almost always end with the obligatory "well, s/he (usually he) died doing something that he loved." You see how the impulse to find a silver lining is not squelched even by the ultimate loss? But it leaves us to wonder if the now deceased would have put on the river that day, had he known that the price of doing something he loved was his life? The economist in me thinks not. That's the tragedy of hindsight...we so often don't get to make the tradeoffs with complete information. It was a statistical risk, very small, but finite. And we like to believe that we can offset bad luck with good skills and effort.

The problem is that everyone has an unlucky day or sometimes it's just a minute or an hour, but it's enough to change our lives forever. If it happens on a river, your income won't save you, but in a lot of life, your income or the social safety net of the society you happen to live in, just might.

I recently performed an exercise where I added up all the times I could remember where I could have died. They included the time our (small) sailboat jibed and almost capsized in strong winds on a very cold December day. I know now (thanks to my whitewater experience) that we would have lasted maybe 90 seconds in the frigid water. There was the time the horse fell on me. There was the time I had cancer. And there are at least six other times that I can remember.

As you can see, there are at least nine reasons why I consider myself lucky. I don't imagine that any of these near misses resolved in my favor because of some special trait or ability that I have. Nor do I believe they resulted from any effort on my part. I  just   got    lucky.

I also got lucky at birth and that has affected my education, my income, and my life prospects.

I'll bet if you think about your life, you'll think of some lucky things that have happened to you. (And no fair claiming that having cancer is lucky (if you live) because of some "silver lining" like now you love your wife and kids more. That's just one of the ways we turn things around cognitively so that we end up getting what (we think) we deserve.)

Here's B&T again:

Data from the World Values Survey [Alesina, Glaeser, and Sacerdote 2001; Keely 2002] show that only 29 percent of Americans believe that the poor are trapped in poverty and only 30 percent that luck, rather than effort or education, determines income. The figures for Europeans are nearly double: 60 percent and 54 percent, respectively. Similarly, Americans are about twice as likely as Europeans to think that the poor “are lazy or lack willpower” (60 percent versus 26 percent) and that “in the long run, hard work usually brings a better life” (59 percent versus 34–43 percent [Ladd and Bowman 1998]). Large disparities in attitudes also exist within Europe, especially between OECD and Eastern European countries [Suhrcke 2001].

And here's a figure they reproduce from a paper by Alesina et al. (2001):

B&T cite ethnographic research that suggests that working and lower middle-class workers exert effort to maintain a belief that effort, hard work, and good deeds ultimately pay off, that people get what they deserve. They note that the corollary is also taken as true: that what they get must be what they deserve. They note that this often combines with a perception that the United States is a highly mobile society with few social and economic barriers to achieving higher status. This last despite evidence they cite to the contrary.

Here is one particularly poignant excerpt they provide from a qualitative study:

Typical is this statement by Maria, a very poor cleaning lady interviewed by Hochschild (1996):“Once, Maria wonders if executives deserve their $60,000 annual salary: «I don’t think they do all that [much] work, do you? Sit at their desk —they got it easy». But she suppresses the thought immediately. «Well, maybe it is a lot of work. Maybe they have a lot of writing to do, or they have to make sure things go right. So maybe they are deserving of it”».

B&T also cite psychologists' findings that we humans have strong tendencies "to explain the behavior and outcomes of others by underlying personal attributes rather than external circumstances or luck." Coupled with this is "excessive confidence that they, and others, can affect their own environment and, ultimately, their own fate." As with my whitewater example, this provides an "illusion of control."

The paper is an excellent example of work by economists aimed at expanding the scope of economics to include psychological and sociological dimensions of human behavior and to address issues of justice. The authors note in their conclusions that there is no sure way of knowing whether the uniquely American cultural beliefs and attitudes about effort, chance, and just deserts are net-harmful or net-helpful.

Systematic under-estimation of the role of chance in whitewater boating, probably helps most of us to stretch and improve our skills and abilities. We get better. Systematic under-estimation of the role of chance in social and economic outcomes almost certainly helps us as a nation to stretch, improve, and grow, but it hinders us, too. Because of our beliefs, we are unable to come together politically to construct an optimal safety net, one that would enable families to rebound from an illness or injury or from a job loss without having to sell the farm (or house or business) or to pay the ultimate price of death or permanent disability. And we are unable to agree on how to regulate or limit concentrated wealth and power because we apparently confuse it with ability and productivity, even when there is massive evidence to the contrary in some sectors.

One reason that income disparities grow is that we possess an inherent tendency to justify them, to chalk up to effort that which is in some measure and sometimes largely a long series of lucky happenstances that start at birth. The problem is that occassionally something happens that forces us to notice and not justify. A major recession. A financial crisis. A major bailout of the guys to ran us off the road. A high unemployment rate. When it happens, some in the middle and at the bottom start noticing that the rich are different from you and me.

What B&T do not discuss is that some day Maria (quoted above) and others like her, who show up on time, work hard, and pursue the American dream, will figure it out. They'll see that the deck is stacked against them. They'll look at investment bankers and their kids and they'll figure out that there's no percentage in a hard day's work, for them or for their kids. They won't put it in quite these words, but they will be struck by the obsessive fear lawmakers and some economists appear to have of investment bankers' alleged backward bending labor supply curve. Specifically, they will be struck by how that fear  gives rise to a near rabid reluctance to tax those same investment bankers. Investment bankers whose speculative activities destroyed  working and middle class families' jobs, neighborhoods, and dreams, and saddled them with mortgage debt and bank and credit card fees they can't afford.

Maybe those at the bottom and middle of the economic pyramid can't afford to withhold their effort from the labormarket, but they can vote. And they can certainly come to view the employment contract as adversarial. They can shirk, they can become dishonest in other ways, they can sabotage, they can start to act as though all that matters is money and how much of it you have, not how or whether or not you earned it...all fairly rationally and (within the prevailing moral climate they have seen rewarded at the top) morally. We can only hope that instead they only unionize and collectively bargain.

The fact that we adapt to inequities by telling stories that justify them doesn't make them fair.

As luck would have it, there's something we can do now that would be a good first step toward a renewed American dream that everyone gets to participate in. There's an income tax reduction about to expire. We could allow it to expire for the wealthiest Americans (those making more than $250,000), many of whom benefited from the bank bailouts either directly (if they work in the financial sector) or indirectly through the support their retirement and investment portfolios received from various Federal Reserve policies aimed at saving banks and inflating assets. Let's take a chance and reward hard work and honest effort for a change. Let's keep the tax break for the working and middle class and let it expire for those who have already had more than their fair share of taxpayer-provided largesse.

*************************

Papers cited by B&T in quoted material above:

Alesina, A.  E. Glaeser, E., and Sacerdote, B.(2001) “Why Doesn’t the US Have a European-Type Welfare State?” Brookings Papers on Economic Activity, Issue 2, 187-277.

Hochschild, J. (1981) “What’s Fair? American Beliefs about Distributive Justice”. Cambridge, MA: Harvard University Press.

Ladd, E. and Bowman, K. “Attitudes Towards Economic Inequality,” American Enterprise Institute Studies on Understanding Economic Inequality.

Comments

[ryan a]

"Specifically, they will be struck by how that fear gives rise to a near rabid reluctance to tax those same investment bankers. Investment bankers whose speculative activities destroyed working and middle class families' jobs, neighborhoods, and dreams, and saddled them with mortgage debt and bank and credit card fees they can't afford."

This is something that really amazes and confuses me these days. There are so many people who are quite willing to absolve investment bankers from any sort of responsibility in these matters. One of the dominant themes is that this whole financial crisis/disaster was caused purely by government meddling. For some, the supposed "free market" is pretty much a flawless entity, so fault HAS to be located elsewhere. Amazing. I mean, empirical evidence doesn't matter--it become a pure ideological issue.

That's why I appreciate your points about the need to limit power in various institutions, state AND private. I agree with you that it's the accumulation (and abuse) of power that's the problem.

Anyway, great post. I think this kind of econ/sociological work is really fascinating and important, especially considering the ways in which some people understand economics these days.

[ryan a]

By the way Maxine, have you ever read "Liquidated" by Karen Ho? It's an ethnography of Wall Street, and considering this post, I think you might like it. I'd be interested to hear your take on it.

[Maxine Udall (girl economist)]

I have not read the book, Ryan, but will look for it and add it to my growing pile of "must reads." Thanks for your comments. I enjoy visiting your blog, too.

[Peter T]

There are quite a few impulses at work here. Just one is that societies that need to stick together to survive (against external threats, or just the environment) tend to emphasise the role of fate or luck, and downplay individual talent and disapprove of outward display. Washington or Jefferson, with their knowledge of the early Roman Republic, would have approved - "one for all and all for one". See, in US history, the "great compression" that followed World War II: ttp://rwer.wordpress.com/2010/09/20/graph-of-the-week-the-top-10-income-share-in-usa-1917-2008/#more-2130.

For a really good view of how having a valued role in a group can change the relevant attitudes, check out the black woman welder in the documentary "The Life and Times of Rosie the Riveter".

[Maxine Udall (girl economist)]

Thanks, Peter. I have seen the graph and should have linked to it. Thanks also for the tip on Rosie the Riveter. It doesn't seem to be available for free online. I'll track it down and buy it if I have to.

[Peter T]

Maxine

The film is available from here:

http://www.clarityfilms.org/rosie/index.html

Not to be confused with an anodyne documentary just called Rosie the Riveter.

I first saw it at university, and it made me think about how different kinds of work structure attitudes and social relations - and lead to very different outcomes in terms of pay and conditions.

[Maxine Udall (girl economist)]

Thank you, Peter! :-)

[rjs]

we still need a higher tax bracket for the casino managers:

There's rich, and then there's rich -

Pay dynamics there are usually chalked up to growth in "CEO pay", but as new research out of the Chicago School of Business indicates, CEO salaries are peanuts compared to the change being earned in finance: We also find that hedge fund investors and other “Wall Street” type individuals comprise a larger fraction of the very highest end of the AGI distribution (the top 0.0001%) than CEOs and top executives. In 2004, nine times as many Wall Street investors earned in excess of $100 million as public company CEOs. In fact, the top twenty-five hedge fund managers combined appear to have earned more than all five hundred S&P 500 CEOs combined (both realized and ex ante). This trend accelerated after 2004. In 2007, it is likely that the top five hedge fund managers earned more than all five hundred S&P 500 CEOs combined.

http://www.economist.com/blogs/freeexchange/2010/09/income_inequality_1

[reason]

I never thought of this before but start with USA add 111 gives VTB reverse gives BTV (Blame the Victim).

[reason]

By the way regarding your story about needing to believe you are in control, I have a somewhat different story in something completely different. It has to do with cricket and facing fast bowlers (maybe some other reader can follow). I used to think if my technique was correct, I couldn't get hurt. Then I got a ball that kicked from a length and hit me in the ribs. And I felt that I couldn't have done anything about it. It shook me up - not so much at the time (while the adrenalin was flowing, but afterwards).

After that, I would quickly lose confidence, if I got any sort of erratic bounce. (Knowing what I know now, I would have bought a helmet - strangely even though I got hit in the ribs it was getting hit in the head that worried me.)

Now that confidence, that I could be in control, was both an illusion, but valuable. Interesting.