Monday, October 6, 2008

More precisely, it's "Guys who LOOK nice finish first"

Scientific American's current article, "Using Math to Explain How Life on Earth Began", starts:
Back in March the press went crazy for Martin A. Nowak’s study on the value of punishment. A Harvard University mathematician and biologist, Nowak had signed up some 100 students to play a computer game in which they used dimes to punish and reward one another. The popular belief was that costly punishment would promote cooperation between two equals, but Nowak and his colleagues proved the theory wrong. Instead they found that punishment often triggers a spiral of retaliation, making it detrimental and destructive rather than beneficial. Far from gaining, people who punish tend to escalate conflict, worsen their fortunes and eventually lose out. “Nice guys finish first,” headlines cheered.
But, more precisely, it's not, “Nice guys finish first,”, rather it's “Guys who look Nice finish first.”. In my younger days I worked as an agent (salesman) at a large auto insurance brokerage. I was in the top 1% in sales largely because I was extremely nice, as well as competent. I always gave the best advice for the customer even if it meant a lower commission or losing a sale. It got me a lot of sales and a lot of referrals. But there were many salespeople who were very un-nice, who would in a second put a customer into an insurance policy that was $1,000 more expensive to get $1 more in commission, and a lot of these guys were top salespeople, because they only did it when they thought they had a small chance of getting caught.

In business, looking nice and trustworthy is usually a big advantage, but there are many smart business people who are very far from nice, but are smart enough to know that they can usually only be un-nice when the odds of the other person finding out are small. And in a complicated world, often you can give a customer, or business associate, far from the best deal, and they will never know. Years later, or as long as they live, they will still think you're the greatest guy in the world.

As much as the Republicans and Libertarians don't understand it, or hate to admit it, the more complicated the world, the more asymmetric information, and the more asymmetric information, the more inefficient the pure free market. And today's world is immensely high-tech and complicated. So unless we want to go back to the good old days of 1810, with small government and an average lifespan in the early 30s, this asymmetric information will require a strong government role to counteract its massive inefficiencies and harm.

I have no doubt that lots of the people selling toxic sub-prime mortgages seemed like the nicest guys in the world.