Saturday, April 17, 2010

Regarding Ponies, Pianos, Self-Interest, Feedback Loops, and Criminal Justice

I'm guaranteed to get the details of this anecdotal lead-in story wrong, but I hope to preserve enough accurately to make a point.

A couple is undergoing a divorce, and the assets are being distributed by a judge. The husband wants the piano and the wife wants the horse. The husband claims the horse is worth $5000 and the piano is worth only $1000. He wants $2000 cash plus the piano to make things fair. The wife claims just the opposite. She claims the piano is worth $5000 and the horse is worth only $1000. She wants $2000 cash plus the horse. The judge's ruling is simple and brilliant.

He awards the horse to the husband and the piano to the wife, no cash to either of them. The husband and wife go nuts.

The husband makes his case: "I didn't ask for the horse. I don't want the horse. I want the piano." The judge responds: "Well, you're in great shape. You have a horse worth $5000. Sell the horse and buy 5 pianos."

The wife gives it her best shot: "But I wanted the horse. I don't want the piano." The judge responds: "I just awarded you a piano worth $5000. Sell the piano and you can buy yourself 5 horses."

The husband and wife look at each other and then ask the judge: "Can we trade?" The judge says: "I don't care. It's your horse," pointing to the husband, "and your piano," pointing to the wife. "Do what you want with 'em."

I'm told it's a true story. I hope that it is.

The judge became known for his seemingly upside down rulings. In another divorce case, both husband and wife agreed the wife would keep the house which they currently owned free and clear. The husband claimed the house was worth $600,000 and that he should be granted $300,000 for his half of the equity. The wife claimed the house was worth only $400,000 and argued the husband should be granted only $200,000. You have a couple lines to figure out for yourself how the judge ruled on this one.

%% humming peacefully while I wait patiently %%

Got it figured out? Good.

The judge awarded the house to the husband and ordered him to pay the wife $300,000.

The husband was irate: "I don't want the house, I want my half of the equity, the $300,000." The judge explained patiently: "No problem. Sell the house and you won't have it any longer. From the $600,000 you'll get for the house, give your ex-wife $300,000 and keep the rest. You'll have just what you asked for."

The wife was equally bummed: "But he doesn't want the house and I do." The judge explained matters to her just as patiently. "No problem. He's going to be giving you $300,000. Add that to the $200,000 you were willing to pay him, and that's $500,000. You said the house was worth only $400,000. Just buy the house from him and you'll have $100,000 left over."

The judge recognizes first that people tend to act in their own self-interest and second that feed-back loops are critical to managing a world of conflicting self-interests.

In each of the two divorce cases mentioned, it's possible that each party was absolutely sincere in their claim on the joint assets. It is a given, however, that each party's assessment was biased by their own self-interest. It's not a crime for someone to pursue their own self-interest, it is simply being human. To expect otherwise is folly.

Any system that depends on people pursuing the self-interest of others is doomed to failure. Consider as an example any system based around the motto: "To each according to their need, from each according to their ability." It may sound idyllic, but sucks in reality.

On the other hand, any system that lacks a negative feedback loop for socially unacceptable behavior is doomed to corruption by the few most powerful. Consider the unbridled capitalism of sweatshops, child labor, and robber barons. Also sucks.

With respect to our economy, we have tried to establish a middle ground, a free-market system in which each person is allowed to pursue their own self-interest, either as a buyer or a seller, while a large number of independent (buying and selling) competitors provide feedback on reasonable prices. Additional feedback loops exist in terms of cash penalties and jail time for those who violate child labor laws, or allow unsafe places of work.

With respect to our judge's rulings, he recognizes that each party is likely to argue their own self interest. He  therefore established a feedback mechanism, via his rulings granting the goodies to the highest bidder, that constrain the behavior of those who would otherwise ask for the moon.

Since I have gone on too long already, I'll wait for my next post to relate all this to the serious problems we have with our criminal justice system. For now, I'll leave it for you to ponder. Whose interest is served when someone is convicted? What feedback loops exist, if any, to encourage or discourage wrongful convictions? Based on the answers to the two questions just posed, are you surprised by the state of our criminal justice system?

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