Showing posts with label solution. Show all posts
Showing posts with label solution. Show all posts

Mar 4, 2009

Two reasons motivate less

In an earlier TED Show psychologist Barry Schwartz illustrated in a humorous and catching way the effects od "Too much choice".

Now, in another TED Show video called, "The real crisis? We stopped being wise", he shows us that the current financial crisis can't be solved by more rules or incentive policy.

Schwartz pleads for a new approach based on a Obama's approach to solve the current financial crisis. Already before his inauguration Obama said:

We must ask, not just is it profitable, but is it right

Schwartz: "In his inaugrual address, Barack Obama appealed to each of us to give our best, as we try to extragate ourselves form the current financial crisis. But what did he appeal to? He did not, happily, follow in the footsteps of his predecessor and tell us to just go shopping. Nor did he tell us , 'Trust us, trust your country. Invest. Invest. Invest.' Instead, what he told us, was, to put aside the childish things. And he appealed to virtue.

Two reasons motivate less?
Schwartz brilliantly illustrates the common wrong notion that if you have one reason for doing something and you are given a second reason for doing the same thing, it seems only logical that two reasons are better than one, and you are more likely to do it.

This is not always true. sometimes two reasons to do the same thing seem to compete with one another instead of complementing, and they make people less likely to do it.

Schwartz illustrates this in the next example:

In Switzerland, back about 15 years ago, they were trying to decide where to site nuclear waste dumps. There was a national referendum and some psychologists went around and polled citizens who were very well informed. And they said, “Would you be willing to have a nuclear waste dump in your community?” Astonishingly, 50% of the citizens said “Yes.” They knew, or thought, it was dangerous, they thought it would reduce their property values, but, it had to go somewhere, and they had responsibilities as citizens.

The psychologists asked other people a slightly different question. They said, “If we paid you six weeks salary, every year, would you have a nuclear waste dump in your community?” Two reasons: it is my responsibility and I am getting paid. Instead of 50% saying yes, 25% said yes.

What happens is that the introduction of the incentive gets us to a point that, instead of asking, “What is my responsibility?”, all we ask is “What serves my interest?”

When incentives don’t work, when CEOs ignore the long term health of their companies in pursuit of short term gains that will lead to massive bonuses, the (wrong) response is always the same: get smarter incentives.

So, in general, adding more or better incentives will not motivate us more or increase our responsibility!

Actuarial lesson
As actuaries we often try to find as many reasons as possible to convince a board of taking the right decision. Perhaps we should emphasize more on finding and communicating that one and only reason to take the right decision: a prudent, healthy and solid decision (investment) that benefits all stakeholders on the long and short term, in a balanced way.

text version of video

Oct 27, 2008

Credit Crisis caused by Pyramid scheme

"Modern banking principles, as defined in the fractional reserve banking system, are essentially an ordinary (and illegal!) Pyramid scheme based on the arithmetic (geometric sequence) of fractional banking.

In an interview, called The Game Is Over, Michael Hudson states that the Fed and Treasury are following the traditional “Big fish eat little fish” principle of favoring the vested interests.

Just like in another Youtube movie he remarks that instead of bailing out the big financial institutions and rescuing billionaires and private investors, the government should have saved only the savings of savers at the bank, pensioners, Social Security recipients and other small fry.

No doubt, given How The Credit Markets Work, current measures will not solve the credit crisis ( Nothing Proposed Will Solve the Credit Crisis ).