Would You Rather Not Know?

If you had an opportunity to know if someone was acting in your best interest, would you take it?

Conventional economic theory would say, “of course”. Companies devise elaborate controls to ensure their employees act in the company’s interest, and not their own. All too often these systems fail (for example, The New Yorker has a fascinating account of how Jérôme Kerviel was able to lose billions of euros in unauthorized trading for Société Générale). There is a whole branch of political science and economics that focuses on the principal-agent problem:

In political science and economics, the problem of motivating a party to act on behalf of another is known as ‘the principal-agent problem’. The principal-agent problem arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe. This is the case to some extent for all contracts that are written in a world of information asymmetry, uncertainty and risk. Here, principals do not know enough about whether (or to what extent) a contract has been satisfied. The solution to this information problem — closely related to the moral hazard problem — is to ensure the provision of appropriate incentives so agents act in the way principals wish.

But, do people really want to know if their agents are acting appropriately? A recent study (via Overcoming Bias) found the study subjects would “…systematically prefer to remain ignorant…” of the decisions made by a trustee investing on their behalf.

Every parent has experienced this. My son is supposed to clean his room. I know (or at least strongly suspect) he hasn’t. If I confirm this suspicion by opening the door, I will need to punish him, and I don’t like doing that. Better to keep the door closed.

I think this tendency is where a lot of control mechanisms go wrong. The system and procedures may be fine, but if implementation is left to people who would really rather not deal with problems, the safeguards won’t work.