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.

We Want to Trust – Sometimes Too Easily

Trust is an essential element in all good relationships, both personal and business. But, sometimes we are too willing to do so. From a post on The Baseline Scenario:

Free Exchange has Anthony Gottlieb’s recollections of interviewing Bernie Madoff about financial regulation:

“At the time he came across merely as calm, strikingly rational, devoid of ego, and the last person you would expect to make your wealth vanish. I certainly would have trusted him with my money. I cannot say the same of other financial superstars I interviewed. . . . Perhaps it is the most confidence-inspiring ones that you have to look out for.”

I couldn’t agree more. We human beings have this completely misplaced confidence in our ability to judge people by “looking them in the eye.” I recall reading about one study (sorry, I don’t remember anything else about it) which showed that hiring managers were more likely to make good hires by selecting solely on the basis of resumes than by interviewing people - because using resumes is completely objective, while interviews allow you to interject your own erroneous beliefs. (I do believe that if you use interviews well - that is, to obtain factual information, like how well someone can actually write a computer program - you can do better than just using resumes; but maybe I’m just fooling myself.)

I think differentiating “strong situations” and “weak situations” sheds some light on where we go wrong. A strong situation is one in which environmental cues are so strong and widely known that everyone behaves in a consistent way (for example, members of a particular faith know how to act at a wedding or funeral conducted at their house of worship). Weak situations are situations with weak environmental cues which are not widely known (for example, a new employee will probably not know the expected behavior at the company Christmas party).

To loop back to the excerpt above, interviews with a journalist or for a job are about as strong a situation as you can get. You are kidding yourself if you think conduct in such situations is representative of how a person might act in a less structured situation.

Martin Luther King, Jr. once said, “The ultimate measure of a person is not where they stand in moments of comfort and convenience, but where they stand in times of challenge and controversy.” Until you have witnessed someone’s behavior in a difficult or ambiguous situation you don’t have a good basis for a decision to trust them.

You can find a further discussion of strong and weak situations in Personality and Organizations by Benjamin Schneider et. al. A less academic discussion of how situations influence personality is in The Lucifer Effect by Philip Zimbardo.