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Monday, January 17, 2011

Kakonomics. Or, the strange preference for Low quality outcomes


This is my reply to the annual EDGE question. This year's question was: WHAT SCIENTIFIC CONCEPT WOULD IMPROVE EVERYBODY'S COGNITIVE TOOLKIT?

Kakonomics, or the strange preference for Low-quality outcomes

I think that an important concept to understand why does life suck so often is Kakonomics, or the weird preference for Low-quality payoffs.

Standard game-theoretical approaches posit that, whatever people are trading (ideas, services, or goods), each one wants to receive High-quality work from others. Let's stylize the situation so that goods can be exchanged only at two quality-levels: High and Low. Kakonomics describes cases where people not only have standard preferences to receive a High-quality good and deliver a Low-quality one (the standard sucker's payoff) but they actually prefer to deliver a Low-quality good and receive a Low-quality one, that is, they connive on a Low-Low exchange.

How can it ever be possible? And how can it be rational? Even when we are lazy, and prefer to deliver a Low-quality outcome (like prefer to write a piece for a mediocre journal provided that they do not ask one to do too much work), we still would have preferred to work less and receive more, that is deliver Low-quality and receive High-quality. Kakonomics is different: Here, we not only prefer to deliver a Low-quality good, but also, prefer to receive a Low-quality good in exchange!

Kakonomics is the strange — yet widespread — preference for mediocre exchanges insofar as nobody complains about. Kakonomic worlds are worlds in which people not only live with each other's laxness, but expect it: I trust you not to keep your promises in full because I want to be free not to keep mine and not to feel bad about it. What makes it an interesting and weird case is that, in all kakonomic exchanges, the two parties seem to have a double deal: an official pact in which both declare their intention to exchange at a High-quality level, and a tacit accord whereby discounts are not only allowed but expected. It becomes a form of tacit mutual connivance. Thus, nobody is free-riding: Kakonomics is regulated by a tacit social norm of discount on quality, a mutual acceptance for a mediocre outcome that satisfies both parties, as long as they go on saying publicly that the exchange is in fact at a High-quality level.

Take an example: A well-established best-seller author has to deliver his long overdue manuscript to his publisher. He has a large audience, and knows very well that people will buy his book just because of his name and anyway, the average reader doesn't read more than the first chapter. His publisher knows it as well…Thus, the author decides to deliver to the publisher the new manuscript with a stunning incipit and a mediocre plot (the Low-quality outcome): she is happy with it, congratulates him as she had received a masterpiece (the High-quality rhetoric) and they are both satisfied. The author's preference is not only to deliver a Low-quality work, but also that the publisher gives back the same, for example by avoiding to provide a too serious editing and going on publishing. They trust each other's untrustworthiness, and connive on a mutual advantageous Low outcome. Whenever there is a tacit deal to converge to Low-quality with mutual advantages, we are dealing with a case of Kakonomics.

Paradoxically, if one of the two parties delivers a High-quality outcome instead of the expected Low-quality one, the other party resents it as a breach of trust, even if he may not acknowledge it openly. In the example, the author may resent the publisher if she decides to deliver a High-quality editing. Her being trustworthy in this relation means to deliver Low-quality too. Contrary to the standard Prisoner Dilemma game, the willingness to repeat an interaction with someone is ensured if he or she delivers Low-quality too rather than High-quality.




Kakonomics is not always bad. Sometimes it allows a certain tacitly negotiated discount that makes life more relaxing for everybody. As one friend who was renovating a country house in Tuscany told me once: "Italian builders never deliver when they promise, but the good thing is they do not expect you to pay them when you promise either."

But the major problem of Kakonomics — that in ancient Greek means the economics of the worst — and the reason why it is a form of collective insanity so difficult to eradicate, is that each Low-quality exchange is a local equilibrium in which both parties are satisfied, but each of these exchanges erodes the overall system in the long run. So, the threat to good collective outcomes doesn't come only from free riders and predators, as mainstream social sciences teach us, but also from well-organized norms of Kakonomics that regulate exchanges for the worse. The cement of society is not just cooperation for the good: in order to understand why life sucks, we should look also at norms of cooperation for a local optimum and a common worse.

19 comments:

Olivier Ertzscheid said...

Merci beaucoup pour ce concept de Kakonomie. Vous trouvrez à l'adresse ci-dessous quelques modestes réflexions complémentaires sur lesquelles j'aimerais avoir votre opinion. COrdialement
http://affordance.typepad.com/mon_weblog/2011/01/kakonomie-culturomie-et-folksonomie.html

P said...

You explained Walmart better than I did. http://goldtogarbage.blogspot.com

Buffalo said...

I think education is a great example of a place where this can naturally occur. Both teachers and students have good reasons to prefer less learning...so long as everybody pretends that they are learning a lot. I don't suppose you have any reference you'd recommend for those of us who'd like to learn more about this?

patrickwilsonwelsh said...

With a single word you have revolutionized how I conceive the "collusive mediocrity" of my particular world -- software development in large organizations. Thanks much for the theory and meme.

whisky1 said...

Hi, great post. I'm editor of Wired.com, would love to discuss possibility of re-publishing this, and the facebook LL riff. we have guest bloggers, and would love to have you! Please drop me a line at evan at wired dot com.

Dana said...

Brilliant. Let's just hope no Real Madrid fans get hold of this, though. Brazilian midfielder Kaka cost them 65m Euros http://www.goal.com/en/news/11/transfer-zone/2010/07/14/2025079/kakas-father-meets-with-real-madrid-to-clarify-sons-future then played like caca and got hurt. Kakanomics.

JESÚS ALFARO AGUILA-REAL said...

I think there is nothing irrational in the outcome if we assume the players are not playing one shot game but are playing repeatedly. If so, the quality of the goods exchanged will be equivalent, good or bad: tit-for-tat issue

Elena said...

A practical and realistic study.
So much common sense.

Bravo

Tennessee Leeuwenburg said...

Genius, love it!

André-Francois Landry said...

Does this mean the only way to get out of the local maxima is to always deliver a high quality work (so people trust you to deliver on your promises) and expect the same?

N. G. Zax said...

This is very often the implicit bargain inside large companies and bureaucracies between the workers and management. There is lots of lip service to quality and hard work but everyone knows it's not true.

Angelo said...

Very recognisable... I see examples every day.

Fernando Esteve Mora said...

Very good post. And I think is a universal or at least a mediterranean phenomenon (in Spain, kakoenomic behaviour is so common as in Italy). I think additionally that you are in something behavioural economics has still forgotten. Be highly efficient is so demanding that it pays to honouring it only by words.
Congratulation for your blog .

Anonymous said...

I was unfamiliar with this term. I appreciate your post. I think that in education in the United States educators and administrators have a kakonomic relationship. Administrators are reluctant to criticize mediocre work and consider it sufficient. In exchange, educators are reluctant to criticize administrative decisions and mistakes.

Laura K said...

This is an interesting topic. I found during my first graduate (master's) program that I did not need to work very hard to get a decent grade. Why should I spend the energy to write an amazing (by my nearly-unattainable standards) paper when my barely-good-enough (by my standards) paper was more than good enough for everyone else? Afterwards, it turned out that no one cared where I got that degree -- but it helped me get a better-paying job (at Harvard no less), just for having the letters after my name.

Now I am working toward an MBA -- from a school that did not require the GMATs for entry -- so I guess it's my own fault if I expect too much (read: any) quality from the instruction. Here's hoping the additional letters will open some doors...

Anonymous said...

Brilliant. It's really insightful and direct.

Anonymous said...

In a hierarchical organization seized by kakoeconomics, only those willing to accept low-low exchanges are fit for management, but only if they extol the wonders of those exchanges.

Martin Conlon said...

A term that can be applied to something seen in field-hockey in most matches.

An umpire's 'interpretation' of a Rule meeting a player's expectation of what that umpire's interpretation will be - with neither interpretation or expectation even close to what the published Rule requires.

Example: a player plays (forces) the ball into the feet of an opponent, the umpire penalises the player so hit even though the Rule gives that a player hit with the ball will have offended only if contact was made voluntarily.

(Some of the definitions or interpretations of the meaning of 'voluntarily' would make Ambrose Bierce blush.)

The decision is made in this way to ease decision making and for consistency.

No subjective judgment is required, "Did the ball hit the foot?" is objective. Any and all body/ball contacts are in this way regarded as offences, but this is not what correct application of the Rule requires.

There are several Rules treated in a similar way. Players accept such decisions because they are applied in the same way to both teams. The quality of the game suffers, in this case because players look to 'find a foot'rather than finding a pass or eluding a challenger.

Kak: good choice of prefix, thank you for the word.

Anonymous said...

I read your chapter in That will make you smarter and I was incredibly illuminated by the idea seeing examples in everything I set my eyes on for a while. I live in Italy in these Berlusconian times, so probably one reason resides in this contingency. Now I have recently finished reading The Little Big Things, 163 ways to pursue excellence by Tom Peters and I think that somehow I have found and antidote to kakonomics. If anyone is interested in a possibile correction please read this book. Compliments for having named such a pervasive phenomenon.