Is Self-Interest Self-Fulfilling?

Vicious or Virtuous?

By report and repute our planet has become a less pleasant place over the last hundred years. We’re wealthier and healthier – well, at least in some parts of the world – but this doesn’t seem to have made us any happier. Certainly the world of work is a harsher place, where people are no longer socially attached to their places of employment but a rather viewed as resources to be disposed of as and when required.

One line of argument suggests that this change is not simply due to increased economic pressures on people and corporations to get results but is because managers have learned – been trained – to behave in accordance with the principles of economics, founded on the dubious idea of self-interest. When we act on the basis of ideas these become self-fulfilling. Vicious circle or virtuous ladder?

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Altruism: Signalling Corporate Fitness

Prisoner's Tit-for-Tat

Variations on the Prisoner’s Dilemma game are widespread in financial studies. The idea is that two people are faced with a dilemma: if they both support each other and stay silent they get a short sentence, if they both rat on each other they both go to jail for several years but if one of them spills the beans while the other one doesn’t then the latter is banged up for a long time and the other goes free. On a single shot basis it doesn’t pay to be cooperative.

On the other hand, if the game is repeatedly iterated, the strategy of Tit-for-Tat – start by being cooperative and then simply copy the last action of your opponent turns out to be the best solution, as described by Robert Axelrod. Over long periods of time exploiters get found out and people prepared to cooperate win. This leads to the suggestion that self-interest dictates that we should operate as though we’re altruistic because this is the most successful strategy. So even if we're altuistic we're actually deceiving schemers. Don't you just love the businessman's view of human nature?

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When Muddled Modellers Model Muddles

Hat, In, Cat, The

If a muddled modeller models a muddle do they end up with a muddle model or a model muddle?

Sadly Dr. Seuss’s most famous creation isn’t about to appear and rescue us from this conundrum. The problem is known as model risk and it’s what we often end up with when we start trying to model financial systems: a muddle rather than a model. Which helps explain how people who don't exist can get mortgages they can't pay.

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Moral Hazard, But Thanks For All The Fish

Vanishing Regulators

Regulators spend a lot of time worrying out loud about moral hazard, the problem that occurs when people don’t have to take risks commensurate with their potential rewards. This sort of ignores the point that if moral hazard didn’t exist most of the need for regulators would disappear overnight.

Still, there’s a sneaking suspicion that a lot of the problems investors face are less to do with moral hazard and more to do with the problems caused by behavioural biases that cause organizations to fail to manage information successfully. This so-called intellectual hazard, it’s suggested, lies behind some of the securities industries biggest boo-boos.

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