Tuesday, April 28, 2009

Tournaments and psychopathic chickens

I recently ran across an article about a fascinating biology experiment. In the experiment, biologist William Muir bred two groups of chickens with similar techniques but one slight difference. In one group, only eggs from the single most productive hen were used to produce the next generation. In the other group, only eggs from the single most productive cage (a group of hens) out of numerous cages were used to produce the next generation. After six generations, the second approach had produced a group of very healthy, productive hens. On the other hand, the first approach, selecting the single most productive hen, had produced only three surviving hens, all in poor health. These were the survivors of on-going violence that had killed off most of that generation. Essentially, selecting the single most productive animal had produced a bunch of psychopaths. It turns out the optimal survival strategy when only one "winner" is allowed is to suppress the competition...attack the other hens, eat their eggs, etc. When a whole group is allowed to win, the optimal survival strategy is one of altruism. Every member of the group must be as productive as possible.

This brings to mind something I read in the book Freakonomics. In one chapter, the "corporate structure" of a crack distribution network is compared to the structure of a typical Fortune 500 company. It turns out, the two are quite similar. Crack distribution networks, and many Fortune 500 companies follow closely a "tournament" model of success.

In a single-elimination tournament, most contestants don't advance very far at all. Half of the participants are eliminated in a single contest, another 25% in the second round, and so on. In a large tournament, only a tiny percentage of entrants will advance to the final round or two where prizes might be up for grabs.

Crack distribution networks, as well as large companies like Wal-Mart and McDonald's, approximate this model very closely. The largest group of workers are at the very bottom, making little more than minimum wage, frequently dependent on public assistance just to get by. As you move up the org chart, smaller groups might make modest salaries that allow them to get by and enjoy a modest middle-class lifestyle without the need for public assistance. And finally, at the very top, there is a very small group of people who enjoys spectacular wealth.

It turns out from the perspective of human behavior and economics, a tournament model is frequently the most effective model for motivating the maximum productivity for the lowest total compensation. The masses of employees working for salaries that don't allow them to escape the welfare system largely do so because they believe they will reach a "later round in the tournament" and compensation will improve dramatically and justify the earlier effort. Because most employees will fail to get this far, the company is able to offer far less than what an employee would normally agree to work for simply by holding out the possibility of excellent compensation at a later date.

The thing that concerns me is how much the tournament model resembles the chicken experiment in which only one chicken is chosen to produce the next generation. If the entire economy was structured on a Wal-Mart model--that only a small number succeed, and they do so individually, not as a group--then aren't we in essence breeding for psychopaths?

Historically, this seems to be the case. Throughout most of human history, societies have tended to follow the tournament model. Wealth distribution has generally looked like a pyramid, where only a few are "winners" at the top. Anybody who has read much history has probably also noticed that societies used to be far, far more violent than today. The US has one of the highest crime rates among developed nations, and even our worst crime rates since records have been kept would pale in comparison to murder rates through-out most of history. Stories of monarchs throughout history are full of tales of murder and genocide, often performed on members of one's own family for purposes of eliminating competition for the throne. Kinda sounds like the psychopathic chicken, doesn't it?

Yet beginning with the advent of modern democracies 200+ years ago, and particularly since WWII, the world has seen a radical re-structuring of wealth distribution in the developed world. In the developed world, wealth distribution looks far more like a diamond than a pyramid, with the vast majority of populations living comfortably, if not extravagantly. And, not surprisingly, as the economic model changed, crime rates plummeted. What has changed is that economic success is less dependent on a winner-take-all model, but on a group-success model. The success of America post-WWII was shared by nearly all of society. Nations with a strong middle-class tend to succeed or fail together, so there is motivation to work together to succeed. Undercutting a member of your own group poses no advantage if success depends on how the group as a whole does. In other words, democracy and a strong middle-class enabled society to stop breeding psychopathic chickens.

This is why wealth distribution is absolutely essential to a strong nation. This is why it's concerning to see the super-wealthy thriving while middle- and low-income people overall are making no progress or even losing ground. Companies like McDonald's and Wal-Mart have demonstrated the (short-term) success of the tournament model of compensation, and unfortunately this model is becoming more and more widely adopted within business. In fact, since government employs roughly a quarter of all workers, a thorough analysis might conclude that government employment is the only thing maintaining a middle-class in our nation right now. Government pay scales are generally far more tightly concentrated around the middle than private-sector pay scales. As a result, it's probably fair to conclude that government workers may well make up nearly half of the workers in the 25th-75th percentiles.

Without the stabilizing effect of government employment, our nation might already be closer to a pyramid economic model than one based on a robust middle-class. If history is any guide, and it usually is, such a change would inevitably lead to tremendous spikes in crime, massive drops in economic productivity (because, of course, far fewer people would be able to afford goods), and a general destabilization of the entire nation. Ultimately, the psychopathic chickens would once again rule the roost.


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