Who Decides? Who Pays? Who Benefits?

(Note: This is a direct quote from Chapter 15 of my book, "Freedom or Serfdom?)

The Parable of the Pie

Polly's Pie Parlor has an unusual business model. You pick the pie you want, but Polly delivers it to the customer who comes in half an hour later. You get the pie someone ordered half an hour ago; I hope you like his taste. And you won't pay for either of those, instead you pay for the pie somebody ordered two hours ago. No trading of pies is allowed.

That is obviously a silly example – or is it? It is an instance of what is called third-party decision making. One person decides, someone else pays and yet a third person lives with the decision. Yes that happens, maybe not in pie parlors, but it does happen in business, and especially in government.

Government and Third-Party Decisions

Government decisions are inevitably third-party decisions, made by someone far from the scene and who neither pays the cost nor lives with the results. It is worth looking at the problems this causes.

For any decision we must consider: (1) who decides, (2) who pays, (3) who lives with the results, and (4) who has the most knowledge of the situation. The best decisions are made by someone who pays the price, lives with the results, and is knowledgeable about the issues to be decided.

A person who pays but does not live with the consequences will have an incentive to keep costs down. However, he may not even care about quality or any results that do not affect him.

Someone who lives with the results but does not pay has an incentive to get a good solution, but not to control costs. He may go for an expensive solution that is only marginally better than something much cheaper.

A decision-maker who neither pays nor lives with the solution has no incentive to either control costs or find a good solution to the problem. Note that most government decision makers are in this category. They neither pay the price nor live with the result.

With government decisions, the decision-makers are usually insulated from both expense and results. However they do have an incentive to appear successful, so they tend to be reluctant to change their decisions. A change would be an admission that they were wrong, not usually career-enhancing. A bad decision is likely to remain in effect, much as the fees on climbers of Mt St Helens and Mt Adams remain in effect.

A person who pays and who lives with the decision, and who gets to make that decision, will have an incentive to balance cost and results. That incentive is likely to lead to the best overall decision, especially if that person is knowledgeable. Third parties are unlikely to have the first-hand knowledge possessed by the people directly involved. Those third parties may be 2,000 miles away from the situation. Furthermore, they may impose a “one size fits all” solution, ignoring differences between places as diverse as a big city like Los Angeles and a rural village where a traffic jam might mean three cars at a stop sign.

Third-party decision makers often think of themselves as smarter and more knowledgeable than the average person. They may even be correct, but the third party tends to have a different type of knowledge than the people at the scene. That third party is likely to have a theoretical background rather than the knowledge that comes from hands-on experience. Meanwhile, the people directly involved draw on personal experience and on information from others who have such experience. And those who pay and live with the results have an incentive to get more information if they need it.

For example, a rancher in eastern Oregon may have employees who drive 50 miles from town each day, then 50 miles back after work. Employees soon tire of the drive and of the expense of gas and automobile maintenance. The rancher has a hard time keeping good people, so he decides to provide housing right on his ranch. Not so fast! Representatives from urban/suburban areas dominate the state legislature. They do not make that daily commute, they do not lose employees who hate the drive, and many probably don't even know the difference between a bull and a steer. Guess who gets to decide how to run that ranch? That's right, the legislators from urban districts, people who want to prohibit such housing. Land use restrictions require that “Minimum lot sizes in farm and forest zones range from 80 to 240 acres.”[1] That restricts the number of houses a rancher may have for himself and his employees.

Ironically, many of the people who support those limits also want to reduce driving, yet their rules force ranch employees to commute from town. That is an example of not only third-party decision making but of stage one thinking. The decision makers do not think beyond the initial objective.

As government acquires more power, we find third-parties making more and more of our decisions. The results are predictable. Our only advantage is that we can blame someone else for the mistakes.

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[1]      http://www.landwatch.org/pages/perspectives/accomplishments.htm

Confusion of Means and Ends, Part 2

Back when I was in the army we were inspected regularly, especially at one big Annual General Inspection. An officer would not only look at things like how neatly the soldier dressed but he might ask questions. The most important question was, “What is your mission?” If a soldier got that one wrong his commander was in trouble; it was the commander’s job to make sure that his people knew such things. (In fact the soldier was also in trouble since his commander would know who couldn’t answer.)

That was a good start to the problem of confusion of means and ends. If every member of an organization knows what the goals are, they are more likely to contribute to reaching those goals. However it takes more than just an occasional question to create that awareness and an understanding of its importance. In fact the army training in general failed to emphasize the mission. The officers paid a lot of attention to ceremony, spit and polish, how we rolled our socks in our footlockers etc. We usually could have passed the visual part of the inspection and answered the questions, but few if any soldiers really gave much thought to the mission. In fact I was tempted to say that our mission was standing inspections.

How do we solve the problem of confusion of means and ends? Awareness is the first step; we must keep our goals in mind and think about how our actions relate to those goals. This should be in our minds whenever we make a decision or take some action. . However that is only a start. People have to make wise decisions that put the goals first, before such things as their individual status. It is the people making the decisions and taking action that determine how effectively we advance toward our goals.

How do we get those people to decide and act wisely? One obvious measure is to push decisions down to the lowest level feasible in any organization. If people close to the issue are empowered to decide, they will usually make better decisions than someone way up in the hierarchy. In a chain of stores, local managers should be able to decide on how much of which products to keep on hand. Yes, some will make mistakes but almost certainly not as many mistakes as if someone remote from the area makes those decisions. It is the local employees who know that people in one town prefer grits while in another oatmeal will sell well.

This extends to families as well. Parents may think their little ones look just darling in certain clothes. However those clothes are likely to collect dust in the closet if the children hate them. The goal should be responsible children, not fashion statements. Of course parents can and should place limits on their children, for example not allowing their daughters to dress like whores. However children should have reasonable discretion according to their maturity, they know what they like to wear better than their parents do.

This decision-making power should be attached to responsibility of course. The local store manager is responsible for profits and if he what he buys sits on the shelf he may find himself demoted to a position where his mistakes don’t cost so much. Children should not be given unlimited clothing budgets but should know that they have only so much to spend. If they blow it all on the latest fads, they will not have money to buy the new fad that comes along next month. They will be out of style and will quickly learn the benefits of buying things of lasting value.

This is one reason to devolve government responsibility to the smallest jurisdictions feasible. The local town council or county commission is likely to know how much they need to spend on police, jails, road maintenance etc. Edicts from Washington, D.C. are likely to overfund some areas while leaving other needs starved for money. One example was the federal effort a few years ago to fund more local police. It was well-intended but the objective was not more police. The objective was to keep criminals off the street. More police were only a means to that end. Many jurisdictions already had a “revolving door” problem with their jails; they had to release criminals for lack of space. More police simply spun those revolving doors faster.

In government, business, family and personal life we have to keep the goal in mind. Every manager or parent should make sure that people understand the goal and why their own actions are important to that goal. If some activity does not help reach the goal, it should be re-evaluated. Each employee or family member should also be assertive in asking why his work is important. It is up to each one of us to know what to do and how that contributes to the overall goals of the organization.

As our actions move us toward our goals instead of simply concentrating on means, our lives, our businesses, and our government will improve.


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To Risk or Not to Risk

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“Do no harm.” As discussed yesterday that is the first rule of rescue. However that rule does need some moderation, the most obvious exception being if the risk of inaction is extreme. For example if a car is on fire, it makes sense to do whatever is feasible to get the occupants out. In that case, the risk of spinal injury is preferable to the certainty of a painful death. By doing nothing potential rescuers would do no harm, but they wouldn’t do any good either. The problem of course is how to decide when to take a risky action and when doing nothing is appropriate.

That question faces us in many of life’s situations. Should we take a new job, perhaps in a different location? Invest in the stock market? Marry? Have children? All have risks and the “Do no harm” motto would imply that we should avoid the risk. The job might not work out, leaving us worse off than before. Our investments might lose money. A marriage may end in early death or disability of a spouse or in divorce. Children might turn out to be expensive delinquents.

However all those risks have their positive sides as well. We face a situation of “Nothing ventured, nothing gained. The new job might be rewarding, both financially and in terms of satisfaction. The investment might pay off handsomely. Marriage and children might increase our happiness.

That gives us two incompatible mottos, “Do no harm,” and “Nothing ventured, nothing gained.” Each has its uses but how do we reconcile them? Clearly there are risks to avoid and risks worth taking. How do we decide? One way is to consider what are technically known as “alpha” and “beta” risk (also known as type 1 and type 2 risk).

Alpha (type 1) risk is what we usually think of as risk. It is the risk that something we do will cause a problem. We pull the accident victim from her car at the risk of causing paralysis. When we make an investment, alpha risk is the risk that we will lose some or all of the money invested. “Do no harm” pays a lot of attention to alpha risks.

Beta (type 2) risk is a bit subtler. It is the risk that we will forego some good by not taking action. If we do not pull the accident victim from her car we may not save her from the fire. It is the risk that if we do not invest, we will forego the profit we might have had. If we don’t take the new job, marry or have children we forego the benefits they might have brought us. “Nothing ventured, nothing gained” considers the beta risks.

Now a blog is not the place for a mathematical treatise on the probabilities involved in alpha and beta risks. However it is a good way to communicate the concepts of these risks. We’ve already mentioned some examples but a couple of other situations may be instructive.

Consider a search and rescue team about to head into the wilderness to look for a lost hiker. Until they find him they won’t know if or how seriously he is injured. They don’t know what medical equipment they will need. Now they could consider only the alpha risk that if they find him they won’t have the needed gear. They could go equipped to deal with bleeding, back injury, fractured limbs etc. By carrying all that stuff they have a low alpha risk of not being able to provide proper care once they find their subject. The problem: that equipment will add weight to their packs and slow them down.

On the other hand, that team may look at the beta risk. If they do not move fast they will not be able to find the subject quickly. By carrying only what they need for their own safety they can move faster. They might even find that the subject is not injured and needs only someone to show him the way back. By going lighter they lower their beta risk of not finding the subject quickly. That however comes at the expense of a higher alpha risk of not being able to treat a seriously injured subject. Most rescue teams lean toward reducing beta risk, carrying some basic first aid gear, but not enough to slow them significantly. By so doing they accept the alpha risk that they will find the subject and not have the right gear to treat his injuries.

An example of something more likely to affect large numbers of people is that of a company that has developed a treatment for some disease. The alpha risk to the public is the risk that releasing that treatment will cause harm to patients. The beta risk of not releasing it is the risk that patients who might have benefited will not be helped.

Of course there are also risks to the company. If they release the treatment and it has previously unknown bad effects, the company will have to pay reparations for the harm done. Those reparations might even bankrupt the company. Bad medical treatments tend to get lots of publicity as well. Even if the company survives, that publicity will cause financial damage. The company’s beta risk, on the other hand, is limited to the risk of loss of income if the treatment were released and worked well.

“But wait,” you ask. “Why not just test the medication until they know if it is safe?” That would be nice, but such testing takes time. What about the patients who might have benefited during that time? If the medication treats some minor malady, such as the common cold, that would not be much of a problem. But what if the treatment is for cancer, AIDS or some other potentially deadly disease? How many people might die during the testing process? By not releasing the treatment, that company has accepted the beta risk that people who might have been cured will die.

In our society we tend mostly to pay attention to alpha risk. If you lose money in the stock market you will feel terrible about it. In fact psychological studies have shown that the bad feelings from loss exceed the good feelings that might have come from a gain. In the medical field, companies get sued for treatments gone wrong. However nobody ever got sued for failure to release a medication that might have cured someone. In fact, the treatment not released is invisible to the public and we never know who it might have helped.

Fortunately, most of us do not have to decide on such things as release of medical treatments. Our decisions are usually less momentous, at least for the country as a whole. However they are important to our own lives. Investment is one example, but we also face alpha and beta risks in other cases. A new job, especially in a different location? Marriage? Children? Those decisions come with alpha and beta risks.

This life is risky and we can never be 100% sure most decisions will work out. However by thinking carefully about what we stand to gain or lose and how likely those gains or losses are, we can improve our decisions and live better lives. In my next blog I intend to expand on this somewhat, adding more tricks from the decision-making consultant’s toolbox.