2005-11-12

Individual incentive & Collective Efforts

I am a great believer of free markets, simply because free markets align perfectly with individual incentives and human nature. To repeat ad nauseam, any system that does not align with human nature is bound to fail. Socialism, for instance. I will illustrate this by a simple example.

Many of the bloggers who have individual blogs had agreed (including I) to contribute to a collaborative blog, called http//isblife.blogspot.com. The blog is no one person’s baby but a collective responsibility. Individual blogs are our own baby which we all individually want to foster. We always find time to write on our individual blogs. Hardly find time to contribute to the collaborative blog. Individual incentive is far greater than collective responsibility. Capitalism is about the former; socialism about the latter. If state owns everything and does not differentiate between performances, then why will anyone work harder or efficiently?

Fundamentally, human beings are selfish, because that is how survival was possible. Imagine human beings being generous, humble and unselfish during prehistoric times. Survival would have been difficult. Having said that, I will also concede that ‘team work’ was very important reason why human beings survived against mammoths, bisons and saber tiger. How is team work and individual incentives aligned so that it results in synergies? Obviously, not by allocating bonus to the team as a whole and allowing distribution equally among all team members, leaving little identity for an individual. This will create free riders. Linking one’s performance and responsibility with others at individual level will ensure a different game. This way each one will help and monitor performance of others. The difference between these two is that former does not see individuals within the team; the latter sees individuals as a team. The latter method has a very good example in microcredit. Women form into groups of five and each one guarantees the loans taken by the other four. Each one thus has an incentive to work and also watch the performance of the other so that she does not end up spending her earnings in repaying loans of others.

Systems which try to disregard individual incentives do not work. That does not mean that collective effort is not possible.

PS: Seek pardon if the posts have been sketchy. Have taken five courses this term resulting in information and assignment overload. Added to this are my efforts to work on various aspects of my interview prep. Life has been tough.

1 comment:

Anonymous said...

We played a game at B-School. We were formed inot groups and we were asked to pick up a number. If all agreed and picked the same number, the group scored. If any one individual picked up a number different from the group, his individual score was very high. Even the best of friends in groups cheated and picked up another number. When you give incentives to move away from common goals, team work breaks down (from Raghu)

2005-11-12

Individual incentive & Collective Efforts

I am a great believer of free markets, simply because free markets align perfectly with individual incentives and human nature. To repeat ad nauseam, any system that does not align with human nature is bound to fail. Socialism, for instance. I will illustrate this by a simple example.

Many of the bloggers who have individual blogs had agreed (including I) to contribute to a collaborative blog, called http//isblife.blogspot.com. The blog is no one person’s baby but a collective responsibility. Individual blogs are our own baby which we all individually want to foster. We always find time to write on our individual blogs. Hardly find time to contribute to the collaborative blog. Individual incentive is far greater than collective responsibility. Capitalism is about the former; socialism about the latter. If state owns everything and does not differentiate between performances, then why will anyone work harder or efficiently?

Fundamentally, human beings are selfish, because that is how survival was possible. Imagine human beings being generous, humble and unselfish during prehistoric times. Survival would have been difficult. Having said that, I will also concede that ‘team work’ was very important reason why human beings survived against mammoths, bisons and saber tiger. How is team work and individual incentives aligned so that it results in synergies? Obviously, not by allocating bonus to the team as a whole and allowing distribution equally among all team members, leaving little identity for an individual. This will create free riders. Linking one’s performance and responsibility with others at individual level will ensure a different game. This way each one will help and monitor performance of others. The difference between these two is that former does not see individuals within the team; the latter sees individuals as a team. The latter method has a very good example in microcredit. Women form into groups of five and each one guarantees the loans taken by the other four. Each one thus has an incentive to work and also watch the performance of the other so that she does not end up spending her earnings in repaying loans of others.

Systems which try to disregard individual incentives do not work. That does not mean that collective effort is not possible.

PS: Seek pardon if the posts have been sketchy. Have taken five courses this term resulting in information and assignment overload. Added to this are my efforts to work on various aspects of my interview prep. Life has been tough.

1 comment:

Anonymous said...

We played a game at B-School. We were formed inot groups and we were asked to pick up a number. If all agreed and picked the same number, the group scored. If any one individual picked up a number different from the group, his individual score was very high. Even the best of friends in groups cheated and picked up another number. When you give incentives to move away from common goals, team work breaks down (from Raghu)