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Wednesday 16 February 2011

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?

Unreal Exploitation

However, if exploiters can sidestep the repeating nature of the game then they can gain an overall advantage. If instead of engaging with the same opponents in repeated games they continually find new adversaries they will, overall, end up ahead. This, of course, is the modus operandi of conmen and scammers everywhere; looking to find fresh victims and forever moving on.

There are endless variations on this game, nearly all conducted in unreal laboratory conditions abstracted from the real world of relationships, social order and restricted opportunities. Outside these closeted environments, however, the situation is more difficult – it may not be possible to escape being exploited, even if we want to. Moreover there are endless examples of what appears to be genuine altruism, where there can be no possible future gain for the individual – a soldier throwing themselves on a grenade to protect their colleagues is undoubtedly altruistic, but it brings an iterated game of the Prisoner’s Dilemma to a final and fatal close.

Unintended Animal Spirits

If, somehow, humans are genuinely altruistic then this poses a problem for modern financial theories which are largely built on the dominant concept of individual self-interest. It’s one thing to exhibit altruism out of calculated self-interest, it’s entirely another to do so because people genuinely care more about others than themselves. If this latter idea is correct, however, it raises a puzzling question for evolutionary biologists – what kind of selective pressure can create a creature that cares more about other people than itself?

A possible answer is: a creature for whom altruism improves its chances of reproductive success. Admittedly, lying around on top of unexploded ordinance isn’t going to propagate the genes of the heroic individuals concerned, but this may be an unintended consequence of a generally useful evolutionary trait. Or it may simply be a temporary surfeit of animal spirits. Very temporary.

Capitalist Chimeras

Both arguments have been expressed, forcibly, from people on different sides of the debate. The idea that altruism is, in fact, a chimera has strong support from studies of other animals where selfless displays of sacrifice are generally either rare or completely pre-programmed, such as where ants or bees sacrifice themselves for the wider community. In general, the rule is that you’re more likely to find altruistic-type behaviour in communal animals than solitary ones: sharks are archetypical capitalists, entirely concerned with their own self-interest.

Humans lie towards the solitary end of the communal spectrum, but we clearly exhibit in-group / out-group behaviours where we support members of the former no matter how obnoxious they are while behaving aggressively to the latter regardless of reason. We can find divides along these lines in everything from nationality to sports teams and from religious affiliation to economic philosophy.

Kin Selection and Culture

Kin selection, where we favour our family members, usually in order of genetic closeness, seems to be the strongest tie. The ideas were first formalized by Bill Hamilton in The Genetical Evolution of Social Behaviour. The basic idea is that altruism is an illusion, because we're only altruistic towards those who carry our genes, and the more of our genes they carry the more we favour them. As J.S. Haldane famously said:
"I would lay down my life for two brothers or eight cousins."
However, the alternative idea that altruistic behaviour is somehow group related suggests that natural selection is working at the group level, and that’s a controversial argument. At root the unit of selection is the gene and it’s darned hard to go from individual genes to group behaviour, although there are a lot of researchers who think that it's entirely possible.

Nonetheless, humans have an alternative means of behaviour modification: culture. Typically this argument runs along the lines of reciprocal altruism as in the Prisoner’s Dilemma: Tit-for-Tat type scenarios. However, if we widen the experiment to include observers as well as participants there’s another possibility: exhibiting altruistic behaviour leads potential mates to favour the altruist over the exploiter. In effect displays of altruism are signals that indicate to observers whether or not the altruist can be trusted or not.

The Return of the Handicap Principle

We’ve seen this before – it’s Zahavi’s Handicap Principle writ large. By making a sacrifice the altruist makes a demonstration not just to the actual recipient but also all the other possible recipients. Gilbert Roberts explains in Competitive Altruism: from Reciprocity to the Handicap Principle that such displays allow the altruists to find each other and to exclude the free-riders:
“There is a parallel here with commercial advertising. Some advertisers promote products by offering ‘free gifts’. This is their way of attracting the reluctant consumer’s attention to their products. They offer an incentive to attend”.
Potentially this is a critical idea for economics and investors alike. If people are inclined to favour altruists then corporations and individuals who demonstrate such behaviour are likely to be favoured by other people who’ll view such behaviours as demonstrative of trust. This implies that, in some situations at least, stark self-interest will not lead to the best economic outcome.

Brand Signalling

So brands that are associated with altruism and which avoid connotations of selfishness may outperform alternatives: this provides a level of explanation for charitable donations and why commercial organisations want to avoid negative publicity. Equally, some companies won’t give a rat’s arse about such things because they’re involved in non-discretionary activities or because they exploit virtual monopolies. Of course, all things being equal an exploiter that people have to use is probably a good investment, but they’ll be exposed to the tail-end of public and government retribution if they get things wrong – just ask the Credit Ratings Agencies.

If altruism is a signalling mechanism this doesn’t tell us whether humans are naturally altruistic or not. It’s at least possible that we act like we’re altruistic in our own self-interest. However, either way, it suggests that financial modellers, corporate executives and investors alike need to be careful in following the most extreme dictats of economic self-interest.

Maximising Returns: Signalling Self-Interest

At its most brutal the bleeding edge of capitalism tells us that it’s the responsibility of executives to maximise shareholder value. Even if you believe that that’s true, the idea of altruistic signalling implies that achieving that is a great deal more difficult than a simple model of self-interest would imply. In fact, in some cases the more self-interest you publicly exhibit the less shareholder value you’ll create: certain oil companies now know this to their cost.

If nothing else it’s a nice conceit: the meek shall inherit the earth while the bullies can go play with themselves because no one else wants to. Sadly, the more the world believes the truth of economic models of self-interest the less true this becomes. Many people believe that the world has become a less friendly and more mean spirited place over the last century or so. It may be true and, if it is, we can find all the explanation we need in the self-fulfilling truths of economics.


Related articles: Advertising on the Handicap Principle, When A Dollar's Not Just A Dollar, Greed's Not Good For Shareholders

3 comments:

  1. On kin selection, can we learn something from organ donations? Namely is it true that kidney transplant rates varies as genetic distance (i.e. between identical twins > fraternal twins > siblings > step siblings = strangers)?

    On the handicap principle, can we learn something by the ratio of anonymous financial donations? Among corporations anything above zero would surprise me. But it would be interesting to see what percentage of individual contributions that United Way, for example, receives anonymously. Also interesting may be what is the distribution of people's guesstimates for this percentage.

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  2. An Italian economist, Matteo Richiardi, has modelled the outcome of Jesus vs Hillel in a heterogenous population. You may read about his findings when he modelled a population consisting of some who did to others what they wanted in return, and some who did not do to others what they did not want in return in his paper here:

    http://www.laboratoriorevelli.it/_pdf/wp40.pdf

    Gaute

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  3. Laying yourself on top of a hand grenade may contribute to spreading the genes you have, if you are battling next to your brothers, cousins and second cousins. A tribe with young men who will make that sacrifice tend to exist for a longer time than those who have the motto "every man for himself".

    Putting women on top of hand grenades on the other hand, would be very stupid (if you had more than one man to spare). The recovery of a tribe is linked to the number of wombs, not the number of men.

    Gaute

    ReplyDelete