Wednesday, May 16, 2007

Common Cents

My goal today is to try to solve one of the mysteries of life: why do completely rational individuals make irrational decisions? (Though it's tempting, this posting is not about why this country elected President Bush to a second term.) In the last few months, I've been made aware of two specific instances where people have voted to make decisions that make no objective sense and yet, have still prevailed. Why?

The first example that I'm thinking of took place a few weeks ago at the Manhattan Center for Science and Math (MCSM), which as a matter of disclosure is the high school where my brother teaches. Schools like MCSM that have a certain percentage of students below the poverty line are entitled to receive additional funding from the federal government, known as Title I funding. Though Title I funding is initially targeted to students who are considered academically "at risk" by the government, the school faculty can vote to apply the funds to the whole school instead of just the at-risk population. Besides the increased flexibility in deciding how the money is spent, switching to schoolwide funding for schools like MCSM, which have a high percentage of poor students but very few at-risk students, means that all of the Title I funds will be deployed by the school, instead of having to consider returning the unused portion of the funds back to the federal government.

The last three years, however, MCSM has done exactly that. A majority of the school faculty has voted to keep the Title I funding targeted to at-risk kids, and as a result the school has returned over $400,000 dollars to the federal government. This decision makes no sense on several levels. First, it turns away money that would directly benefit the students by providing additional resources. Second, in this case the teachers are acting in an economically inefficient manner because the funds would allow the school to hire new teachers and lower class size. Thus, by turning away some of the money, the teachers are increasing their own work load.

Another example of irrational decision making has been on display recently in Virginia's decision to extend the Washington area Metro to Tyson's Corner, an area that is now known as an extremely traffic congested office park, which also features two big malls. (Also as a matter of disclosure, my father works near Tyson's Corner). The main sticking point is whether to construct the rail line on an elevated track above ground, a la Chicago's El train, or to put the train line underground. On the face of it, the governor's decision to go with the former option contains at least some logic. Building above ground is cheaper by about $200 million and means the project would be finished a year earlier than if the train line was put underground. However, once you dig a little deeper (pardon the pun) it becomes clear that the decision, like the MCSM example above, makes no sense.

First, the vast majority of people involved in the project - citizens, developers, and public officials - favor building the tunnel. The governor stands almost alone in choosing to pursue the elevated track option. Second, the tunnel is cheaper in the long term because it costs less to maintain and will last longer than the elevated track. The tunnel option is also cheaper in the short term because it would allow the county to sell the air rights for buildings over the roadways near the proposed underground stations, which would help finance the construction costs. Lastly, the ultimate goals of extending the rail line is to eliminate the gridlock that has plagued Tyson's Corner over the last decade and to create a downtown pedestrian area so that Tyson's Corner becomes more than just an office park. Whether or not the city and state will ultimately succeed in this urban transformation is up for debate, however, everyone agrees that putting in an elevated train track will make it much harder to succeed because it will interfere directly with the county's ability to put in a pedestrian-friendly street grid.

The governor has defended his position by arguing that changing the plans to build the tunnel could jeopardize $900 million in federal funds that have been committed to the project. That argument doesn't explain why the tunnel option wasn't picked in the first place, before the federal funds were committed. And it also appears to be more of a threat than a reality. None of the numerous newspaper articles I've read on this issue provide any backup support for the governor's statements.

Now that I've hopefully made my case about why the decisions that were made in both of these examples represent irrational decisions by supposedly rational economic actors, the question remains why did these people make these decisions?

At MCSM, the underlying motivation behind the faculty vote was the pervasive adversarial culture that exists, particularly among the older teachers and those involved in the teacher's union, that leads them to oppose the school administration at all costs. Put another way, the teachers are willing to cut off their nose to spite their face in order to stick it to the school principal. Does this mean that the teachers are acting irrationally? I could frame their decision in rational terms: a majority of the teachers place a high value on challenging the administration and a low value on making decisions in the best interests of their school. So, they're willing to pay for their decision with an increased burden on themselves as long as it means that the administration suffers with them. Though this reasoning explains the teacher's motivations, it doesn't mean that they acted rationally, at least from an economist's point of view. The bottom line is that the teachers' decision costs all parties more in hard dollars and cents and is therefore economically inefficient.

In the Tyson's Corner example, the governor's decision can potentially be explained away by the fact that the contractor that "won" the no-bid contract to build the elevated track, Bechtel Infrastucture, is a political heavy weight in the state. (Sounds a little like Haliburton, no?) In this light, the governor's decision makes sense because it rewards an influential special-interest group. However, as an elected official, the governor's decision still appears irrational because he is acting in a countermajoritarian fashion by ignoring the majority of his constituents, who ulitmately will be responsible for keeping him in office when elections roll around.

The last fitting explanation I have for how common sense was thrown out the window in these decisions, is that individual decisions do not take place in a vacuum; rather, they are made in group contexts. Thus, people make bad choices because other people, who are often misguided themselves, exert pressure on them to go along for the ride. In other words, individuals lose the ability to think rationally for themselves and instead become followers. Adam Smith, the grandfather of capitalism, suggested that the "invisible hand" that guided group decisions should lead to a positive economic outcome. I'm not suggesting that capitalism is bad; on the contrary, I'm a firm believer in its values. However, based on the examples I've just described, and the countless others that I'm sure other folks can cite (including electing Bush for a second term!), Adam Smith's invisible hand doctrine does not always create a positive economic outcome.

3 Comments:

At 5/16/2007 2:48 PM, Blogger burrito eater said...

I was with you right up to adam smith. The invisible hand is the market acting in millions of individual mutually beneficial transactions.

Teachers unions and a decision by the government and bureaucrats in virginia hardly fit the criteria of summarized information from millions of individual, mutually beneficial transactions.

Giving the parents at MSCM vouchers to go to any school and letting their decisions form a guide for schools toward better decisions would be an exmaple of my understanding of the invisible hand - not the decisions of a gaggle of teachers.

 
At 5/16/2007 4:05 PM, Blogger Ariel Glasner said...

Ahhh burrito eater. I was hoping you'd chime in. The idea is as follows: One of the tenets of capitalism is that the aggregate effect of individual decision making is positive economic returns. In this case, however, individuals acting in a group or at the behest of a group, are making economically irrational decisions. Each individual teacher has the right to decide whether or not to apply the Title funding to the entire school or not. It's the same as if they were picking stocks in a stock market, with the added benefit of having information telling them which stock generates positive returns and which one has negative returns. Yet, in the MCMS case, individual teachers are acting in mutually detrimental ways. Similarly, the governor of Virginia isn't acting alone, and the net result of individual decisions made by special interest groups, bureaucrats and the governor himself, is negative economic returns.

I think school vouchers could be an example of Adam Smith's invisible hand in its pure form, except they don't necessarily provide parents with the full range of schooling options for their kids, especially in this case where MCSM is a magnet school that only selectively accepts students, who first have to pass an exam to get in.

 
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