Saturday, December 02, 2006

Correlation, Causation, and Character: The Dangers of Storytelling

Humans love stories. They're how we make sense of the world.

Yet storytelling can be a dangerous thing when we allow the simple narratives to seduce us into false conclusions.

As we seek meaning in the events we observe, we often fool ourselves into taking correlation for causation, and causation for character.

Let's take a simple example.

Right now, I'm reading Judith Harris' "The Nuture Assumption," a groundbreaking book that persuasively argues that the stories we tell ourselves about parents and children are dead wrong.

Specifically, researchers have found that healthy, happy children tend to come from families that allow freedom, yet set limits (gee, isn't that an easy prescription to follow!). Harris shows her humor by dubbing this the "just right" approach, as opposed to "too strict" and "too loose."

Based on this research, we generally conclude that this enlightened parenting style is the cause of the children's success (correlation to causation), and that this means that the people who practice the style are "good" parents (causation to character).

And we'd be wrong.

As Harris points out, "environment" is critical to child development, but "environment is not synonymous with "nuture." In fact, there are two equal factors that account for child development: genetics, and their peer group, and the data bears this out.

Yet despite the evidence, parents (and I am no exception) have continued to obsess about our role in our kids' development. Why? Because it just sounds right. Because it's something we can do something about. And because we'd like to believe that we have more influence on our beloved son or daughter than that annoying twerp from across the street, even if it means taking the rap for any problems they might develop. (Side note: This is why we should be really really worried that Britney Spears is now hanging out with Paris Hilton. But I digress....)

The same danger applies to business as well. How many times have we seen how wealth and success lead people astray?

Let's say you read about entrepreneurs who hit it big, and you see that lots of them are Stanford dropouts. You might therefore conclude that the entrepreneurs succeeded because of their intelligence (correlation to causality), and that Stanford dropouts have the "right stuff" to be entrepreneurs (causality to character).

Never mind the fact that Stanford's proximity to the world's single largest source of venture capital and the world's leading technology cluster might have something to do with it.

Or perhaps more pointedly, think of the many ballyhooed entrepreneurs who were feted as geniuses after a freshman success, but never delivered a sophomore hit. Did Mark Andreesen and Sabeer Bhatia suddenly lose 50 IQ points because LoudCloud and Arzoo were duds?

The true answer is that neither is a genius or a bum (Note: I do not personally know either of them, so this is largely supposition). When Netscape and Hotmail made them millions, it simply made them rich, not smart. And when later companies failed to generate the same results, it simply made the less rich, not stupid.

Stories continue to be powerful. You should employ them in your business (claiming you started a company to sell Pez dispensers? Brilliant PR!), but recognize that our very human nature is to give too much credit to causes and character, and too little to chance. Never believe that a fat wallet makes you smart, or that a lack of funds makes you dumb. Chances are, the wheel will turn again before too long.

P.S. This post is a sidebar to a future essay I plan to write on the evil of righteousness, the morality of doubt, and why religions are so tragically easy to turn into tools of evil. Watch for it in the next few weeks.

Wednesday, November 29, 2006

The Minimum Wage Controversy

My recent post on economic creationism drew a brisk response, including some offline debates about the validity of raising the minimum wage.

Now I am not an economist. I never took any economics classes in college, so all my economic knowledge comes from either HBS (where we didn't do much theoretical work) or my ancient Econ class with the icepick-wielding Mr. Richards (a great story for another time).

As a result, when I take a stance that raising the minimum wage is probably an unwise move, it comes from little more than reading The Economist in the bathroom. Not a strong leg to stand on.

On the other hand, I do know delegation, so I will cheerfully turn the debating over to Nobel-prizewinning economist Gary Becker and Judge Richard Posner (one of the founders of the law and economics movement).

Posner's Take:
As a means of raising people from poverty or near poverty, the minimum wage is distinctly inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market. EITC is of course not devoid of allocative effect, because like any other government spending it is defrayed out of taxes; but it is probably a less inefficient tax than the minimum wage. And it is a more efficient device for spreading the wealth, since many, perhaps most, minimum-wage workers are not poor.

So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured. First, unions, which are an important part of the Democratic Party's coalition, favor the minimum wage because it reduces competition from low-wage workers and thus enhances the unions' bargaining power and so their appeal to workers. This would not be as serious a problem for unions if minimum-wage workers were organized. But the fact that most minimum-wage workers are part time makes them uninterested in joining unions. Second, increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals. And third, genuinely poor people vote little. The number of nonpoor who would be benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes will rise as a result of reducing competition from minimum-wage workers, probably exceeds the number of nonpoor who will be laid off as a result of an increase in the minimum wage. Teenagers, moreover, will be among the groups hardest hit, and most of them do not vote.

Becker's Take:
Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.

A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.

My Take:
Obviously, I can't add much to the discussion other than this: These two very smart economists believe that the ostensible reasons offered in support of the minimum wage increase are either a) false, or b) inefficient in comparison to other options.

I realize that authorities are often wrong, but in the absence of a compelling alternative, I'm happy to throw my lot in with these two.

Adios, Meatspace!

Cyberpunk fans rejoice--according to the USC Annenberg Digital Future Project, we are getting closer to the day when the majority of people prefer virtual worlds to RL (that real life for you n00bs).

Of course, we still have a ways to go before we reach the Matrix, or even Jim Cameron's upcoming Avatar (curses, thanks to Cameron finally getting the mojo to make the movie, the famous unproduced script has been yanked). Here's the actual quote from the USC Annenberg Digital Future Project:

43 percent of Americans who belong to online communities say they feel just as strongly about their virtual worlds as their real-world counterparts.

Nonetheless, that's a pretty striking statement. Close to half of those who participate in virtual worlds feel as strongly about their online life as their meatspace one. Which tells me that while the current wave of Second Life stories are definitely overhyped, the underlying direction is dead on. There's gold in them thar virtual hills!

Sunday, November 26, 2006

More on Barack Obama and Insane Troll Logic

Two points I thought about, but forgot to include in my last post:

1) Despite my disappointment with Barack Obama's recent stance on Wal-Mart, I still think that the Democrats would be insane not to run him in 2008. When people like Steven Levitt are swooning over his eloquence, you know you're on to something. Besides, monkeys would fly out of my butt before Hillary ever won a national election. The entire religious right is convinced that she IS Satan, you don't think they'd turn out in an election?

2) What gets me about Insane Troll Logic is the fact that many of the same people who oppose the scientific madness of creationism and intelligent design on the grounds of logic then turn around and support trade unions, protectionism, and economic idiocy like rent control.

Logically, if you oppose one, you should oppose the other. Proponents of creationism receive the ridicule that they so richly deserve, yet proponents of economic creationism get a free pass. What's up with that?

Virtual Race and Teaching Racism

One of my hopes for virtual worlds has been that the ability to arbitrarily change skin color and appearance would reduce the pernicious evil of racism in the offline world.

Unfortunately, for most of its history, the MMOG industry has followed the tradition (established by lazy fantasy writers) of light-skinned=good, dark-skinned=evil. (Actually, perhaps it would be even more accurate to say that light-skinned + big-breaster = good, based on the cover art for most of the games....)

I'm not a scientist, but my guess is that if you spend 40 hours per week slaughtering dark-skinned foes, it probably has some negative impact, however unconscious.

That's why I was glad to see that the latest edition of Guild Wars would use a North African setting with African and Arabic heroes (the first two editions have European and Asian settings).

It will be interesting to see if this third installment, Nightfall, achieves the same commercial success as its predecessors (over 2 million players). Otherwise, the forces of big-breasted racism may once again prevail.

Dammit, Barack, I thought you were different

Democratic hopeful Barack Obama recently joined in the chorus of critics slamming Wal-Mart. It never ceases to amaze me that the political party that claims to be the friend of the poor panders to prejudices by attacking the nation's single-largest private employer which has also brought huge price savings to millions and millions of lower-income customer.

I can understand when folks like Barbara Ehrenreich employ insane troll logic, but I expect better of Mr. Obama, who holds degrees from Columbia andHarvard Law School, and should understand reasoning.

Let me bottom line this for them. Wal-Mart's net income is about 3.5% of sales. It's basically a very efficient conduit for funneling savings from suppliers to consumers. Mandate that the company increase what it pays its workers (who, by the way, aren't being forced to work there!), and Wal-Mart will have to either raise its prices or lower its already slim profit margins.

In other words, there is no magical supply of money that Wal-Mart has sitting around that the good Mr. Obama can appropriate for the underprivileged. Any money or benefits that get directed to its workers will end up coming from its (low-income) customers, or by appropriating that value from its shareholders.

In the first case, there is no net benefit to the poor. In the second case, the government is effectively taxing the shareholders.

If politicians want to give themselves the ability to appropriate private property and redistribute it as they see fit, that's fine, but let them at least have the honesty to do it openly.