The economics discipline more or less started because people were interested in studying the competition between different firms that produced the same (or similar) products and that area of study (called Industrial Organization, or IO, if anyone else wants to sound like a dork) is still one of the major fields of study. It seems surprising then, that the idea of competition between people has received very little attention from economists. As many/most of you know, I did my senior honors thesis on the topic at Colby, and because my interest wasn’t satiated in the subject after that, I’m now in the process of trying to come up with a theory and experiments to study the phenomenon more closely here. I thought I’d post about what I’m focusing on, what I think is interesting about it, and where I’m having a problem formalizing my research project. I will fully admit a selfish motive for posting about it; you guys are some of the smartest people I know and I want to hear what you think about it.
The base intuition that Igor (who I played beer die with in the econ department yesterday) and I are starting with is the concept that people enjoy winning over and above the monetary value they get from winning. This, by itself, does not have too many implications for the way people behave, although there still are some interesting effects. What makes our model a little different is twofold: one, they not only like winning, but they dislike losing; two, the intensity of this feeling increasing with the amount of effort you put into the competition. These two aspects of the model combine to have some interesting theoretical implications (i.e. predictions about human behavior), which I’ll mention briefly.
First, it means that making something a competition will not cause everyone increase the amount of effort they exert. On the contrary, some people will actually decrease the amount of effort they put in. The reason for this is because of our assumption that the cost of losing is increasing in the amount of effort you exert; you never like to lose, but you really don’t like to lose after you try hard. This assumption means that anyone who either really hates to lose or who expects to lose going in to the contest will just “give up.” They decide not to put in effort in order to minimize the pain of that loss. By doing so, however, they guarantee themselves the loss even though, had they put in more effort, they had a chance to win. Thus, the effect on average effort of framing something as a competition is ambiguous, but the framing will cause the variance of how much effort people put in to increase.
The second implication is that it means small initial differences in talent matter a lot. The reasoning behind this is similar to the previous paragraph. If Michael is slightly more likely to beat me in die the first time we play, I’m not going to put in any effort (in order to minimize the pain of losing to him, which was probably going to happen), and thus get shut out. Damn. Roughly, this is true even if the initial difference in talent is really, really small and I was going to win almost half of the time anyway. As you can imagine, this would intensify over time and make small initial differences have a large effect.
This has pretty huge implications. Imagine, for example, two kindergarteners (call them Isaac and Michael) who are identical in every way during school. Then, over summer, Michael’s parents read to him a few times and work on a couple math problems. All of a sudden first grade comes and Michael is a little better than Isaac at reading and math; if the tests are framed as a competition, that means that Michael beats Isaac a few times. So what are the two kids responses: Michael is winning so starts working a little harder (because it feels good to work hard and win) and Isaac stops working (because it feels bad to work hard and lose). This increases the talent difference and by the time they’re 18, Michael is off going to school at the best college in the country (Stanford) and Isaac is selling crack on a street corner at going to UC-Berkeley. Naturally, this scenario only works under some assumptions in the model (namely about the size of the joy of winning versus the pain of losing), but is an interesting case that I think does happen at times.
The last implication is a slightly more subtle one. It means that often the people who win competitions are the ones who really, really want to win. At first this seems both obvious and probably good, but (when taken literally) the model predicts that those in high-level positions that required a competition to get (think CEOs, politicians, professional athletes, econ Ph.Ds, etc.) are not necessarily the best people for the job. Instead they’re the people who like to win the most, which makes efficiency theories even more questionable.
What I’ve just described is a very stripped down and less math-y version of my paper last term. Now the plan is to try to move past formulated and the simple economic model toward testing whether the implications of the model are indeed accurate. Unfortunately, that has proven to be quite difficult. There are a few reasons why it has ended up being difficult.
The biggest problem is that we’re dealing with a bit of a “fuzzy” concept when looking at competition. Will people want to win a hypothetical contest? Can different people view the same thing differently, in regards to whether it’s a competition or not? Even defining “winning” can be difficult in some cases, for example how would you feel if you were expected to lose by 10 and only lost by 5? These issues make it much more difficult to define a change in “competitive frame,” or “degree of competition.” To be able to see how people respond to making something competitive, we need an (exogenous/random) change in how much a contest is viewed as a competition. Unfortunately, this rarely happens, is tough to quantify, and might depend on the person. Even then, it is still tough to interpret an individual’s response; in particular, it’s tough to separate out joy of winning/cost of losing from risk aversion or fairness concerns.
The second big problem is in the nature of the predictions from the model. Most of them are “quantitative” instead of directional. In other words, they are mostly something like “the competitive frame makes small differences in ability result in larger differences in outcomes because of differences in effort provision,” which is difficult to test because “larger” is tough to define and study.
Another problem that we’re running into has to do with the nature of economics and what I think its use is. In short, I don’t think economics is meant to ex post rationalize things and I don’t think that this ex post rationalizing has much use. What I mean by ex post rationalizing is the following. Say I’m looking through papers and I see experiment Y, which gives result X and the researchers gave an explanation of Z. I could, instead, think that the result X of the experiment Y has a different explanation: if you define “winning” right, the joy of winning/cost of losing explains it perfectly. But if the explanation Z and the explanation joy of winning/cost of losing do not have any different implications (in terms of what would happen in varying “what if” scenarios), are they really different theories at all? Also, even more importantly, I want to be able to look at experiment Y and predict that X will happen before I see the result. This notion of using mathematical models to predict what will happen in varying contexts and after policy changes is really what economics is all about. As a side note, it’s also why you need to put some structure on the model, “tie your hands” a bit when defining winning, and make some assumptions (that most likely aren’t fully true)… in other words, it’s what economists get bashed for doing.
I’ll tell you all how we’re thinking about testing our theory with both lab experiments and possible real world data in a future post. I’m not doing it now for three reasons. One, I have a presentation on another project on Monday and need to start working on that. Two, we don’t have a fully formed plan of how we’re going to do it yet, just the rough idea. And three… uh… um… well … The EPA? Oops. Ok, the actual third reason is that I want all of your opinion, given that you are some of the smartest people I know. How do you think I should test this? I’ve found that I’m always more creative before I hear how someone else is approaching the problem. So before contaminating your creativity with my ideas, what are yours?
