Lone Gunman

A newly pro­posed inter­na­tional def­i­n­i­tion of the mid­dle class for devel­op­ing coun­tries, pro­duced by the Cen­ter for Global Devel­op­ment for the World Bank, has some sur­pris­ing con­clu­sions for India.

The report, pro­duced by the pres­i­dent of the Cen­ter for Global Devel­op­ment, Nancy Bird­sall, sug­gests that “mid­dle class” is defined as every­one with an income above $10 a day, exclud­ing those in the top 5% of earn­ers in the coun­try… mean­ing India has no mid­dle class.

This is a com­bi­na­tion both of the depth of India’s poverty and its inequal­ity. China had no mid­dle class in 1990, but by 2005, had a small urban mid­dle class (3% of the pop­u­la­tion). South Africa (7%), Rus­sia (30%) and Brazil (19%) all had siz­able mid­dle classes in 2005. […]

In socio-political terms, the mid­dle class is tra­di­tion­ally that seg­ment of soci­ety with a degree of eco­nomic secu­rity that allows it to uphold the rule of law, invest and desire sta­bil­ity. They do not, unlike those defined as rich, depend on inher­i­tances or other non-productive sources of income. […]

OECD coun­tries define their poverty lines as 50% of median income which works out […] to about $30 day. In the US the poverty line for a sin­gle indi­vid­ual in 2008 was $29 per day and for each indi­vid­ual in a four-person house­hold was about $14 per day.

How­ever, peo­ple in devel­op­ing coun­tries liv­ing on even $10 a day still have extremely low social indi­ca­tors. Econ­o­mist Lant Pritch­ett has shown that infant mor­tal­ity of house­holds in the rich­est quin­tile in Bolivia was 32 and Ghana 58 per 1,000. Fewer than 25% of peo­ple in the rich­est quin­tile in India com­plete 9 grades of school, Pritch­ett showed. “An upper limit of the 95th per­centile, while on the high side, is just about suf­fi­cient to exclude the coun­trys rich­est,” Bird­sall adds.

via The Browser

When there is a medium placed between our effort and a desired out­come, we strive to max­imise this medium regard­less of whether or not it leads opti­mally to that out­come (think points or vir­tual cur­ren­cies as a medium when attempt­ing to obtain goods).

That’s my attempt at a con­cise sum­mary of the find­ings from a study coin­ing the phrase ‘medium max­imi­sa­tion’.

This exam­ple taken from the paper (pdf) and pre­sented by The New York Times may help:

Stu­dents were given a choice between two sim­ple tasks. One would take six min­utes, and the stu­dents were told that they would get a gal­lon of Haagen-Dazs vanilla ice cream as a reward. The other would require seven min­utes of work, and the pay­ment would be a gal­lon of Haagen-Dazs pistachio.

Not sur­pris­ingly, since the sec­ond option involved more work and a less pop­u­lar fla­vor, only about a quar­ter of the stu­dents chose it.

But the researchers also repeated the exper­i­ment with a cou­ple of tweaks. In the new ver­sion, the six-minute task led to a pay­off of 60 points, and the seven-minute task brought 100 points.

The researchers then told the stu­dents that any­one who fin­ished with between 50 and 99 points would be given a gal­lon of vanilla ice cream. Any­one with 100 points would get pistachio.

Prac­ti­cally, there was no dif­fer­ence between the two exper­i­ments. But the out­comes ended up being very different.

In the com­ments of a pre­vi­ous post of mine look­ing at the denom­i­na­tion effect, the idea that “the greater the level of abstrac­tion, the more ready we are to spend” was mooted. So it seems to be the case here.

via @BFchirpy

In light of the ongo­ing debate with regards to the finan­cial sector’s so-called ‘bonus cul­ture’, econ­o­mist John Kay looks briefly at the his­tory of the bonus and why the idea of a ‘bonus cul­ture’ is a “poor joke” (using the exam­ple of teacher and doc­tor bonuses).

At one time, the offer and receipt of a gra­tu­ity was a state­ment of social and eco­nomic supe­ri­or­ity on the part of the giver, its accep­tance a state­ment of social and eco­nomic infe­ri­or­ity on the part of the recip­i­ent. To be salaried – to be trusted to do the job for which you had been con­tracted and paid – was a mark of sta­tus. Con­trac­tu­ally agreed performance-related pay – com­mis­sions and piece work – was wide­spread in shops and fac­to­ries, but has now largely been abandoned.

The com­mon out­come was that employ­ees came to care more about the quan­tity of the prod­uct than its qual­ity. The sys­tem polarised the con­flict between the inter­ests of the organ­i­sa­tion and of those who worked in it. […]

Teach­ers and doc­tors strongly resist the intro­duc­tion of a bonus cul­ture: not just because they resent mea­sure­ment of per­for­mance and account­abil­ity for their activ­i­ties […] but because they oppose import­ing the cul­ture of assem­bly lines. They fear an envi­ron­ment in which they would be encour­aged to focus on nar­rowly quan­tifi­able objec­tives at the expense of the under­ly­ing needs of clients.

Even if many teach­ers and doc­tors are incom­pe­tent and lazy, many oth­ers are seri­ously com­mit­ted to the organ­i­sa­tions for which they work, the sub­jects and spe­cial­i­sa­tions to which they are devoted, and to a broader sense of pro­fes­sional ethics: and it is only peo­ple like these who estab­lish the kinds of schools and hos­pi­tals we want as par­ents or patients.

Kris­t­ian Segerstrale–owner of online games com­pany Play­fish (acquired by Elec­tronic Arts for $400m in Novem­ber 2009)–discusses why online game envi­ron­ments are excit­ing places for eco­nom­ics research (and specif­i­cally: “how social fac­tors influ­ence eco­nomic deci­sion making”):

When econ­o­mists try to model behav­ior in the real world, they’re always deal­ing with imper­fect infor­ma­tion. “The data is always lim­ited, and once you get hold of it there are tons of rea­sons to mis­trust it,” Segerstrale says. In vir­tual worlds, on the other hand, “the data set is per­fect. You know every data point with absolute cer­tainty. In social net­works you even know who the peo­ple are. You can slice and dice by gen­der, by age, by anything.”

Instead of deal­ing only with his­tor­i­cal data, in vir­tual worlds “you have the power to exper­i­ment in real time,” Segerstrale says. What hap­pens to demand if you add a 5 per­cent tax to a prod­uct? What if you apply a 5 per­cent tax to one half of a group and a 7 per­cent tax to the other half? “You can con­duct any exper­i­ment you want,” he says. “You might dis­cover that women over 35 have a higher tol­er­ance to a tax than males aged 15 to 20—stuff that’s just not pos­si­ble to dis­cover in the real world.”

Of course, there’s a fairly obvi­ous caveat:

One pos­si­ble flaw in this eco­nomic model is that the kind of peo­ple who spend hours online tak­ing care of imag­i­nary pets may not be rep­re­sen­ta­tive of the rest of the pop­u­la­tion. The data might be “per­fect” and “com­plete,” but the world from which it’s gath­ered is any­thing but that.

When requested to give up a “sacred value”, the inclu­sion of a finan­cial incen­tive incites moral out­rage, decreases gen­eral sup­port for a com­pro­mise, increases anger and increases a subject’s approval of “vio­lent opposition”.

Research look­ing at our reac­tions to such pro­pos­als offers same sug­ges­tions for nego­ti­at­ing over sacred val­ues.

A more suc­cess­ful tack for nego­ti­at­ing over sacred val­ues, as it turns out, is to sim­ply use the right words. Whether dis­cussing nuclear dis­ar­ma­ment or reluc­tance to sell one’s lucky mug at a garage sale, using spe­cific rhetor­i­cal strate­gies can make trade-offs seem less taboo and can facil­i­tate con­flict res­o­lu­tion. […] One tac­tic is to describe trade­offs in terms of “costs and ben­e­fits” and “analy­sis” rather than in terms of sacred val­ues and money. This vague util­i­tar­ian lan­guage appears to mask the emotion-laden taboo nature of the exchange. Another strat­egy is to empha­size the dire, oblig­a­tory nature of the trade-off. For exam­ple, peo­ple are more will­ing to sell their body organs for med­ical trans­plants when told it is the only way to save lives because this fram­ing posits the exchange as one sacred value for another. In an age where many of the most volatile con­flicts stem from sacred causes, and politi­cians have ques­tioned effec­tive­ness of diplo­macy, under­stand­ing how to best nego­ti­ate about these issues has never been more critical.

via Schneier on Security