Tuesday, October 11, 2016

Why would a majority of people reject a change?

Why would a majority of people reject a change that they knew would be good for the group overall as well as most of the individuals in it?

Take a hundred people. Suppose 40 of them come up with an idea that would disrupt some (say 30), but create new opportunities for the rest (70)—not only themselves, others too. 

These are not kleptocrats. Assume that the overall gains from the new opportunities are more than enough to offset the losses. Nobody’s promised to compensate the losers, but it could be done. So why would a majority not like the idea? Why can good economics not be good politics even after we’ve assumed away ignorance and institutional distortions?

This is not an abstract question in light of the current political currents against globalization. “Economic malpractice”, “populism”, and a “retreat from globalization” have been in the headlines for much of 2016.

One word. Well, three: Individual-specific uncertainty. Take the perspective of the 60 who didn’t come up with the idea. How do they know whether they will be among the 30 who get left behind or the 30 who gain from the new opportunities? From their perspective, it’s a 50-50 gamble.

It would be completely understandable for them to say no to the change, depending on the level of losses and their own feelings about risk. And when they say no to change—whether it’s a vote against liberalization or for protective barriers—they never realize the opportunity. The winners never learn who they are.

The same thing can work the other way. An idea that would be bad for most people can be approved by a majority using the same logic. But individuals actually learn how the changes affect them and the coalition of self-aware losers is often enough to reverse the bad move. Individual uncertainty, in short, is more likely to handicap our experimentation with policies that work than provoke lasting changes for the worse.

The effect only gets worse if we think about other possible influences on people’s willingness to support economic change. Raquel Fernandez and Dani Rodrik wrote the more general proof for the relationship between individual-specific uncertainty and status quo bias in 1991, during an earlier era of liberalization, with trepidation. They were trying to avoid relying on distortions, psychology, or irrationality to explain policy choice. But all of these factors enhance the effect of uncertainty on bias towards the status quo.

Take envy, for example. Assume that the anticipated cost of being among the losers while knowing there are winners is actually worse than the economics would imply. This would make people stick with the status quo for an even broader range of ostensibly good policies with smaller losses and greater gains.

ame with loss aversion, the psychological tendency to be more concerned about actual losses than missed opportunities. Insecurity, which could be thought of as an inflated sense of the probability of being the losing group, also enhances the bias against change. Instead of 50-50 in the example above, an insecure person may see the gamble as being 60-40 that they will be among the losers.

The growing backlash against globalization becomes a different and possibly larger problem when one looks at the world from the perspective of individual voters and citizens rather than the scorecards that research delivers.

Uncertainty (and insecurity, envy, and loss aversion) are widespread. We’ve actually contributed to this situation in the name of efficiency and incentives. We’ve allowed inequality to increase and become more visible. We’re in a period of profound change. Today’s economic context—what Klaus Schwab’s 2016 book calls “The Fourth Industrial Revolution”—is distinguished by the velocity of change, the extent of unprecedented paradigm shift and transformation of entire systems.

It’s no surprise that individuals would look at these developments, wonder whether they will end up among the winners or losers, and opt to not find out. It’s also not surprising to find politicians willing to take them up on that preference, to play on constituents’ uncertainty and insecurity in order to gain electoral traction.

How do we short-circuit this underlying dynamic, the effect of uncertainty on unwillingness to change? Reciting research findings and advocating the general benefits of economic openness will not help much. The evidence shows that continued openness is probably good for the world in general and many income groups in particular, but how many actual people know where they fall on the graph?

Investing in education systems, skill-building, and other support for entrepreneurship may help do so by limiting perceptions of insecurity. We don’t want to go overboard and create a herd of optimists who leap at any opportunity, but equipping people with the skills to have confidence in their ability to navigate new industries and contexts is important.

However, there is no avoiding the need to address individuals’ uncertainty—the need to invest heavily in redistribution, enhanced social safety nets, even guaranteed minimum incomes—as a precursor, a necessary condition, for keeping ourselves open to change, learning, and the many twists and turns that continued global integration will inevitably produce.

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