Monday, April 20, 2020

Chance and Determinism in Economic Outcomes

In their article "Analytical Egalitarianism, Anecdotal Evidence and Information Aggregation Via Proverbial Wisdom" (Journal of Economic Methodology, Vol. 11, No. 4 (Dec. 2004): 411-35), David M. Levy and Sandra J. Peart write of Adam Smith's analysis of public opinion of gambling,
In a nutshell, Smith tells us that those who succeed are presumed to be deserving of success. To use modern terms, he sketches an updating procedure by which random events ex ante become deterministic events ex post.
Sigmund Freud writes in The Future of an Illusion that our primitive human minds can't comprehend a system without a determining force behind it, so early man created a bunch of gods to explain the forces of nature. Either way, something that happens because of impersonal forces becomes easier for us to accept when we think someone's driving the outcome.

Fifty years ago, it seemed the American Dream was pretty universally realized; as long as you showed up not drunk between the hours of 10 and 3, you were going to get your suburban home and two cars and college-educated kids. Some got it from hard work and some from chance, but the confusion of reception with desert meant both were deemed praiseworthy.

The American Dream doesn't always come true for everyone, though, and just as Smith says onlookers assign praiseworthiness to winning gamblers, we assign blameworthiness to losers, too. Losers who chafe under the injustice of this blameworthiness then complain, "The system is rigged!"

If success were rarer, we would know more praiseworthy people who lost, and this would help us remember that success was based on luck, not desert. When success is thought to be common, however, the unsuccessful have more need to deflect blame by questioning the fairness of the system. Notice, this is different from the situation where deserving losers disparage the game, but to the winners it might not seem different at all.

Imagine a coin toss with a fair coin. We expect the outcome to be 50/50. What if we tell ourselves, though, that winners deserve their victories, and we heap disapprobation on the losers? The losers would (rightly) draw our attention to the randomness of the game, but the winners would (wrongly) say, "That's just what a loser WOULD say!"

What if a game that was previously based on skill, with a winner/loser split of 95/5, were supplanted by a game based on chance? The winners would continue to make claims of skill to maintain their praiseworthiness, and the losers would be thinking, "If this game were fair, I'd be winning 95% of the time." If the losers made claims of chance they would be discounted as sour-grapes attempts to deflect blameworthiness. The number of losers will have increased by an order of magnitude and the more they continued to feel the game was skill-based, the louder they would claim a rigged game.

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