The Second Best

13 Wei_Dai 26 July 2009 10:58PM

In economics, the ideal, or first best, outcome for an economy is a Pareto-efficient one, meaning one in which no market participant can be made better off without someone else made worse off. But it can only occur under the conditions of “Perfect Competition” in all markets, which never occurs in reality. And when it is impossible to achieve Perfect Competition due to some unavoidable market failures, to obtain the second best (i.e., best given the constraints) outcome may involve further distorting markets away from Perfect Competition.

To me, perhaps because it was the first such result that I learned, “second best” has come to stand generally for the yawning gap between individual rationality and group rationality. But similar results abound. For example, in Social Choice Theory, Arrow's Impossibility Theorem states that there is no voting method that satisfies a certain set of axioms, which are usually called fairness axioms, but can perhaps be better viewed as group rationality axioms. In Industrial Organization, a duopoly can best maximize profits by colluding to raise prices. In Contract Theory, rational individuals use up resources to send signals that do not contribute to social welfare. In Public Choice Theory, special interest groups successfully lobby the government to implement inefficient policies that benefit them at the expense of the general public (and each other).

On an individual level, the fact that individual and group rationality rarely coincide means that often, to pursue one is to give up the other. For example, if you’ve never cheated on your taxes, or slacked off at work, or lost a mutually beneficial deal because you bargained too hard, or failed to inform yourself about a political candidate before you voted, or tried to monopolize a market, or annoyed your spouse, or annoyed your neighbor, or gossiped maliciously about a rival, or sounded more confident about an argument than you were, or took offense to a truth, or [insert your own here], then you probably haven't been individually rational.

"But, I'm an altruist," you might claim, "my only goal is societal well-being." Well, unless everyone you deal with is also an altruist, and with the exact same utility function, the above still applies, although perhaps to a lesser extent. You should still cheat on your taxes because the government won't spend your money as effectively as you can. You should still bargain hard enough to risk losing deals occasionally because the money you save will do more good for society (by your values) if left in your own hands.

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Adversarial System Hats

8 Johnicholas 11 March 2009 04:56PM

In Reply to: Rationalization, Epistemic Handwashing, Selective Processes

Eliezer Yudkowsky wrote about scientists defending pet hypotheses, and prosecutors and defenders as examples of clever rationalization. His primary focus was advice to the well-intentioned individual rationalist, which is excellent as far as it goes. But Anna Salamon and Steve Rayhawk ask how a social system should be structured for group rationality.

The adversarial system is widely used in criminal justice. In the legal world, roles such as Prosecution, Defense, and Judge are all guaranteed to be filled, with roughly the same amount of human effort applied to each side. Suppose individuals chose their own roles. It is possible that one role turns out more popular. Because different effort is applied to different sides, selecting for the positions with the strongest arguments will no longer much select for positions that are true.

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