January 22, 2008
Tying Odysseus to the mast
There is a well-known, difficult-to-solve motivation problem: keeping a commitment to yourself. Nearly everyone experiences this in one form or another: "I'm going to diet until I lose 25 pounds". "I'm going to get more sleep" (honest, right after I finish typing this post). "I'm never going to smoke another cigarette."
In Homer's epic, when nearing the Sirens whose entrancing song would lead men to dash their ships on the rocks, Odysseus had his men tie him to the mast and plug their ears with beeswax so they could hear neither the Sirens, nor his orders to doom them (all of this because he was curious and couldn't resist listening himself!).
There is a well-known story among economists that Nobelist Thomas Schelling advised those who wanted to diet: "Write a large check to the American Nazi Party and put it in an addressed envelope. When you break your diet, mail it." (Steven Levitt writes that he heard the advice first-hand.) This sensible scheme to increase our incentives to stick with a commitment suffers the problem of a bit of circularity: if you decide to break your diet (or other) commitment, what is to stop you from breaking your commitment to mail the check?
Yale economists Ian Ayres (a classmate of mine while getting our Ph.D.s) and Dean Karlan (also an MIT grad) have started a Web-based company to help implement this tempting but difficult to implement scheme: StickK.com. The scheme is pretty simple: mail them the check and they will hold it in escrow, and if you break your commitment will mail it for you.
"But what", you say, "will force me to let them know I broke my commitment"? Here's where the time-honored mechanism of a trusted-third party referee comes in: set up your commiment in a way that can be verified, and then have a friend or other trusted third-party monitor you, and agree to notify StickK.com if you break your promise.
(Yes, yes, of course: what's to stop you from offering your buddy half of the money if she doesn't report you? Isn't recursion fun?)
This is a fun example of a principal-agent problem: you are the principal and the agent, and you have what amounts to a hidden action problem. That is, you cum principal can't enter an enforceable contract with you the agent to ensure performance because the agent can take an "unobservable" action: instructing you the principal to not enforce. The third-party mechanism transforms this into a symmetric information problem with verifiable, enforceable action.
(Thanks to Buzzy Nielsen for pointing me at StickK.com.)
Posted by jmm at January 22, 2008 10:58 PM