In a study released earlier this month, researchers tested this bias by having college undergraduates play a few rounds of the prisoner’s dilemma. The original version of the two-player game rewards both participants if they agree to share a prize, but gives one player the full bounty if he or she betrays the other. However, if both players betray each other, they get nothing.
The researchers offered students a variant: same rules, but taxes took a bite out of any payout, and betrayers had to pay a bit more. Even though everyone made less money, the new penalty for betrayal encouraged cooperation, meaning fewer players ended up with nothing, and everyone got richer in the long run.
But when offered a choice between the games, most participants stuck with the original setup, turned off by the reduced payouts.
“The sirens’ call is very strong,” said Ernesto Dal Bó, an economics professor at the University of California, Berkeley, and one of the paper’s co-authors. “They should vote to go to the new game. In equilibrium, they’re going to make a higher payoff. The problem is, even with very smart individuals … they don’t.”
Dal Bó—who wrote the paper with his brother, Pedro, a professor at Brown University, along with a colleague at the London School of Economics—has a particular interest in the public’s ignorance of equilibrium effects, and how that can fuel the rise of shoddy policy. A native of Argentina, he’s noted how poor governance in Latin America usually gets blamed on governments, not the voters who support them.
“We are voting for these people, partly because they’re telling us things that sound nice but eventually have very bad effects,” he said. “There are certain policy platforms that sound very good on the surface but may have hidden costs that end up being important.”
Protective tariffs may provide one example. If Americans are unhappy with the state of U.S. manufacturing, why not bump up the fees on foreign goods to encourage people to buy American? In a hypothetical system where nothing else could change, that might work. But other countries have power, too. It they put up tariffs of their own, it would ignite a trade war and create a slew of secondary complications.
The nationalization of industry also has divergent near-term and long-term effects. While it can repatriate wealth held by multinational corporations, it can also close off interest in future investment. It worked in Venezuela for a time, handing Hugo Chávez the economic clout to enact his populist policies and scoring points with voters resentful of corporate influence. Years later, mismanagement and plunging energy markets have sent the country into a deep recession.
Equilibrium effects can cut both ways. Sometimes, a decision that sounds good at the start prompts a change in behavior that leads to a long-term loss. Consider a crowded highway. It makes sense to widen the road—more lanes with the same amount of cars means fewer traffic jams, right? But that ignores the likelihood that bus commuters will see a less-congested freeway and decide to drive to work instead. Traffic goes up, and we’re back where we started.