Thursday, January 19, 2012

Paying for a difficult job, although not necessarily one well done

In Daniel Kahneman's wonderful Thinking, Fast and Slow, he writes about the vast number of heuristics we use in decisionmaking. One of these he calls "answering the easier question,"--when faced with a difficult question, we often unknowingly substitute an easier, but different, question to simplify our task. For instance, Kahneman says, to determine how much we would contribute to save an endangered species, our mind might instead ask how badly we feel when we think of "dying dolphins". Although this can simplify our task, it also makes it less exact. Kahneman provides a hypothetical caution:

The question we face is whether this candidate can succeed. The question we seem to answer is whether she interviews well. Let's not substitute.

As Kahneman explicitly points out, the has implications for the labor market. It's often difficult to evaluate how successfully a candidate can/is perform/ing. Instead, we rely on imperfect measures, such as grades, dress, affability, etc.*

I wonder if this doesn't have a bit to do with the growing income inequality gap. As the economy becomes increasingly complex, the demand for people that can add at least perceived certainty and order to the economy has exploded. Because of this, consultants, lawyers, bankers and other high-earning professions staffed by graduates of elite schools have seen their salaries explode. With middle-class jobs disappearing, this has, among many of factors, helped contribute to a growing gap between the rich and poor.

What I think we don't really know, though, is whether they're worth it. It's tough to figure out how well these people are actually doing their job. So instead, I'd imagine a different question often gets asked: how difficult the job itself is. And because these jobs are difficult--if not impossible (no one can really predict the future)--people will pay more for them even though it often only creates the illusion of a job well done. Companies--more specifically, their employees--may hire firms because of their status, not necessarily their quality--as the old saying goes, no one every got fired for hiring IBM.** Companies may be wasting vast sums of money to make themselves feel better that someone is doing a job, albeit poorly.

As I'm making a theme these days, the market economy should help us allocate resources better, not serve as a scorecard. If money is being spent merely to create a feeling of certainty and understanding where one never exists, we should be concerned about a massive misallocation of resources.

* Of course, not all of these are substitutes. Dress and affability might be concerns because clients will care about them. But, of course, the clients themselves are then using imperfect questioning to grade a service.

** It's why even as law students struggle to find jobs, elite law firms can still charge high hourly rates--price doesn't tell the market anything useful because you can't easily make yourself into an "elite" firm to compete.

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