Saturday, August 6, 2011

Teacher Cheating, Banking Self-regulation, LIBOR, and Ethiopia's Population: How Incentives Matter

There is widespread mandated standardized student testing in the US that is supposed to measure the learning outcomes of cohorts of children. These are high stakes tests: teachers and school administrators have a lot to lose (depending on the locality) if the tests show no progress, or even regress. However, there is one flaw with the system: the teachers administer the tests to their own pupils (!). So, much to the surprise of people with low real world IQ, turns out that there is widespread cheating by teachers across states, cities and districts (some teachers tell students what some of the answers are, others manually correct wrong answers prior to submitting the tests for official grading).

The teacher situation is similar to banking (or any other industry) self-"regulation". I won't belabor the point as there is plenty that has been written on dejure and defacto (regulatory capture) self-reg. Though one of the more memorable moments from the credit crisis was the probe into LIBOR manipulation (LIBOR is probably the widest-use reference rate globally): it is still on-going. LIBOR is a self-reported rate by the banking industry, and, needless to say, there is a strong suspicion that individual banks might have "mis-reported" their numbers during the peak of the crisis to make it lower than it actually was.

There is a horrible famine (pics link) going on right now in East Africa (which most Americans associate with the movie Blackhawk Down). Hundreds of thousands might die. Back in the 1980's there was a similar situation there- in Ethiopia: the world came together and brought food in. But there was a message about incentives that got lost: Ethiopia's population in 1983 was 33 million, now it is...75 million (Update: 91 mm per 2011 CIA esitmate). If the US had grown at that rate since 1983, we'd be north of 500 600 million people now.

People do what you incentivize them to do: if you pay them to report improved scores, they will report improved scores. If you pay them to report low borrowing costs, they will report low borrowing costs. If you pay them to lack foresight, they'll surely not have any.

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