2012 : WHAT IS YOUR FAVORITE DEEP, ELEGANT, OR BEAUTIFUL EXPLANATION?

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Father of Behavioral Economics; Director, Center for Decision Research, University of Chicago Graduate School of Business; Co-Author, Nudge

Commitment

It is a fundamental principle of economics that a person is always better off if they have more alternatives to choose from. But this principle is wrong. There are cases when I can make myself better off by restricting my future choices and commit myself to a specific course of action.

The idea of commitment as a strategy is an ancient one. Odysseus famously had his crew tie him to the mast so he could listen to the Sirens' songs without falling into the temptation to steer the ship into the rocks. And he committed his crew to not listening by filling their ears with wax. Another classic is Cortés's decision to burn his ships upon arriving in Mexico, thus removing retreat as one of the options his crew could consider. But although the idea is an old one, we did not begin to understand its nuances until Nobel Laureate Thomas Schelling's wrote his 1956 masterpiece: "An Essay on Bargaining".

It is well known that thorny games such as the prisoner's dilemma can be solved if both players can credibly commit themselves to cooperating, but how can I convince you that I will cooperate when it is a dominant strategy for me to defect? (And, if you and I are game theorists, you know that I know that you know that I know that defecting is a dominant strategy.)

Schelling gives many examples of how this can be done, but here is my favorite. A Denver rehabilitation clinic whose clientele consisted of wealthy cocaine addicts, offered a "self-blackmail" strategy. Patient were offered an opportunity to write a self- incriminating letter that would be delivered if and only if the patient, who is tested on a random schedule, is found to have used cocaine. Most cocaine addicts will probably have no trouble thinking of something to write about, and will now have a very strong incentive to stay off drugs. They are committed.

Many of society's thorniest problems, from climate change to Middle East peace could be solved if the relevant parties could only find a way to commit themselves to some future course of action. They would be well advised to study Tom Schelling in order to figure out how to make that commitment.