Time to Let Logic to Replace Empathy and some game theory

As I wrote, the web is pretty excited about the story of a harvard business school professor Ben Edelman got legalistic with a Chinese restaurant that over-charged him $4. I get it. It seems no one can get over with the sympathy they feel for that poor restaurant owner. As I mentioned in my previous blog, empathy, the very attributes we seem to think so highly of, lead to awful judgement errors.

Many businesses take it as a strategy to "mistakenly" over-charge customers. Since the amount is small, most people will not complain other than frowning at it. These little sums, when coupled with volume, accumulates to a big number. 4 dollars is no big deal, but do this to 100 customers a day, that will lead to 12K a month. Pretty good money, I would say. In fact, those stupid banks do it all the time. This charge and that charge. When you call their customer service, you wait half an hour on the line, and got told that it is a "mistake" and get refunded. Sure, I can get refunded, but how many of us will get around to do it. I still remember TDbank over-charged me 12 bucks that I meant to call them for. But it has been a year and I have not called them yet.  Telecommunication companies like AT&T also employ this ploy.

When it comes to banks, we feel we are justified to be angry. Because banks are jerks. The very same act, when committed by seemingly innocent restaurant owner, we blame Ben. How logical is that? Take this to the next logical step, empathy is the rule upon which we judge. We need no laws.

I am a selfish guy. When this happens, I do the cost benefit analysis, and mostly just get over with it and never pursue it further. In economics, we call it "Rational Inattention". It is the optimal strategy for each one of us. However, when taken collectively, we sow the seeds for businesses to take advantage of us and incentivize them to be dishonest "incrementally". In the end, we all got worse off. This is the well-known "prisoners' dilemma". It is because there are "irrational" agents who are willing to go after such jerks who abuse our rational inattention that puts such behavior in check. In fact, I wish everyone is like Ben, so that I can free-ride on that vigilance---as it becomes unprofitable for businesses to be dishonest.  How does that help? When enough people refuse to let it go, business's revenue from such fraud diminishes, and they have less incentive to be dishonest. Furthermore, if each time a customer stands out like Ben, the business incurs a loss, the expected profit for being dishonest will go negative. This is when business no longer wishes to be dishonest. In fact, that is why the law requires the business to suffer a penalty larger than the amount of the overcharge. Gary Becker got this a long time ago---when enforcement is costly, we will make punishment higher.

Friend or Foe, it is a question of logic, not empathy.

Empethetic Sociapath

Check out Financial Times' latest read on Net Neutrality:

Net neutrality: Strife in the fast lane

The main idea is that the Internet Service Providers (ISP) abuse their monopolistic power and hence created the digital divide which is described by FT as

the gulf between those who have access to the internet and those who do not – has become one of the flashpoints in the fierce battle over US broadband policy.

While this is an important issue, it is sad, almost disheartening that this becomes the focus. Politicians take this issue as their goal: "Mr Obama has often spoken of his desire to close the gap between the digital haves and have-nots". It seems to them as long as we can close this gap, it is all good.

Nothing could be farther from the truth.

Those ISP are monopolies in their respective markets. They abuse their monopoly power.  The so-called digital divide is merely one symptom of such abuse. A good policy should aim at the root of the problem instead of working at one symptom, which is typical of what politicians do. Abusing its monopoly power, ISP like Comcast has charged unreasonable price for all internet users, and most of us simply surrender and pay the price. For the unlucky ones, they simply chose not to. In an economic sense, those who purchased internet suffered more from having a monopoly than those who simply could not afford internet (Econ 101).

However, empathy drives people to the visible inequality, the digital divide, and completely blind to those who suffer in silence. Empathy, with the help of media, turns the have-nots and haves head on, when they are in fact both suffering from the common enemy---monopolistic ISP. These leads to myopic policy agenda as the one put forth by Mr. Obama. The true evil lies in the damn monopoly, and we need to kill it. Period. Give reasonable price to everyone, not just the poor.

Ominously, Comcast is taking advantage of the public empathy-oriented judgement, and is pre-empting legislative moves:

Comcast does offer a much cheaper plan – $9.95 a month – for families with children on free or cut-price school meals...

This seems like a great benevolent move, if our mind revolves around the stupid and narrow goal of closing the digital divide. In fact, this is what economists would call "price-discrimination"---charging everyone his willingness to pay, a typical move by monopolist. If you look at it, Comcast does not lose a dime in this "charity move". In fact, it collects money. The key to realize that internet service has very low marginal cost, almost zero, as long as it is within capacity limit (By the way, ISP like Comcast has deliberately limited its capacity to blackmail Content Providers like Netflix to build its fast lane with ISP) . Thus, offering this plan is like hitting two birds with one stone. First, Comcast sells more products at near zero marginal cost, with relatively low margin; Note that those who can afford internet service still pay the unreasonable price due to the design of this offer. Second, this is a great public relation move, especially for the empathetic crowd. This will probably takes the steam out of further regulatory moves.

Comcast is a complete empathetic socialpath---it understands how the public psychology works, and uses to its advantage, bringing hard to all in the name of charity.

If one has any doubt that the ISPs in US are destructive monopolies, check out the following two graphs---high price, low quality--typical of monopolies. ISPs have wielded their monopolistic power for too long, causing economic loss to all of us.



We are fighting a losing war. The public is diverted by empathy to the stupid digital divide. The regulatory agency is captured---Tom Wheeler, FCC's democratic chairman, lobbied for the cable and wireless industry before entering FCC via this "revolving door". Established Internet companies are more ambivalent. For one thing, lack of net neutrality means they might get blackmailed away some of their profits. On the other hand, that probably means, they could build fast lane to forestall any start-up intent on rising to their position. In this age of technological convergence, such preemption is certainly valuable. One could see that as long as ISP do not get too greedy, big Internet companies will be more than happy to pay a tribute to let ISP to serve as a guard against any innovative "disruptor".  In fact, google has been silent about the issue since 2006, and even when it broke its silence, it is more of a lukewarm support for net neutrality. I am not optimistic how long the current conflict between internet companies and ISP will genuinely last. We the paying consumers? Who cares? Those future innovators? LOL