Generating Predictability: Institutional

Human behaviour is infinitely complex, the result of thousands of interactions between predispositions, external factors and physical and cognitive processes. It is also highly unpredictable which makes meaningful social engagement difficult without the aid of some external framework such as that offered by an institution. Both formal and informal institutions can provide the element of predictability necessary for successful, complex interactions, a factor which is often overlooked by institutional analysts and designers. Drawing on a wide range of disciplines including psychology, economics, and sociological and political studies, this book develops a coherent and accessible theory for explaining the unpredictability of individual behaviour. The author then highlights the danger of institutional reforms undermining the very capacity to generate predictability which is so central to their success. This book will appeal to academics, researchers and professionals in many fields including management studies, behavioural economics and the new, interdisciplinary field of institutional design.

Preface

ix

Notation

xi

1 Introduction

1

(19)

1.1 The puzzle

1

(6)

1.2 The policy problem

7

(3)

1.3 An interdisciplinary approach

10

(1)

1.4 Related approaches in the literature

10

(6)

1.5 Organisation of the book

16

(1)

1.6 Addressees

17

(3)

2 The psychological predictability problem

20

(45)

2.1 Introduction

20

(4)

2.1.1 Making predictability problems visible

20

(1)

2.1.2 A unified theory of the mind?

21

(1)

2.1.3 Micro-nano-pico analysis

22

(2)

2.1.4 Actor constellations

24

(1)

2.2 The nano level

24

(31)

2.2.1 Introduction

24

(2)

2.2.2 Plurality of mental tools

26

(4)

2.2.3 Cognition

30

(8)

2.2.4 Judgement

38

(3)

2.2.5 Memory

41

(1)

2.2.6 Learning

42

(1)

2.2.7 Motivation

43

(6)

2.2.8 Emotions

49

(1)

2.2.9 Choice

50

(2)

2.2.10 Behaviour under perceived risk

52

(3)

2.3 The nano/micro divide

55

(1)

2.4 The pico level

56

(1)

2.5 Effects

57

(8)

2.5.1 Introduction

57

(2)

2.5.2 Variance over time

59

(1)

2.5.3 Variance across contexts

60

(1)

2.5.4 Variance across individuals

61

(4)

3 Rational choice responses

65

(127)

3.1 Introduction

65

(3)

3.2 Game theoretic model

68

(24)

3.2.1 Introduction

68

(3)

3.2.2 The model

71

(4)

3.2.3 Types of games

75

(12)

3.2.4 Artificially increased unpredictability

87

(2)

3.2.5 Signals

89

(1)

3.2.6 Alternative languages

90

(2)

3.3 Type revelation

92

(71)

3.3.1 Unilateral response by Ego

93

(11)

3.3.2 Unilateral response by Alter

104

(15)

3.3.3 Joint decision about individual type revelation

119

(12)

3.3.4 Joint response by interaction partner and actor

131

(9)

3.3.5 Third-party involvement

140

(6)

3.3.6 Sovereign intervention

146

(7)

3.3.7 The problem of linking

153

(4)

3.3.8 The problem of power

157

(3)

3.3.9 Institutional choice

160

(3)

3.4 Subsidy/tax

163

(13)

3.4.1 Characterising the solution

163

(4)

3.4.2 Unilateral response by Ego

167

(3)

3.4.3 Unilateral response by Alter

170

(3)

3.4.4 Joint response by Ego and Alter

173

(2)

3.4.5 Response by outside actors

175

(1)

3.5 Insurance

176

(9)

3.5.1 Characterising the solution

177

(1)

3.5.2 Unilateral response by Ego

178

(2)

3.5.3 Unilateral response by Alter

180

(2)

3.5.4 Joint response by Ego and Alter

182

(1)

3.5.5 Response by outside actors

183

(2)

3.6 Risk premium

185

(5)

3.6.1 Characterising the solution

185

(1)

3.6.2 Unilateral response by Ego

186

(1)

3.6.3 Unilateral response by Alter

187

(2)

3.6.4 Joint response by Ego and Alter

189

(1)

3.6.5 Response by outside actors

190

(1)

3.7 Summary

190

(2)

4 Behaviourally informed responses

192

(51)

4.1 Introduction

192

(2)

4.2 The limited ability of actors to comply

194

(3)

4.2.1 The problem

194

(2)

4.2.2 Solutions

196

(1)

4.3 Behaviourally informed responses

197

(42)

4.3.1 Introduction

197

(2)

4.3.2 Exploiting the plurality of mental tools

199

(6)

4.3.3 Cognitive route

205

(4)

4.3.4 Motivational route

209

(2)

4.3.5 Countervailing psychological mechanisms

211

(1)

4.3.6 Opposing values

212

(2)

4.3.7 Mechanisms for intervention

214

(3)

4.3.8 Psychological paths

217

(5)

4.3.9 Institutional designers

222

(5)

4.3.10 Operationalisation

227

(2)

4.3.11 Formal and informal institutions

229

(4)

4.3.12 Becoming concrete: institutional impact on the choice among mental tools

233

(6)

4.4 Changing the character of the task

239

(2)

4.4.1 Ego's task

239

(1)

4.4.2 Alter's task

240

(1)

4.5 Summary

241

(2)

5 Behaviourally determined responders

243

(10)

5.1 Behavioural weaknesses of Ego

243

(5)

5.1.1 Introduction

243

(1)

5.1.2 Plurality of mental tools

244

(1)

5.1.3 Cognition

245

(2)

5.1.4 Motivation

247

(1)

5.2 Behavioural strengths of Egos

248

(1)

5.2.1 Higher degree of rationality

248

(1)

5.2.2 Better than rational

248

(1)

5.3 Fully behaviourally informed institutions

249

(2)

5.3.1 Coping with behavioural weaknesses

249

(1)

5.3.2 Exploiting behavioural strengths

250

(1)

5.3.3 Changing the character of the task

251

(1)

5.4 Summary

251

(2)

6 Outlook: implications for interaction with higher complexity

253

(10)

7 Predictability at the crossroads of competing institutionalisms

263

(7)

Equations

270

(5)

References

275

(33)

Index

308

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Generating Predictability: Institutional Analysis and Design

Summary

Table of Contents

Supplemental Materials