The Problem with Too Much Fairness

Today, let’s talk about fairness. Have you ever experienced this feeling of being treated unfairly? Maybe an undeserving colleague got promoted instead of you? Or when somebody broke the line at the ticket counter? Such injustice!

Human beings have a strong need for fairness. Big or small, when we see something unfair done (especially against us), we are enraged. Even a three-year-old has the common sense to scream when they get a smaller portion than their sibling. Not just humans, even monkeys have a sense of fairness.

To illustrate how the perception of fairness affects us, let me explain what researchers call ‘the ultimatum game’. The game is played by two people. One person receives some money (say $100). This first person offers to split the money with the second person (say $50/$50, $70/$30, $80/$20, or whatever they want). This offer is an ultimatum, so the second person only has two choices: to accept or reject the offer. If it’s accepted, they both keep the offered split, and if rejected, they both get nothing.

The purely logical way to play the ultimatum game is for the first person to offer the minimum (e.g., a $90/$10 split) and for the second person to accept it, since otherwise they would get nothing, and there is no other negotiation possible. In practice though, the second person rejects offers lower than 30% of the total, because of the ‘perceived’ unfairness of the offer.

People would rather deny others anything, even at the expense of receiving nothing themselves.

In 2012, when Greece was in the fifth year of recession, they had just agreed to a second aid package from the EU, totalling $174 billion, but their future was still not looking very good. Germany, the largest contributor in the bailout would have none of it. Germany declared there’ll be no more money if Greece couldn’t turn itself around soon.

The rational course of action would have been relaxing some austerity measures for Greece (for example, slim government budgets weren’t boosting the economy) and giving them a little more aid and a little more time to reform. But the EU wasn’t arguing about what the most sensible economics policy was in order to prevent something like a Grexit (where Greece would default on its debts and abandon the EU). They were arguing about what was fair. This inevitably caused some problems.

The Germans thought it was unfair to support Greece that lived beyond its means and piled up debts they couldn’t repay. The Greeks were certain that it was unfair for them to suffer years of slim budgets (and high unemployment as a result) in order to repay richer neighbouring countries (such as Germany).

The grievances weren’t unreasonable on either side, but the focus on fairness made it hard to reach an agreement.

We care so much about fairness that we are willing to sacrifice economic well-being to enforce it. Research shows that people are willing to pay money to punish others who are taking from a common pot but not contributing to it. Just to ensure shirkers get what they deserve, we are prepared to make ourselves poorer.

Similarly, the ultimatum game experiments illustrate that people will walk away from free money if they feel that an offer is unfair. Even when there’s a solution that would leave everyone better off, a fixation on fairness can make agreement impossible.

It is more important to have the right system in place than a fair system. From the perspective of society as a whole, concern with fairness has all kinds of benefits. It limits exploitation, promotes meritocracy, and motivates people. But dropping ‘effectiveness’ of the system in pursuit of complete ‘fairness’ is suicidal. We have to learn to stop asking ourselves what’s fair and start asking what works.

In medieval Europe, when the court couldn’t determine if a defendant was guilty they would offer them an option: either accept the punishment or put their hand in boiling water. If they weren’t guilty, God would (miraculously) save them. If you’ve watched Game of Thrones, you know how it works.

Ideally, nobody would actually go through the boiling water test. The defendants were judged solely by their intentions. Only an innocent would take the test while the guilty would avoid it—at least, theoretically.

But if nobody was ever made to go through the boiling water test in front of the crowd, the trick would lose its effectiveness. People need to see some defendants suffering the boiling water torture to believe in its authenticity. This means some innocent people will have to go through the torture. This is unfair to them but this would maintain sanity and order in society. This is sometimes referred as the “greater good” which, if you ask me, Machiavelli’s The Price is all about.

Machiavelli’s philosophy was driven by this very notion: an orderly state in which citizens can move about at will, conduct business, safeguard their families and possessions, and be free of foreign intervention. Anything which could harm this greater good, Machiavelli argued, must be crushed ruthlessly.

Failure to do so out of weakness or kindness is contrary to the interests of the state, just as it would be contrary to the interests of a patient for his surgeon to refuse an operation out of fear of inflicting pain.

As Charlie Munger says:

It is not always recognised that, to function best, morality should sometimes appear unfair, like most worldly outcomes. The craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they’ll be fairer on average for all of us. I frequently cite the example of having your career over, in the Navy, if your ship goes aground, even if it wasn’t your fault. I say the lack of justice for the one guy that wasn’t at fault is way more than made up by a greater justice for everybody when every captain of a ship always sweats blood to make sure the ship doesn’t go aground. Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you. But again, I wouldn’t put it in your assigned college work if you want to be graded well, particularly in a modern law school wherein there is usually an over-love of fairness-seeking process.

A fair system is where the guilty gets punished. This sends a signal to the people: the system works. This also sends another (more important) signal: there are consequences for your actions.

There’s good reason why there’s rampant corruption, extortion, rape, abduction, and theft in certain parts of India, and it isn’t unobvious. In pursuit of too much fairness—in trying to make sure that even if 100 guilty go free, no innocent should be punished—the system has become impotent.

Our need for a 100% fair system often gets in the way of having an efficient system, one that works. On paper, it’s good to have 100% fair system, but in practice, an 80% fair system is fair enough. Unlike a theoretical system, it gets 100% of the job done.