Thursday, 5 April 2007

The Problem of Badly Designed Targets

As prosaic as it might sound, a policy is designed to achieve its ultimate objective. Very often, incentive will be a part of the policy that will encourage behaviours and actions towards achieving that objective. Unfortunately, objectives are often subjective and difficult to measure. Nonetheless, for a policy to work, something has to be measured in order for an incentive mechanism to be designed such that there is a tangible target. The rationale is that the target is a reflection of the objective, and when the policy successfully induces behaviours to reach the target, which is easily measurable, it will then mean that the objective, which is more subjective, is achieved as well.

All is well if reaching the target always equals achieving the objective. Unfortunately, most of the time, this is usually not so. The problem often lies in the nature of the objective, which is multi-dimensional in nature, and the target, which has to be simple and one dimensional. Most of the time, the incentive will be designed such that the target will be achieved, perversely at the cost of abandoning the original intention of the objective.

A simple example is given in Steven D. Levitt’s Freakonomics. In order to improve the quality of school teaching, the Chicago public schools introduced a performance-based reward system for the teachers. Teachers of the top students or students who show the most improvement in their examinations will be rewarded in pay increase and bonuses. Teachers of students without much improvement in examination grades will not be rewarded or perhaps even be punished. In the case, the objective is noble and broad – to improve the quality of education that students get for their wholesome development. The target however, is considerably narrower – better examination grades. And herein was the problem. With this system in place, teachers had a strong incentive to dedicate all their efforts in improving examination grades, at the expense of other dimensions of education, such as wholesome learning, encouraging knowledge-seeking and character development. On a relatively harmless level, the teachers focused all teachings on how to spot and answer examination questions. On the other side of the extreme, some teachers began to cheat in examinations for their students – by giving the answers before/during the examination or by manually changing the answers after. Instead of achieving the objective, the target had in fact moved the teaching system further away from it.

One can easily see a parallel in a poorly designed education system in which chasing countless A’s is seen as a target, perhaps at the risk of undermining the ultimate objective of having a wholesome education. To Malaysian secondary school students out there – do remember the ultimate objective of schooling is learning. Let not the craze of chasing A’s distract you from something so valuable, especially during such important formative years. If your intention and passion is aligned with the ultimate objective of learning, the A’s will follow.

It is also not very difficult to extrapolate this to conceivably the most far-reaching social engineering policy of any economy – the NEP. The original objectives were poverty eradication and elimination of economic identity based on ethnicity, but now, the dogmatic pursuance of the target of 30 per cent equity has made the policy far removed from its original objectives. How much longer should corruption, inefficiencies, complacency and global marginalisation be tolerated for the sake of achieving the sacred target? When will we start to refocus on the objectives instead?

Ironically, this pervasion might actually work. When foreign investors begin to give up on us, when both our companies and talents continue to leave for better opportunities in other countries – perhaps then our economy will be so marginalised that the 30 per cent equity will eventually be reached through the shrinking of the wealth of our nation and the diversity of our population. After all, there are two ways to reach the target – expansion in wealth of the targeted group or the contraction of total wealth by the non-targeted groups leaving.

Let us hope that our nation will not go down the latter path.



Mat Merah said...

Truly an astute observation of how the ends justify the means.

And a reflection of the international objective of prosper thy neighbour whilst the national objective is impoverish thy neighbour.

What have we wrought and reaped but a growing bunch of jaguh kampung unable to compete in the international arena.

Our destiny as a nation lies in our hands but can we break the shackles of an evolved race-based economy.

Maybe Tun Dr Ismail is right, the Malays or the Bumiputeras will sort it out themselves.

I fear not however, and how much the poorer we will be as a nation.

Resurrected said...
This comment has been removed by the author.
Resurrected said...

That sent a chill down my spine.

*sweeping generalization mode on*
More often than not, policies are guided by individuals or groups who may not understand the rigours of the world economy, and the investment thesis link with their objectives. There is a mismatch with investment policies and the goals, which seems inconceivably myopic.
*sweeping generalization mode off*

zcer said...

Great post! Only wished you also used it to explain what an efficient market is. A target, not an objective.

Anonymous said...

I think the underlying reason to the NEP can be summarised in two words- malay pride.

Its silly that we Malaysians are hindering our progress with discriminative policies to achieve a 30% bumiputera equity target when we could all be better off getting a bigger pie of the global economy. The problem with Malays is wealth distribution. They can have 50% of the economy but the NEP will never end if it stays in the hands of the privilaged 10%.

mob1900 said...

The Malay Pride is about Fighting Spirit but alas our racial politicians decides it is best harness into a force they could manipulate to keep themselves in power. Politics is a cheap way to wriggle into economic powerplay therefore it could not be separated unless our target audience(the mass) equip themselves with knowledge. With knowledge, realisation will follow and informed decisions can be made.