21 December 2007

Crimes and Cover-Ups

Ever since Watergate, we've been told that "it's not the crime, it's the cover-up," meaning that we could forgive the President breaking into the Democratic campaign headquarters, or Monica Lewinski, if only he hadn't lied about it. Everyone's heard this advice, hardly anyone follows it.

Right now, though, we're being treated to a particularly interesting controlled experiment testing this theory. Jason Giambi and Barry Bonds both took anabolic steroids in violation of law and the rules of baseball. Giambi more or less confessed and came clean. He was voted the come-back player of the year two seasons ago and continues to pursue a lucrative baseball career.

Barry Bonds is screwed.

So at least in this instance, this advice turns out to be good. It's better to confess than to cover-up. It might work particularly well in this case. "Confessing" was embarrassing for Giambi, but he wasn't in any danger of going to jail and not in serious danger of incurring severe penalties from baseball. Lying to grand jury, on the other hand, is very bad if you get caught. Even if Bonds isn't convicted, we'd have to say that he's in worse shape than Giambi.

Why don't people follow this advice. Maybe their stupid or evil. But I think that they're just loss averse. Loss aversion is one way in which people are, in the economic sense of the term, irrational: we are risk averse to gains but risk preferring when it comes to losses. If you ask people whether they'd rather have $500 outright or a 50% shot at $1010, most people will just take the $500. We're risk averse. On the other hand, if you ask people whether they would rather just pay $500 or take a 50% shot at paying $1010, most people will take the bet. We're loss averse and our loss aversion outweighs our risk aversion. (Cognoscenti will recognize the work of Kahneman & Tversky in this hypothetical.)

Barry Bonds, faced with the choice between certain embarrassment immediately or a relatively small chance of severe legal penalties in the future, chose the latter. He's loss averse.


Susan's Husband said...

The meaning is not that we'd forgive the original trespass, but that the cover up will only compound the problem by leading to the commission of crimes worse than the original one to pile on top of it. It's really a variant of "don't throw good money after bad".

Still, it ties in with your theory in that confessing is taking the immediate, non-risk loss while a cover up is a risky bet with a much larger cost if you lose.

Bret said...

Then why does anybody ever buy insurance?

David said...

Bret: Because what people actually care about is wealth, so insurance is trading a small cost now against the chance of a large loss later. In fact, since people necessarily pay more than the actuarial value of their coverage (otherwise the insurance companies wouldn't make a profit), insurance is driven by risk aversion.

SH: "don't throw good money after bad" is actually the sunk-cost fallacy, becuase sometimes you should throw good money after bad. This may, however, be an example of a bounded rationality heuristic.

Bret said...

But then Barry Bonds would've "bought" "insurance" by "confessing". I don't think it has anything to do with loss aversion. I think it has to do with overconfidence and discount rates.

Brit said...

The benefits of getting your confession in early also hold in the work environment.

There is almost no cock-up you can't get away with if you immediately admit it.