The Benefits of Insanity

Insanity has its privileges. Inmates of mental institutions sometimes “deliberately or instinctively [cultivate] value systems that make them less susceptible to disciplinary threats.”^{[9 ]}An inmate could gain some freedom from staff coercion by, for example, becoming self-destructive whenever the mental institution tried to discipline him. If a rational person told his boss that he would cut his own vein if demoted, the boss would likely not believe the threat. An inmate in a mental institution, however, could credibly use a threat of self-mutilation to, say, get permission to watch Seinfeld reruns.

I have attempted to extort $20 each from my students by threatening suicide. I first ask my students to raise their hands if they would spend $20 to save my life. (Some, but not all, raise their hands.) Next, I tell my students that if those who have raised their hands don’t each give me $20 I will kill myself. Of course, the students don’t pay because they don’t believe my threat. If they had believed me to be (more) crazy, however, I might have gotten some money.

Exhibiting insanity can enhance your threat’s credibility. In many of the games presented in this chapter, your threat could easily become believable if your opponent thought it was more important for you to “win” than to maximize your payoff.

The purpose of business is to make as much money as possible. Any firm that sacrifices profit maximization to further other goals is considered irrational by economists. Interestingly, however, an irrational person might actually make more money than someone who cares only for money. Consider the game in Figure 9. Your competitor moves first. He can be either nice or mean. If he is nice, both of you get $1,000 and the game ends. If he is mean, then you get to move and choose whether to be nice or mean. If you are mean, both of you get zero. If you are nice, you get $100 and he gets $2,000.

Figure 9

If you care only about money, then if the game gets to B, you should be nice. True, this would cause your competitor to make more than you. Recall that the goal of business, however, is to make as much money as possible, not to make more than your competition does. (Would you rather own the most profitable restaurant in a small town but make only $50,000 a year or the third most profitable one in a large city and make $1,000,000 a year? Would anyone ever want to invest with someone who would prefer the $50,000 option?) Consequently, a rational businessperson would choose to be nice at B especially if the game is played only once. Unfortunately, if your competitor believes you will choose to be nice, he will choose to be mean, and you will get only $100. In contrast, if your competitor believes you would seek revenge on him for being mean and would choose to be mean yourself, he will be nice and you will get $1,000. This situation seems paradoxical, for how could a person who cares only about money make less than someone who has more diverse goals?

You wouldn’t suffer in this game from being rational per se; you would suffer for being perceived as rational. Your competitor would make her decision not based upon whether you were actually interested in revenge, but on whether she thought you were interested in revenge. This game provides an important business lesson. This chapter has shown how, in many situations, it might not be in your interest to carry out a threat. Others might realize this and not take your threat seriously. A way around this credibility problem is to convince others that you are somewhat “crazy” and would carry out a threat even if doing so was costly. For example, when asking for a raise, it might be beneficial if your boss thought that if he turned you down you would get mad and quit, even if quitting would not be in your own best interest. Of course, this does not mean you should ever strive to become crazy; rather, it means that you should sometimes strive to convince others that profit maximization is not your only goal.

Another lesson from this game is that others may have an incentive to convince you that they are crazy when they really aren’t. You should suspect anyone who acts insane in a way that “coincidentally” strengthens his negotiating position.

Interestingly, evolution might have made humans irrational precisely because of the benefits of insanity. Consider the emotion of revenge. At its core, revenge means hurting someone else who has harmed you, even if you would be better off leaving him alone. Revenge is an irrational desire to harm others who have injured our loved ones or us.

To see the benefit of being known as vengeful, consider a small community living in prehistoric times. Imagine that a group of raiders stole food from this community. A rational community would hunt down the raiders only if the cost of doing so was not too high. A vengeance-endowed community would hunt down the raiders regardless of the cost. Since the raiders would rather go after the rational community, being perceived as vengeful provides you with protection and therefore confers an evolutionary advantage.

A reputation for vengeance could benefit a person in the business community, too. While few businesspeople outside of the drug cartels hunt down and kill those who have done them wrong, businesspeople often seek vengeance through lawyers. Lawyers are very expensive, though. Therefore, once someone has already harmed you, it is often better to forget the incident than to pursue legal recourse. If, however, people believe that you irrationally lust for legal revenge, then they will avoid giving you a cause of action. The optimal strategy to adopt with respect to legal vengeance is to convince people that you are insanely attached to vengeance when, if someone did violate your legal rights, you would really rationally evaluate whether to sue.

^{[9 ]}Schelling (1960), 17.