The Evaluated Ones Dilemma

The Evaluated Ones’ Dilemma

Companies often grade workers on a curve. Pretend that you develop a new product and hire 20 salespeople to push it. How do you determine each salesperson’s quota? Since the product has never been sold before, you can’t really know how much a competent, hard-working salesperson should sell each month.

The solution: evaluate each salesperson on a relative standard—compare him to his peers.^[3] Relative performance standards create a prisoners’ dilemma for employees. Consider the game between two employees where each can work either 40 or 60 hours a week. Assume that your company can’t judge how much each employee works, but does observe how much they sell, with employees working 60 hours a week selling more than ones who put in only 40 hours a week.

If both employees work the same hours, then each will get an average evaluation. Obviously, to get the same evaluation, the employees would vastly rather put in 40 than 60 hours each week. Prisoners’ dilemma, however, compels them to work more. If the other person works 40 hours, and you put in 60, you will get an excellent evaluation. Alas, if he works 60 hours a week, and you work only 40, then your continued employment will be at peril. Consequently, working 60 hours is a dominant strategy for both employees.

When judged by relative standards, your workers would all like to go for the easy life and underperform. Sadly, prisoners’ dilemma makes it challenging for workers to credibly commit to collective laziness.

Workers judged by relative standards are like athletes considering taking steroids. Steroids increase athletic ability. Unfortunately, such drugs have harmful medical side effects. For a top athlete, however, it might well be rational to take performance-enhancing drugs. It could be worth suffering the side effects of steroids to win an Olympic medal or to get a multimillion-dollar professional football contract.^[4] Alas, when all athletes use steroids, then none receives a competitive advantage. Figure 37 shows a prisoners’ dilemma game where there are two equally matched runners competing for some prize. They each have the ability to take steroids, which would make them faster but would also give them health problems. If the athletes have equal ability, and only one runner takes steroids, then he will win. If it were worth enduring the health problems to win, then either athlete would be willing to take steroids if the other doesn’t. Furthermore, if the other athletes take them, and you don’t, then you would have little chance at victory. Therefore, it might well be in your interest to take steroids if your opponents also take them. Of course, if both athletes take steroids, then neither is helped in their competition, but both still suffer the drugs’ negative side effects.

Figure 37

While most workers wouldn’t enhance their career by ingesting health-imperiling steroids, they do benefit by putting in family-destroying hours. You can sometimes employ prisoners’ dilemmas, however, to get your workers to put your needs ahead of their family responsibilities.

^[3]See McMillan (1992), 118–119.

^[4]If there were a smart pill that would give me a slight chance of getting cancer but also give me a reasonable shot of winning a Nobel Prize in economics, I would probably swallow it.