Theme: Incentives

http://www.ribbonfarm.com/2013/05/01/the-economics-of-social-status/Excellent accessible piece on status signaling.

The Economics of Social Status

200 ribbonfarm / by Kevin Simler / 959 days ago

Kevin is a 2013 blogging resident visiting us from his home blog over at Melting Asphalt.

In economics, a good is anything that “satisfies human wants and provides utility.” This includes not just tangible goods like gold, grain, and real estate, but also services (housecleaning, dentistry, etc.) as well as abstract goods like love, health, and social status.

As an economic good, social status is a lot like health. They’re both intangible and highly personal. In proper economic terms, they are private goods – rivalrous and mostly excludable. And the fact that they’re hard to measure doesn’t make them any less valuable — in fact we spend trillions of dollars a year in their pursuit (though they often elude us).

But status differs from health in one very important respect: It can be transacted – spent as well as earned. It’s not a terminal good, but rather an intermediate good that helps us acquire other things of value. For example, I can trade some of my status for money, favors, sex, or information — and vice versa.

Health, if it’s possible to spend at all (e.g. in pursuit of career success), is extremely illiquid. But as I will argue today, status is so liquid — so easy to transact, and in real time — that it plays a fundamental economic role in our day-to-day lives.

Before we dig into the transactional nature of social status, let’s ground ourselves, briefly, in its biology and sociology.

The biology of status

No one plays status games in Heaven. Why bother? Souls have no want for food, sex, or smartphones — and thanks to His omnipresence, God even takes the fun out competing for an audience with Him.

Meanwhile, here on Earth, we (embodied primates) engage in all manner of status games. It’s one of the ways we compete over access to scarce resources like food and mates. And it’s something we share with a lot of other social animals — chickens, dogs, chimps, etc.

Here are some of the concepts that govern the day-to-day biology of social status:

Prestige vs. dominance. Joseph Henrich (of WEIRD fame) distinguishes two types of status. Prestige is the kind of status we get from being an impressive human specimen (think Meryl Streep), and it’s governed by our ‘approach’ instincts. Dominance, on the other hand, is the kind of status we get from being able to intimidate others (think Joseph Stalin), and is governed by fear and other ‘avoid’ instincts. Of course these two types of status aren’t mutually exclusive, but they’re analytically distinct strategies with different biological expressions.

Fitness displays. In The Mating Mind, Geoffrey Miller argues that many of our most prized, socially-desirable qualities — athleticism, artistic skill, eloquence, intelligence, physical beauty — serve as fitness displays, i.e., advertisements for the quality of our genes. We are attracted, socially and sexually, to people with high skill and beauty, largely because these traits are honest signals of good genes. [1]

Hormones. There are at least two hormones involved in processing social status: testosterone and cortisol. To grossly oversimplify, testosterone is the ‘aggression hormone’ while cortisol is the ‘stress hormone.’ In a recent paper (and also a great TED talk), Amy Cuddy et al. asked participants to adopt either a high-status pose or a low-status pose for ten minutes. The researchers then measured participants’ hormone levels and their willingness to take risks on games of chance (a behavior associated with feelings of power). Participants who took high-status poses showed increased testosterone and reduced cortisol levels, and took greater risks, relative to their counterparts who were asked to adopt low-status poses.

Body language. Cuddy’s experiment also illustrates the role played by our bodies in mediating status. Specifically, we’re wired to interpret people’s use of space in terms of status — the more space you take up, the higher your status. Also relevant are postures of intimidation, submission, and vulnerability.

The point I’m trying to make here is that social status is not arbitrary. Instead, it’s grounded, very concretely, in the biology of honest signals – and as such, it’s subject to very real constraints. Wild swings of status are possible, but they’re mostly the stuff of stories. Our daily lives are governed by much smaller — and more predictable — gains and losses.

Sociology: Keeping (and cooking) the books

Ultimately, status lives in the minds (and bodies) of all the humans within a given community — by which I mean, primarily, other people’s minds and bodies. You might maintain a sense of your own status, but it’s not really up to you. Status is fundamentally about how others perceive and interact with you (and what they allow you to get away with). It’s like keeping a checkbook — you might maintain your own ledger for planning and making decisions, but the official balance lies with the bank.

There are many ways to define status, but as a working definition let’s take status to be

the total amount of social influence a person has over the other members of his or her community.

There’s a lot to unpack from this definition. Here are some of the more interesting implications:

Status is defined with respect to a community. This accords with how we reason about status in the real world. You don’t have one canonical status for all occasions. You might have relatively low status in your workplace but high status at your church, with hardly any cognitive dissonance on the part of everyone involved. [2]

Status is zero-sum (to a first approximation). There’s only a fixed amount of influence to go around. Some have squirmed to dodge this conclusion, but let’s just bite the bullet and be done with it. If nothing else, this should motivate our discussion of status as an economic good. [3]

Status is not a positional good. It’s sometimes argued (e.g. on Wikipedia) that status doesn’t have a cardinal value — only ordinal (rank) values. According to this view, status is synonymous with your relative position on the totem pole — but I don’t think this is correct. You can be the highest-status member of your community by a wide or narrow margin, depending on how much influence you have. There are ‘distances’ involved, not just relative positions. Geert Hofstede’s power distance index is an illustration of the cardinal nature of status.

Status is a value that summarizes a very high-dimensional quality. The underlying reality is the set of all pairwise influence values (A’s influence over B, A’s influence over C, etc.). These values can be averaged or summed (which is how we typically think of status), but they also have a variance, a kurtosis, etc. To complicate things even further, we might consider treating status as the weighted sum of all the pairwise influences — weighted (perhaps perversely) by the status of each of the people being influenced. Additionally, some influences aren’t pairwise at all — you can have influence over an entire group, even without having much influence over any of the members in isolation. I don’t think it changes much of the analysis here, but it’s useful to know that we’re dealing in approximations.

Status is (in part) a knowledge problem. Your status is based not just on how people react to you, but also on how people think everyone else will react to you. This gives rise to all manner of higher-order effects: common knowledge issues, perception management, manipulation of consensus reality, etc.

Because of these higher-order effects, status is most reliably measured in public. We tweak our private estimates during every pairwise interaction, but reconcile those estimates during interactions that take place in front of larger audiences — because that’s where we can observe the reactions of everyone else. This explains some of our desire to watch speeches, movies, events, etc. in large crowds, despite the convenience of watching from a screen at home. Large crowds can be manipulated, of course, but the very manipulation is itself an honest signal of influence.

Basic status transactions

Now we get to the really interesting stuff: the economic properties of social status.

Let’s start with transactions, since they form the basis of an economy. Status is part of our system for competing over scarce resources, so it should be no surprise that it participates in so many of our daily transactions. Some examples:

We trade status for favors (and vice versa). This is so common you might not even realize it, but even the simple act of saying “please” and “thank you” accords a nominal amount of status to the person doing the favor. The fact that status is at stake in these transactions becomes clear when the pleasantries are withheld, which we often interpret as an insult (i.e., a threat to our status).

An apology is a ritual lowering of one’s status to compensate for a (real or perceived) affront. As with gratitude, withholding an apology is perceived as an insult.

We trade status for information (and vice versa). This is one component of “powertalk,” as illustrated in the Gervais Principle series.

We trade status for sex (and vice versa), which often goes by the name “seduction.” Sometimes even the institution of marriage functions as a sex-for-status transaction. Dowries illustrate this principle by working against it — they reinforce class/caste systems by making it harder for high-status men to marry low-status women.

We reward employees in the form of institutionalized status (titles, promotions, parking spots), which trade off against salary as a form of compensation.

We can turn money into status by means of conspicuous consumption, or status into money by means of endorsement (i.e., being paid to lend status to an endeavor).

None of these transactions is perfectly clean, and most of them are impossible to audit (arguably a feature rather than a bug, for some transactions). Paying with status is much murkier than paying with dollars, and it’s easy to get something other than what you expected. But don’t let the uncertainty or the potential for cheating distract you. There are real gains to be had from these kinds of trades — so, as humans always do, we find a way. Our emotions, for example, often tell us when we’ve been cheated in a status transaction, even if it’s hard to articulate exactly how.

In addition to participating in direct, X-for-Y trades like the above, status also functions as collateral or “table stakes.” (We often call this type of status “reputation.”) In many ways, a favor is like a loan (of time, energy, or some other resource) collateralized by the status of the borrower. It’s a weird kind of collateral, since it can’t be transfered to the creditor if the borrower defaults. But the borrower’s status can be destroyed or ruined, which provides incentive enough for most purposes. The bigger the favor, of course, the more status needs to be put up as collateral. This explains why it’s hard for a low-status person to ask a high-status person for a favor, but easy for a high-status person to make the request.

“Bidding for status” is another activity with economic characteristics. The nature of a bid is that it sets a particular ‘price’ that can be accepted or rejected. Robin Hanson suspects that speaking in public is a way of bidding for status. The very act of standing in front of a group and speaking authoritatively represents a claim to relatively high status. If you speak on behalf of the group – i.e., making statements that summarize the group’s position or commit the group to a course of action — then you’re claiming even higher status. These bids can either be accepted by the group (if they show approval or rapt attention, and let you continue to speak) or rejected (if they show disapproval, interrupt you, ignore you, or boo you off stage).

Similarly, every request for a favor is a complex bidding process (i.e. negotiation) framed largely — and often implicitly — in terms of status. When a manager, for example, gives a task to a subordinate, many nuances are involved in negotiating the ‘price’ of the favor in terms of the subordinate’s status:

Does the manager frame the task as a favor (high status for the subordinate), as a request (medium status), or as a demand (low status)?

Does the manager lower his or her status when making the request? Please and thank you are just the two most ritualized ways of doing this; there are many others. Alternately, does the manager attempt to raise the status of the subordinate? E.g. “You’d be really good at this.”

Conditional verbs (would, could) allude to the subordinate’s autonomy (and high status), whereas declarative verbs set an expectation that there will be no negotiating (low status).

Does the subordinate acquiesce immediately to the request (low status), hint at requiring extra terms (medium status), or outright reject the request (high status)?

Does the subordinate accept the task happily (low status) or begrudgingly (high status)?

… Etc.

One-off transactions (like a favor) usually take place within the context of a relationship. Different types of relationships can be viewed as primitive ‘contracts.’ Friendship, for example, is a contract whose terms specify that the two friends are roughly equal in status (at least within the frame of the relationship) and that they’ve agreed to dispense with fine-grained accounting of every status transaction. In Impro, Keith Johnstone says of friends that they are “people who agree to play status games together.” The emphasis here is on games – friends play status for fun rather than for keeps. Other types of relationships (manager/subordinate, mentor/mentee, partnerships, client/vendor, etc.) set different terms for how status is to be transacted between the parties, which I leave as an exercise to the reader.

Status as money

So far we’ve been talking about status as a good without trying to articulate its formal economic properties. So now I’d like to propose that status functions as money. We have a few idioms that encode this idea — social capital, political capital, etc. — but the analogy goes a lot deeper than our ordinary use of language permits.

In economic terms, for a good to function as money it must serve three related purposes:

A medium of exchange,

A store of value, and

A unit of account.

We’ve already discussed how status functions as a medium of exchange. Because it’s so fluid, it can be used to price favors and other goods at relatively fine resolutions, and it facilitates transactions that wouldn’t otherwise be able to occur. Negotiating with status beats the hell out of bartering — i.e., trading one specific good for another — thereby allowing smoother, more efficient economies to develop.

I hope it’s also clear that status functions as a store of value. It’s not as stable as gold or USD, which hold their value with much less volatility. But status can certainly be accumulated (within a given community) and it doesn’t depreciate too quickly.

Whether status functions as a unit of account is much less clear. A unit of account is what allows e.g. a firm to know whether it’s operating at a profit or a loss. And this requires, well, an actual unit – something precise and quantifiable, neither of which is status’s strong suit. Nor can status be aggregated across individuals. But where it lacks objectivity, it is at least subjectively measurable, i.e., across an individual’s life history. At the end of a work day, for example, you’ll have a pretty good sense for whether you gained or lost status that day. And at larger time scales (quarters or years), you can have reasonable certainty about whether you’re doing better or worse than you expected. This allows status to function as a unit of account for your individual P/L. It certainly helps you make decisions about when to switch roles or jobs or careers, or when to seek out new friends — or just try something different. It also lets you (and others) know when you’ve gone bankrupt, which is usually accompanied by some kind of formal intervention from the community, up to and including excommunication.

So: status may not be an ideal money, but it’s close enough for the metaphor to hold water. (Also encouraging: apparently money and social status are processed in the same region of the brain.) At any rate, here’s what happens when we apply monetary economic concepts to the realm of social status:

Liquidity. Status, like other forms of capital, can be more or less liquid. Status liquidity is inversely proportional to how much it is institutionalized. Institutional forms of status include titles, formal roles, positions within a hierarchy, desk/office location, parking spots, and membership in decision-making bodies. These forms of status hold their value much better than reputational status — which is why they’re coveted by employees — but they also make some transactions more difficult. If you’ve ever worked with someone who’s not as valuable as his title or role would suggest, you know how frustratingly inefficient such an arrangement can be.

Gresham’s Law. Gresham’s Law states that “bad money drives out good.” The classic example is that people will attempt to spend coins suspected of being counterfeit before they spend coins that they know to be honest. Does something similar happen with social status? Emphatically, yes. Within the economy of an office, say, we can distinguish between the ‘honest’ status earned by doing one’s job vs. the ‘counterfeit’ status earned by carefully manipulating one’s image. It’s all too easy to reach an equilibrium where counterfeit, image-based status drives out honest, reality-based status. Once an office culture allows its employees to win large amounts of status by ‘talking themselves up,’ everyone drops what they’re doing to focus on seeking credit and avoiding blame. In such an economy, only a sucker does any real work.

Status inflation. Inflation is a bit tricky because it requires that value be measured in terms of a specific unit — which can then be debased by ‘minting’ more of those units. Dollars clearly fit the bill, but we can find inflationary tendencies in almost every explicit measure of status. Companies — and sometimes even entire industries — can experience title inflation, for example. Or top-heaviness, which is basically an ‘inflation’ of the hierarchy. I don’t know of any studies that attempt to measure office inflation, but I wouldn’t be surprised to find that as companies age, they tend toward office buildings that have more windows, or just nicer space in general. Even more cynically, I wonder if the practice of hiring interns is driven (in part) by the same incentives that lead to other forms of hierarchy inflation.

Status arbitrage. I’m not sure if the analogy is perfect, but the word arbitrate suggests a parallel between status mediation and financial arbitrage. If you play the role of mediator in a community, you can earn status by brokering conflicts. A conflict usually arises when two parties disagree about their relative statuses, i.e., when there’s a price discrepancy. Since any successful resolution will involve a re-pricing, it might be possible to view mediation in terms of siphoning off some of the status that needs to be exchanged in order to successfully resolve the conflict.

Currency blocs. Previously we defined status with respect to a community, but we could also flip it around:

A community is a group of people who agree on how to measure status among their members.

In other words, it’s a group of people who share a common status currency. Silicon Valley, for example, is a community oriented around a particular way of measuring status — the ability to influence the growth of engineering companies. But Silicon-Valley status won’t buy you anything in Hollywood — unless you convert it to something that makes sense in the Hollywood economy. (Financial wealth usually does the trick).

This definition allows us not only to draw boundaries between communities (porous and fuzzy though they may be), but also allows us to discuss the strength of a community, i.e., the level of agreement about how to measure status. Google, for example, is a fairly strong community insofar as Googlers agree on how to measure status among themselves, but Google engineering might be an even stronger community.

Treating communities as “status-currency blocs” helps explain how there’s relatively free trade (at low transaction costs) within the community — and also how trade is distorted across community boundaries. The fluctuating ‘exchange rates’ and asymmetric information make cross-community interaction more difficult. When a Google VP walks into a meeting with some employees from Facebook, say, everyone will be unsure about their relative statuses, and the group will have to spend time and effort (and a lot of posturing) in order to figure it out.

The “currency bloc” metaphor also helps explain both the benefits and the costs of institutional re-orgs. Merging two organizations, for example, can increase economic efficiency (by standardizing on a single status currency and thereby facilitating more interaction/trade), but the integration will also require some ‘repricing’ — with resistance from everyone who loses out.

Efficiency

If status acts as a medium of exchange, then one of the most important questions we can ask is how it contributes to economic efficiency.

For simplicity, I’m going to focus on the economies that develop in mid-sized office environments. As we’ve seen, status is just one of the goods flowing through such an economy. Other goods include money (salaries and bonuses), information, favors, desk location, task assignments, and access to decision-makers.

Different types of organizations have different ways of ‘metabolizing’ status. An engineering company, for example, has limited external use for social status, but uses it internally as a currency — to account for wins/losses and to facilitate the metabolism of less-liquid resources. A relationships business, on the other hand (e.g. a wealth management firm), does use status externally, as leverage in negotiating relationships. So whereas conspicuous consumption is a liability to an engineering firm, it’s an asset to a business that runs on relationships.

Let’s define a culture’s use of status as efficient if status transactions tend to advance the goals of the community.

An efficient culture, then, is first and foremost a meritocracy. Status will be awarded for skills and contributions that advance shared goals — making a big sale, meeting an important deadline, etc. And status will not be awarded for things that are orthogonal to (or detract from) the goals of the community. These include: nepotism, flattery and ass-kissing, race/gender/age, and humor/beauty/external status (unless they’re important for getting the job done). And seniority should correlate with ‘substantive contributions’; no one should be rewarded just for warming a chair.

But how status is awarded is only half of the equation; we also have to ask how status is spent. Do people use their status to pursue shared goals, or rather to advance their own, competing agendas? Executives who abuse the corporate credit card, get off on harassing their employees, or engage in certain types of empire-building, for example, are contributing to an inefficient culture.

Dominance status is an especially tricky proposition. There’s a niche for dominance in human societies, so trying to get by without it is an unstable arrangement. And it’s necessary for keeping people in line. But there’s also a real potential for abuse. People often use dominance to reinforce their status in ways that don’t advance shared goals. And in addition to being potentially inefficient, dominance also has the effect of silencing criticism. Criticism is always a threat to one’s status, but unless your goal is to maintain your own status at all costs, you need criticism to stay on the right track. No one makes perfect decisions at all times, and not everyone promoted into a position of leadership is good for the organization.

There are many, many nuances to attend to here — all of them important to maintaining an efficient culture. But in the interest of space, I’d like to call attention to two disease states in particular:

Gossip. Some gossip is necessary for moving information around, but often it’s used to lower someone’s status behind his or her back. This is especially pernicious. Because gossip can’t be confronted outright, it leads to an equilibrium where everyone needs to spread rumors and participate in the gossip mill just to maintain their position. Sticking to the economic metaphors, gossip is like a black market for shorting other people’s status in exchange for elevating your own (among your gossiping partners). Bridgewater — the world’s largest hedge fund and, I would argue, an extremely efficient culture — elevates gossip to the level of capital offense.

Politics. It’s hard, perhaps even impossible, to provide a neutral account of what constitutes ‘political’ behavior in an office, but here goes: Politics is any attempt to win status through actions that don’t advance the goals of the community. The economic analogue here is rent-seeking — vying for a larger share of the pie in ways that don’t increase the overall size of the pie. Rent-seeking behaviors in a status economy include: competing for access to high-status individuals, hoarding resources that could be put to better use, acting as an information broker (requiring payment instead of giving information freely), and (as we’ve seen) manipulating one’s image instead of attending to reality. Efforts spent on politics/rent-seeking represent deadweight loss in an office economy.

The macroeconomics of social status

It’s a somewhat arbitrary distinction, but traditionally microeconomics studies behavior at the scale of the firm and smaller units, while macroeconomics studies behavior at regional, national, and global scales. By way of wrapping up, I’d like to sketch some steps toward a macroeconomic account of status.

First there’s national politics, which is driven by status more than we typically admit. As Tyler Cowen argues:

Occasionally the real force behind a political ideology is the subconsciously held desire that a certain group of people should not be allowed to rise in relative status.

This extends beyond overt identity politics (like the marriage equality debate). Even an issue like gun control, for example, is driven (at least in part) by the desire to stigmatize or support not just gun-ownership, but the group of people who own guns.

Jack Balkin explores similar themes in his article The Constitution of Status (a wonderful read, by the way), where he treats status very explicitly as an economic good. But in contrast to the micro scale, where status is a property of individuals, on the macro scale status is a property of entire groups of people. As such it tends to be manipulated (a) symbolically and (b) through the making and interpreting of law.

Finally, I have a hunch that we can even use the economics of status to understand civilizational decay. Such an account might start with the observation that status-seeking is a very powerful force. Thus, civilizations that can harness it more efficiently (toward material progress and/or military power) will grow faster. But a civilization can get in trouble when it institutionalizes a particular form of status (i.e., a particular status currency) that later becomes decoupled from the ever-shifting material economy. At that point, status-seeking behaviors that were once economically productive become counter-productive (i.e. rent-seeking), and sooner or later — or in some cases, much, much later — the civilization will fall.

___

[1] fitness displays. The argument for fitness displays (of both body and brain) is interesting. The body and the brain both have a large genetic (and ontogenetic) ‘surface area.’ Many genes contribute to their development, and if any of those genes are defective, something will come out looking (or thinking) a little wonky. This is compounded by the barrage of entropy from the physical environment — malnutrition, predators, and especially parasites (viruses, bacteria, fungi). When an adult ends up with a highly symmetrical face or a brain capable of wielding a large vocabulary, it’s a strong signal that his or her immune system was able to defend itself from a great many dangers that could have disrupted development. Geoffrey Miller explains this in a lot of great detail in The Mating Mind.

[2] status ~ community. In a slightly more sophisticated formulation, we could define status with respect to a given frame, which would encompass not just a particular community, but also a set of circumstances and/or concepts. For example, if the mayor of a town is cheering for her son at a soccer game, she’s a low-status member of the game (i.e. just a fan, not a player or coach or referree), while simultaneously a high-status member of the town – even if it’s mostly the same people involved. The endless reframing that goes on (and the attendant implications for status) provides much of the spice and drama of daily life. Understanding these frames and being able to manipulate them (even in the course of a single conversation) is the consummate art of the politician.

[3] status ~ zero-sum. If status is a non-zero-sum game, it’s not because you can re-define your community in order to change your status. Moving to a “smaller pond” might change your relative status, and might even change your absolute status, but it doesn’t change the size of the overall human status pool. Your increase in status comes at the cost of lowering the status of others. Instead, if status is a non-zero-sum game, it’s because communities can accord more or less influence and respect in aggregate to their members. In other words, raising the level of trust within a community is a way of creating more status/influence to spread around.

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