How large is the control premium?

Cass Sunstein on Twitter directs us to this paper (AEA gate), by David Owens, Zachary Grossman, and Ryan Fackler, entitled “The Control Premium: A Preference for Payoff Autonomy.”  The abstract is here:

We document individuals’ willingness to pay to control their own payoff . Experiment participants choose whether to bet on themselves or on a partner answering a quiz question correctly. Given participants’ beliefs, which we elicit separately, expected-money maximizers would bet on themselves in 56.4 percent of the decisions. However, participants actually bet on themselves in 64.9 percent of their opportunities, reflecting an aggregate control premium. The average participant is willing to sacrifice 8 percent to 15 percent of expected asset-earnings to retain control. Thus, agents may incur costs to avoid delegating and studies inferring beliefs from choices may overestimate their results on overconfidence.

There are ungated versions here.


Control or information?

This study confirms my beliefs so does not surprise me. For men, the fitness payoff of being seen by women to be the winner is at least equally important as the resources gained.

Experimental economics make sure that payoffs are anonymous, so your postulated effect cannot be directly driving behaviour here.

The behavior could be innate from natural selection. No need for payouts I really exist. See: embarrassed feeling by yourself.

Hence my use of the word "directly" in my above statement. The interplay of evolution and the measurement of preferences in the lab is subtle and hard to disentangle.

Interesting to compare this with the premium typically paid to control a corporation. This premium depends a great deal on particular circumstances, but is typically thought to be 20 to 30 percent. There are more factors at play in corporate control scenarios (tax, regulatory, etc); however, the overriding justification is that control can enable the majority owners to run the corporation differently and better. This study suggests that a good deal of that may be illusory: Those paying the premium merely hubristically or egotistically *think* that control will enable *them* to run the business better. Ironically, there may, therefore, be a built-in economic advantage to ceding part of one's minority position to another who wants to *think* he can do things better---and pay for the privilege.

Control: in a modern airplane which do you feel safer with auto-pilot, or some junior airplane pilot at the controls while the senior pilot is in the restroom taking a break (Google: EgyptAir Flight 990 ['The Captain asked, "What is this? What is this? Did you shut the engines?"'], Air France Flight 447). Or would you rather travel by ferry rather than plane, since you feel you're in control more, perhaps like in a Philippine ferry, where they take your names down so they can have an accurate record of the number of missing when there's the inevitable disaster? I myself have flow in Soviet era planes in communist countries and loved it.

"Tis of the essence of life here, though we choose greatly, still to lack the lasting memory at all clear, that life has for us on the rack nothing but what we somehow chose. Thus are we wholly stripped of pride, in the pain that has but one close, bearing it crushed and mystified..." Robert Frost.

Oneself and the partner have very different incentives to answer the question correctly, or to invest in the thinking needed to do same. Here, as in most real-world situations, aligning control and payoff also aligns incentives.


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