Perverse Incentives

By Siegfried Othmer,
Chief Scientist, The EEG Institute

July 2002

"Ill fares the land, to hastening ills a prey,
Where wealth accumulates, and men decay"
--Oliver Goldsmith,
as quoted by Kevin Phillips in "Wealth and Democracy"

The ultimate defense of capitalism is that it naturally and benignly aligns economic incentives with our societal values. Our values are reflected in the pricing of commodities or services, whereas profit, the difference between price and cost, metes out the rewards appropriately. If something is worth doing, it should turn out to be profitable. Conversely, if it cannot be profitable, it is probably not worth doing. Profit calibrates incentives in the least regimented way possible. Any questions?

We have just decided to put our efforts going forward into a non-profit entity, the Brian Othmer Foundation and the EEG Institute. ("We" here refers to Susan, Siegfried, and Kurt Othmer.) This after more than a decade of bringing EEG Spectrum International to success. What has moved us to this decision, and what do we hope to accomplish? It is worthwhile to review our self-talk on this matter, because our enthusiasm about the non-profit either has to be contagious or it will not bear fruit.

We do not regret for a moment our prior focus on launching EEG Spectrum. During some of the early days where we could not see our way through to success, it was important to hold the larger dream that would one day make it all worthwhile. This also brought on board the many early investors who knew we needed help to get the venture off the ground. EEG Spectrum International is now launched, and will continue with a primary focus on NeuroCybernetics.

Over the years of trying to attract major capital into the field of neurofeedback, it has become clear that one of the key issues is control. We thought that "first-mover advantage" would be enough to attract capital into EEG Spectrum (and that accounted for our sense of urgency), but the issue of control over the technology turned out to be paramount. Neurofeedback is beyond the point where patents can extend hegemony over the field. The technique is in the public domain. So investors stayed away, even during an era when money was being thrown at nearly everything that could support a price tag.

Eventually, the question needed to be revisited, just what was capital needed for? The software now exists. The market is big enough to support the continuing development of new software. A large infusion of capital may just serve to distort the very organic multi-faceted development that has in fact taken place, and is continuing to take place, in this field. Capital could be used to implement specific practice models, much like Sylvan Learning Centers or Fast Forword, or Lindamood-Bell. But the core technology development was actually doing fine, thank you, without major new capital.

It was also becoming clear that whatever plans were being made for the growth of the field, through business plans and other presentations, always involved attracting the customer with discretionary income. There was no way to move away from a dependency on the private-pay kind of service. And this meant that the largest group of people needing our help would remain unserved as far as they eye could see. In continuing our focus on the middle and upper-end market, we were continually in conflict with our own values.

It became clear that extending neurofeedback services to the communities in greatest need was not going to be the by-product of anything we were currently doing, and it was not likely to happen on any foreseeable timescale. The only way this was going to happen is if we made it a primary objective and explicit goal of our work. Thus our decision to redirect our own efforts. To meet our objectives, we also depend on the success of EEG Spectrum International, but our personal energies will now be going into the non-profit activities.

We have to move from a top-down model of technology insertion to a bottom-up model. An example of a top-down model of technology insertion is the DVD. The whole development had to be completed before the product was initially launched, and then it was launched with great fanfare, and with the expectation of ultimate market saturation. An example of a bottom-up model is the marketing of St. John's wort. Various companies are selling it. Nobody owns a patent on it. Word about it spreads in various ways. Growth is diffuse, decentralized, and therefore organic. Whereas the VCR served as the stalking horse for the DVD, there was no precursor for St. John's wort. It is creating a new market for itself. The same goes for neurofeedback.

Having become persuaded that the capitalist model cannot be relied upon to effect the healthy diffusion of neurofeedback into the communities of need, we have come to realize that our situation reflects, in microcosm, the same dilemma playing out on the larger stage. As a society we are just recovering from an orgy of capitalist excess, and yet we have no competing model that can command our allegiance. Right now it is easy to flog the system, so I will get right to it.

The first issue is that the overall elevation of economic well-being does not address all of the problems. No matter how high the tide that lifts all boats, the roofs in the Compton school district will not stop leaking. You actually have to go in and fix the leaks. There is a good deal of confusion about this even at the highest levels, because when Congress recently denied $1Billion in extra funding for neglected and abused children they turned right around and---without even stopping to wash their hands like Pontius Pilate---cut the taxes of sixteen of our largest corporations by $7Billion, no doubt in the belief that they were promoting the societal welfare in the best way that they could.

The second issue is that the individually optimized solution does not always equate to the societal optimum. The other day an apologist for the Pacific Legal Foundation wrote that SUVs had the argument of safety in their favor. This may be true for an individual, who can say he is personally better off in a heavier, larger car. But this argument does not scale up. From the societal perspective, the safest solution is when all cars weigh nearly the same amount, and the energy of a collision is equally distributed to both cars in an encounter. A person buying a much heavier car is purchasing his own safety at the expense of the safety of everyone else. A second example is that of the California lottery. A proper calculation of self-interest would argue in favor of the poor participating in the lottery, which represents the best chance of escaping from poverty for each one individually. On the other hand, at the level of social policy we must acknowledge that we are paying for public education in the most regressive possible way---on the backs of the poor, who are collectively worse off because of the lottery. Shame on us. Many other such examples can be cited, but our ideology does not allow us to confront these flaws in the construct.

The third issue is that the capitalist model turns citizens into consumers for purposes of public policy. So we have R-rated movies and cigarettes being marketed to children; and some 250,000 children introduced into the sex trade in this country, some 75,000 of those with the approval of their families. Perhaps the best example of our commoditization is to be found in the California energy mess. Electricity markets should be about as exciting as watching grass grow. Power plants last decades, and coal mining is predictable. But the capitalists managed to turn this staid market into something akin to the cocoa futures market, with white-knuckle trading of daily dollops of power. As public policy, this was madness. The power that cost Californians a modest $7 Billion in 1999 cost them $25 Billion in 2000, and $40 Billion in 2001, with hardly any increase in utilization. Power is inherently cheap. However, continuity of service has very high economic value, quite unrelated to the underlying price of power. A crisis had to be precipitated that put continuity of service into question. It was all engineered. And it was done by people who had no sense at all of a countervailing civic duty. Ross Perot, whose company was working both sides of the street in this matter, said innocently, "If there's something inherently wrong with discussing gaming theory, then several Nobel prizes need to be returned." His company had said that there was a large domain between "genteel and illegal," and proposed to move closer to that edge. If Perot doesn't even see the problem here, then he is unlikely to be helpful in fixing it.

What has happened incrementally is that money and capitalism have become an independent power center in our society, and government has increasingly become its servant. This is most apparent from the fact that wealth has increasingly become insulated from taxation. First we have the cuts in property taxes, then the cuts in marginal tax rates, and in the corporate tax. Then we got the elimination of the inheritance tax. Finally, we have companies moving off-shore to eliminate their corporate taxes entirely. When we see our government idly standing by as companies move off-shore, it is clear who is governing whom. There is something that commands a higher loyalty of these elected officials than the government they serve. It is capitalism itself, and its agents. Republican policy begins and ends with tax cuts, but even Democrats have been brought to heel with the same monetary tether. Said Todd Gitlin (Professor of sociology at Columbia University): "The big, unacknowledged picture is this: The people in power represent an economic clique whose interests are only superficially tied to the well-being of the country as a whole."

How far we have come from the patron saint of capitalism, Adam Smith, himself: "A goal of taxation should be to remedy inequality of riches as much as possible by relieving the poor and burdening the rich." We have now stood this on its head. After all, what is the point of installing a capitalist reward system, and of promoting a winner-take-all economic edifice, if we are going to allow those who have been beaten fair and square in the economic wars to turn around and pick our pockets with the help of the tax collector? Just as we locked the door on the old factories of the rust belt in order to bring the new economy into being, we have to cut our losses when it comes to social expenditures. The poor will always be with us. It was Edward Luttwak, military strategist, who pointed out years ago the inherent conflict between predatory macro-economic policies, on the one hand, and the promotion of family values at the other. By undermining economic security for the middle class, economic growth has indeed been helped, but at what long-term cost?

The fourth issue is that capitalism protects itself from criticism. Critique of the system is always deflected into criticism of "bad actors." Thus when the Asian Tigers collapsed a few years ago, the IMF became a stern parent, even though it had nothing but praise for the Asian Tigers before the collapse. When Russia collapsed financially, we laid the blame at their door, when in fact it was our recommended policies that they had been following. And now we are looking for the bad actors responsible for the Enrons, etc. Did not Business Week praise the accounting finesse of a Tyco before its CEO was criminally charged? Were they not all in the cheering section before the collapse?

The manifest interest of government and of the media appears to be in maintaining the institution of capitalism inviolate as a matter of principle. There is an analogy here to the convulsion currently happening within the Catholic Church, where institutional preservation appears to be the paramount concern. I recently found myself lecturing at Fordham University on the use of neurofeedback for recovery from trauma. Since Fordham is a Catholic institution, I drew attention to the current issue:
"Oh, can neurofeedback help with pedophilia?"
The question caught me off guard.
"Well, yes, we think so….But I have been focusing on trauma in this talk, and I was rather thinking about the victims…."

With this as a background, what lessons shall we draw for the promotion of our public health? First of all, we have in the health industry perhaps the best examples of perverse incentives. When it comes to addiction treatment, for example, the best outcome is that the treatment fail. Then the person will be fired, and will no longer be the insurance company's problem. If, on the other hand, the treatment gives signs of success, the likelihood is that there will be a relapse sooner or later and the company will have to pay all over again for another round of treatment. Clearly it is much better to fail the first time. In the larger scheme of things, it is not of interest to HMOs to take care of chronic problems. Chances are that after a couple of years, the client will be someone else's problem.

It is in the health insurance business that the perennial whipping boy, bureaucracy, serves the desired ends of postponing reimbursement. Here we have another perverse incentive. But the worst of it is the fact that one does not know what a contractual arrangement with an insurance company actually means, given all the gate-keeping going on. Capitalism assumes that parties to contracts have knowledge about what they are signing onto, and some means of settling disputes. Here the individual is entirely out-gunned. Consider the arbitration proceeding that is often proffered for dispute resolution. Both parties have to agree on an arbitrator. What is unknown to the hapless patient is that the only arbitrators that survive on the candidate list are those who side exclusively with the insurer. In one instance, an arbitrator ruled in favor of the claimant for the first time after 400 rulings, and yet he found himself black-balled by the insurance company as a result. Capitalist incentives, innocently at work….

Years ago I purchased Medicare supplemental coverage for my mother. When cancer was diagnosed, Medicare declined to pay for a novel kind of chemotherapy that had been ordered for her by her oncologist. Since Medicare did not pay anything, neither did the supplemental coverage. So my mother found herself paying net into the insurance up to her death. In some sense, this can be considered a strategy for maximizing happiness. All during your healthy years, you are happy in the knowledge that you are well-insured, and when you discover the problem, you just die quickly. Unhappiness is minimized. Overall happiness is maximized.

If insurance companies had any real abiding interest in their customers' health, they would be beating down our door. In health insurance companies and HMOs we are seeing the total absence of technological innovation, except insofar as financial instruments are concerned. What better proof that the issue with HMOs is financial aggrandizement, not health maintenance.

There are only two entities that have an interest in the well-being of each person in the society over the longer term. One is the government (in principle), and the other is the person himself. By extension, the family may have such an interest as well, as may the employer.) A solution based on the top-end, governmental interest we would call a communal solution. One based on the individual self-interest we might call an atomized or individualized solution. On the basis of the above, we have to count the government out. As the only government in the developed Western world not to offer health coverage for all its citizens, it does not see its interest this way. This leaves only the individual self-interest.

For the time being, we have nothing to offer but the atomized solution: neurofeedback for the individual who comes in and pays for it. Families clearly play a role here, as do some employers. But the larger potential societal impact of neurofeedback is being missed-in educational failure, juvenile justice, corrections, mental health of the elderly, addictions treatment, domestic violence, etc.

In terms of institutional support, we must rely on the philanthropic sector of the economy. Says Torie Osborn of the Liberty Hill Foundation: "…philanthropy blows on the sparks of social change. It serves as an incubator for new approaches to social problems." And to attract the interest of foundations, we need non-profit status. In terms of individual initiative, we must rely on the shock troops that interface with these social problems directly: the social worker. In residential treatment, for example, we have more than one-third annual turnover of staff. Serving the needs of our most challenging children leads to burnout-unless we really turn around our potential for success. The social workers must be given the tools to make their labor successful---neurofeedback.

Social workers are employees who are not expected to furnish their own tools of the trade. Somehow these people must be empowered to do neurofeedback in spite of aloof and intransigent management and lax public oversight, and in despite the absence of major capital. It is time for another kind of revolution, a bottom-up introduction of neurofeedback into the field of mental health and social service. This is another kind of atomized solution, one directed toward those who are most invested in positive social change.

Summary

Our society has just been disappointed in its greatest optimism, that the fertilization of innovation through wealth accumulation would yield a general improvement of society. The improvement has been highly selective, and it has come at great cost. Our societal pessimism remains intact with respect to our greatest challenges: addictions, criminality, and the vast numbers of those unable to contribute positively to the society for reasons of mental, educational, or emotional problems. A different approach is needed, namely one that targets the problems directly. No single approach offers humanity more hope than neurofeedback, both in terms of improved function and in terms of relief from suffering. And now that we have the means, the moral imperative will hopefully follow. It is this sense of moral imperative that must grow from the bottom up. The most significant social movements have always come in by stealth rather than via sponsorship by the elites. The fact that our younger generation is more committed to volunteer service than any previous generation already is a portent of change in the societal value system toward one that is more supportive of our mission. The EEG Institute will hopefully be a focal point for the multi-faceted program that is needed to bring the revolution of self-regulation based remedies into being.

|events|books|faq|home|