There is a widespread idea, or cliché or meme, that in-group loyalty is the psychological equivalent of the appendix: an organ that was once useful, when we were in tiny hunter-gatherer bands, but now can only do harm. It turns up in Chris Paley’s new book, Beyond Bad, which controversially argues against the very idea of morality, partly because morality is intrinsically parochial. Or in any number of journalistic articles, like this one in the Guardian.
I think this is horse, and to show why I’ll write you a simple, general story, or as economists would call it, a model. The point of the story/model is that in-group loyalty is a necessary social glue for groups. Groups didn’t die out in the Pleistocene: they are basic to economic and social life, from choirs to rugby teams to workplaces.
The story
Two IT companies are selling a new kind of database. To explain the new technology to their customers, they need salespeople. Each customer has a 1% chance of benefiting from the database. (The odds are so small to avoid a clever clogs industrial organization person saying “why not just sell the whole business to the salesperson?” That’s ruled out because a salesperson can’t live on a 1% chance of profit.)
The two companies’ products are slightly different and suit different customers. If a target customer gets the right product, it benefits by $3m. If it gets the wrong product, the benefit is only $2m. The IT company makes a profit of $500K on each sale.
Sales is complex and subtle, it’s about building relationships, and so the salespeople’s effort can’t easily be monitored. The companies must rely on their salespeople’s goodwill!
Suppose that the salespeople are homo economicus, who only care about their paycheck. They will make minimal effort. In fact, it’s not even worth the companies’ while to hire them. The products remain unsold, the customers’ need is unmet, and everyone is worse off. This is not news, folks! There’s a big literature on employment as a gift exchange, motivated by just such cases.
Now here’s the rub. Suppose the salespeople are global altruists. They care only for the wellbeing of all! In particular, they care equally for the wellbeing of their own company, the rival IT company, and the customers. In this case, after building a successful relationship with each customer, they will recommend the product that suits the customer best. Maybe their own firm’s, maybe the other’s, it’s 50-50. That’s great for the customers, who always get the best product. Unfortunately it is not so good for their employers, who are paying someone to work for the other firm half the time. In fact, with only a 0.5% hit rate — half of 1% — they again can’t afford the hire. So again, the products remain unsold, the customers’ need is unmet, and the pig can’t get over the stile to market.
The answer’s obvious: hire salespeople who are loyal to the firm. These guys will always recommend their own firm’s product. Sometimes the customers don’t get the best solution, sure. But the firms now make enough profit to hire the salespeople in the first place. And the second best database is better than none. Everyone wins, and this is only possible because the salespersons’ altruism is partial.
Responses to two criticisms.
1. Hey, this is also not news. The work on employment as a gift exchange models reciprocity from the worker to the firm! So that is just another word for group loyalty.
Response: yes it is. In fact, the social psychologist Toshio Yamagishi called groups a “container of generalized reciprocity”. I’m fine that this isn’t new: I’m not trying to publish it. I just want you to admit that group loyalty is an essential glue of collective action, which is the basis for humanity’s biggest achievements. Fine, group loyalty is reciprocity! Just don’t say that in-groups are a tragic holdover from our evolutionary past. You know what else comes from our evolutionary past? Feet. Useful for cavemen… useful for us.
2. The two firms should merge. Then you wouldn’t need group loyalty: global altruism would be enough. And the salesmen could always recommend the best product.
Sure. That’s a solution, and what it tells us is that, in a world where having only one organization is efficient, we wouldn’t need groups! That has always been the socialist dream, so, yeah. There’s certainly nothing self-contradictory about that story, and if you buy it, then I’d like to sell you a — hah! — revolutionary database.
Conclusion
Real organizations only work because their members are loyal to them. Parochialism isn’t an outdated feature of morality. It’s of the essence of morality, as a fair exchange between a defined set of people. That applies to companies, and there’s a vast “company culture” literature in management science on how to elicit this kind of loyalty. It applies to nations too! Nations are the most basic organization. We trust them to keep us alive. And when push comes to shove, we have to care about them too. If we don’t, they go unmaintained, and then — slowly, quickly, or the one then the other — they crumble.
That’s my story. If I was bored or uninspired enough, I’d fill in the details, call it a Bayesian Nash Equilibrium, and publish it somewhere. If you want to do that, go ahead, just thank me in a footnote. Actually, thank me in a footnote stating “sixties liberalism is destroying Western culture”. My terms are always reasonable.
You do realize that most salespeople who do half-million-dollar deals get the vast majority of their compensation from commissions, and would be fired outright if they ever got to the point of only drawing their salaries, right?
So, if there are zero per-individual fixed costs from hiring, then it doesn’t matter how many sales any salesperson makes. It seems reasonable to assume that fixed costs are non-zero, so that there is a breakeven below which hiring someone wouldn’t be worthwhile. Here’s some evidence on that which suggests that indeed fixed costs are large.
“neccesary” means somethilike all other options are impossible or anything that tries to be very different will in fact be found to be a form of the usual.
There is a prisoner dilemma kind of coperation-copration possible where 0.5% get recommended the same companys product but also 0.5% of the other companys customers get redirected to you. Because they are all of high fit the customer satisfaction is 3m and you still get the same 1% of global customer amount. With loyal sellers you get the same share of global 1% but the average satisfaction is only 2.5m. Sure it would be nice to have loyal sellers AND get traffic redirected from competitiors but that kind of situation is likely to other also get loyal sellers.
It’s more of a thing that happens, a tragedy, rather than an inevitability.
Right, if both salespeople agreed to swap customers they could cooperate and improve the equilibrium. Standard Coase theorem reasoning applies. But as in many other real-world cases, that kind of enforceable agreement may not be feasible. (What if the salesmen don’t know each other? Or there’s 1000 firms instead of 2? Note that the salesmen have to know each other. They can’t just recommend the other firm’s products, because then they’re not worth hiring. They’re only worth hiring if they are recommending your own products when appropriate, and also being sent new customers from the other firm’s salesman.)
Broadly, I think this argument is a similar logic to “the two firms should merge”. It’ll work so long as it is efficient for the firms to merge. But merging (or agreeing on how to split the customers) may be inefficient for other reasons (e.g. the firms then also agree to charge monopolistic prices). If so it ought to be banned by a benevolent government, as indeed many countries do.
If everyone were fully, globally cooperative then we might be in the best of possible worlds, and might require neither group loyalty, nor firms, nor governments.
While the salespeople cannot unilaterally recommend other firms products, the firm as a whole can have a strategy of recommending the best product, and use that reputation to land more customers (the Miracle on 34th Street / Progressive insurance model)
It’s a hopeful story, but again I think this is a version of “in the best of all possible worlds”. Sure, if everybody is in a long-run repeated game, then anything can be an equilibrium, including all possible efficient outcomes. That might be possible sometimes, but we don’t see many firms pursuing a strategy of recommending their rivals’ products.
I frequently am allowed to leave shops without buying a product so atleast some baseline non-loyalty is around. “Neccesarily” is a possiblity claim so at that level inconvenient worlds are relevant.
If the situation is a long iteration game then the relevance of short iteration analyses can be questioned.
In theory a hyper-loyal seller might be tempted to give wrong change to a customer giving money in excess to agreed price. However in practise the PR fallout of trying to do anything like this is so great that they are forbidden from doing so on multiple levels. There are lots of situation where tribalism would be so abhorrent that we don’t even register it as a relevant possibility.
I don’t fully get why they need to know each other. The kind of norms that keep this behaviour up run much with “you would have done the same to me” which works to upkeep the situation if there indeed are other following similar principles but following the principles doesn’t check for their existence.
Should the firm choose to replace a recommender with a loyal seller then they are likely to also destroy other firms recommending customers to them. Then the caused sales can be more directly attributed to the seller but the total output remains the same.
I think you are implicitly arguing that firms should always split ie firms should fire people that are not known to be linked to a profit generation. But this runs the risk of cutting down and destroying profit generating processes that can’t be well attributed to be the cause of single actors. Part of the reason for the firm is that the employes can cooperate instead of competing against each other. So there are scenarios where competition is destructive. If the effect would be super mandatory then it would mean that two deparments of the same company would be forced to only play for their own benefit and the larger company trying to force them to cooperate would neccesarily fail. Splitting might be ineffective for other reasons so it is not an autorecommendation.
In sales the relationship building goes in many directions. One salesperson today may be selling company A’s product, but may be trying to sell you company B’s product next year, or a completely different product category. They have a relationship with their current employer, yes, but also a set of relationships with past customers, both companies and also individuals they’ve sold to (and those individuals migrate over time to new roles and new companies). As a buyer, I’m more likely to buy from someone who, in the past, has been honest about whether their company’s product is a good fit for me. I’ve worked with many successful salespeople who are honest about not being the best fit for a customers’ needs. This is especially important when a firm intends to sell to the same customers on an ongoing basis, whether support services or new products or versions. Salespeople will also follow such cues better as long as their commissions depend in part on retention, not just initial sales. It’s hardly universal, but it does happen.
Also: loyalty to a firm relies on believing the firm will also be loyal to you, and I don’t know how common that is, but I have not yet worked anywhere that engendered such a feeling, especially in sales.
Edit: these days the real-world resolution would seem to be that both competing companies move to a SaaS model, reducing the costs of trying and switching products so that customers self-sort over time until they find one they’re happy with, while also incentivizing each database company to continue improving to keep customers happy.
Here’s a nice recent statement of what I take to be the mainstream view.