Crime, Gambling, Risk & Deterrence

There was a lawyer on Sunday Morning TV this weekend talking about criminals and victims of crimes. His contention was that the penalty system would be better if victims of crime directly receive the financial spoils of fines rather than it going to the establishment. I'd wager that if he was an economist he would be less keen on the idea, because I think it would be an unwise move. Remember one of the near-ineluctable laws of economics: people respond to incentives. Remember another: everything is a trade-off.

Fines impose costs on criminals, thereby discouraging them from committing crimes. But financial restitution bestows direct benefits on victims of crimes, thereby minimising the incentives to avoid being victims of crime. By the way, if your reaction to that is one of incredulity, and you’re ready to assert that that can’t be right, I’d suggest you need to brush up on your economics (especially the Coase theorem). Some compensation for victims is perfectly just, but if it lessens the cost of being a victim of crime to the extent that many more people become victims of crime with better financial restitution then it would fail an efficiency test hands down.

The criminal has an entirely different set of incentives, which I'll explain by talking about gambling and risk-taking. A man who will break the law by answering his mobile phone whilst driving is a man who will willingly risk a possible fine (and points on his licence) rather than the certain inconvenience of having to pull over and delay his journey. To a much different extent, a man who burgles your house probably just needs the money (often for drugs), so his risk-analysis is often not the same as the first man. 

To get another perspective on risks we can look at how people gamble. As a former professional gambler (I use that term for simplicity’s sake – that’s not really what I was), I can tell you that the majority of people that spend their days making small bets in the bookmakers, and those that pump money into fruit machines for hours on end, are not really gamblers. If you do either of those things for a sustained period of time you will be at a financial loss at a fairly predictable rate. That is the opposite of gambling – because gambling doesn’t involve predictable rates – it involves risk and uncertainty (and there is a key distinction between those two things as well).  A man who drives and uses his mobile phone whenever he feels like it is taking a risk – but just like a gambler his risk may pay off if the net cost of his fines is less than the net benefits of the calls and the time saved in making them on the road. 

Although people are criminals for a number of reasons (I’ve already alluded to drugs as one example), the rational criminal is someone who has chosen a life of crime because he prefers risks, and perceives a better pay-off than if he wasn’t taking risks. If rational gamblers weren’t like this, they’d be shopkeepers, dentists, factory workers, waiters or mechanics instead. Someone who plays the lottery likes low stakes, long odds and big pay-offs. If lottery players weren’t like this they’d be buying scratch cards or in betting shops instead. 

If you want to understand the government’s ethos regarding crime, you have to understand what attracts people to committing crimes – so it helps to understand what attracts people to gambling and to playing the lottery. Surveys I’ve seen show that given the choice between twenty prizes of £500,000 or one prize of £10 million, most lottery players prefer the latter, because they prefer a small chance of a huge win rather than a better chance of a smaller win. If you want to make the lottery more attrctive to consumers (and sell more lottery tickets) then increase the size of the jackpot, because the kind of people who prefer a better chance of £500,000 aren’t playing the lottery to anything like as great an extent as those who prefer a small chance of £10 million. 

Lottery players don’t usually risk big stakes, which means lottery players are not like rational criminals - because rational criminals like risks, but they also think those risks enable them to beat the odds. So while increasing the jackpot will attract lottery players, increasing the size of the prison sentence won’t have as much of an effect on criminals as increasing the conviction rate, because increasing the conviction rate will reduce their chances of beating the odds in a risky environment. In other words, double the length of the prison sentences attached to every crime and crime will fall; double the conviction rate attached to every crime and crime will fall a lot further. 

In dog racing the kind of person who will be most attracted to a tri-cast (trifecta) bet of, say, 33/1 (predicting the first three dogs) is much more likely to be the kind of person who will quit when he gets that one big pay-off. The kind of person who will be most attracted to betting £20 on a 6/4 dog is much more likely to be the kind of person who will place those winnings on the next race, and eventually come home at a loss. Bookmakers have an interesting trade-off between these two kinds of customers; a big pay-off maximises the profit on the present race, while lots of small prizes maximise the action on the races to come. 

Lottery players are like tri-cast players - they prefer a small chance of a huge win. They are like the rational criminals that prefer a small chance of a lengthy jail sentence - so if by reducing the one big jackpot on the lottery to twenty smaller jackpots you're going to deter people from playing the lottery, then by analogy to crime deterrence if the state increases the conviction rate by a significant degree it is going to deter a lot of rational criminals from committing crimes. 

Of course, increasing the conviction rate is not entirely straightforward – the state has to prudently channel its resources into areas that will engender the highest conviction rates (police strategies, personnel, research, surveillance, etc). As well as that it will have to assess the social costs of each crime and the relationship between that cost and number of occurrences; it will have to match the sentence to the crime; and it will have to calibrate whether enforcing a law is costlier than not enforcing it. If I made the decisions, I’d increase the sentences of the costliest crimes and add resources into increasing the conviction rates, because that is probably where the most good would be done.