Behavioural Choices- Interrogating Rationality
Article by Gulhaider Zaidi & Evita Rodrigues
The Sveriges Riksbank Nobel Prize in Economic Sciences-2017 awardee, Dr. Richard H. Thaler, in his book, Misbehaving very aptly points out, “The purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool”. Very much indeed, the economic theory is replete with robots and cold-blooded optimisers called Homo economicus– rational humans. While it becomes a herculean (as well as banal!) task to put the bland economic principles, taught across different Undergraduate Courses into practice, it is equally interesting to think about the novel aspect of economics- Behavioural Economics. It is this very field that takes along with itself, a baggage brimming with psychology, economics, sociology and mathematics. In real life, this is what we put into practice. After all, humans are whom we deal with! And we can be sure that you did not ever feel the urge to draw your budget constraint and indifference curves and use ‘partial derivatives’ to arrive at your maximum utility point, if you were ever confused between the red and the blue dress (trust us, even a rational economist won’t do it…wait what?!). It is this field of Behavioural Economics that has motivated people, even laymen, to start viewing economics from a different perspective altogether.
The ‘Academic Summit-2018’, organised by the Centre for Economic Research, St. Stephen’s College (Delhi), laid stress on Behavioural Economics, its applications and hacks that must be incorporated into policy making for effective outcomes. The guest speaker for the second day of the summit (i.e. 27th October, 2018) was Dr. Abhinash Borah, Assistant Professor of Economics, Ashoka University. He spoke on ‘Behavioural Choices- Interrogating Rationality’. Students, not just from the economics department but also from other courses attended the lecture. The faculty members from the economics department were also present for the talk.
Dr. Abhinash Borah pursued his undergraduate education in Economics at St. Stephen’s College. He did his Masters from The Delhi School of Economics. Thereafter, he did his Ph.D. in Economics from the University of Pennsylvania. Dr. Borah has been actively investigating the question of how social identities operate, and how they interact with individual behavior and perception. He also has a research program that tries to understand how individual decisions are shaped by social influence and their ramification in economics. He has been very much involved with Behavioural Economics, as can be seen in his research interests, which are in the fields of decision theory, behavioral economics, economic theory, public economics, political economy and welfare economics.
The lecture commenced with his explaining how economics as a versatile field, finds itself apart from other social sciences. Other social sciences lack a firm and definite theory, while economics doesn’t. The existence of formal models, based on certain assumptions (which ironically make economics distant from reality) is what makes economics the most powerful of all social sciences- powerful in two diverse ways. One is: when it comes to public policy, economics usually has the largest sway, undoubtedly. The other way is that economics is also considered the most powerful of the social sciences in an intellectual sense. That power comes from the fact that it has a unified core theory from which nearly everything follows. It was in the early 1900’s that Pareto suggested about rationality of humans. However, one should not completely disregard the assumptions made in economics. These are in fact, simplifying features to understand any complex system. However, at the same time, one must not take them as a given but, one must question the credibility of these theories and models, largely made up of assumptions, so that the real world can be understood better.
A very interesting concept that sir talked about was about Jeremy Bentham, who was an English philosopher, jurist, and social reformer who gave the ‘psychophysical concept’ of calculating pain and pleasures that an individual experiences, according to which, for example, a person who steals something from you should be punished with the same intensity at which you experience displeasure for losing the thing. Like, if Person A steals Person B’s watch, suppose Person B experiences displeasure (called disutility) equal to 20 units (or a pleasure of -20 units). Then, Person A must be given such a punishment that gives him 20 units of agony, no less, no more. At this, the students were delved into thinking if it was relevant in the present scenario, especially in the field of criminology. This concept has been captured in Bentham’s book, ‘Principles of Morals and Legislations, 1789’.
Dr. Borah talked about the Neoclassical Model of Economics (which assumes rationality) and how it talks about the ‘what’ of behaviour and not the ‘why’ of behaviour. The juxtaposition of Neoclassical Economics and Behavioural Economics is tantamount to dealing with ‘Mindless’ versus ‘Mindful’ economics. One popular concept in behavioural econ is ‘Self-control problems’. He took an example from the psychologist, Walter Mischel’s 1960s experiment to clarify the concept. It involved a researcher who let a child pick a favorite food from a tray of cookies, marshmallows, candies, pretzels, and other sweets. The researcher put that treat on the table in front of the child and made an offer. The child could eat it at that time or could wait a few minutes while the researcher went to check on something else, and got two treats when the researcher returned. If the child lost patience, they could ring a bell, the researcher would come right back, and the child could eat the treat right away. They did not get another one, of course. How children behaved in the Mischel experiment turned out to be a good predictor of other behaviours later in life. For instance, those who couldn’t wait for the second treat had more behavioural problems in school and scored lower on standardized tests. Those who could wait, scored higher, maintained friendships well, and handled stress better. The experiment has been repeated many times since. In fact, economics deals with intrapersonal conflicts which face an individual as he makes decisions, self-control issues being among them.
Something that captivated the attention of the listeners was the ‘Endowment Effect’, which Dr. Richard H. Thaler talks about in his book too. This effect mainly describes that an individual values the thing that he possesses more than the thing that he doesn’t possess at that moment, even if both of them are identical. This happens because when the thing you own is taken away, you feel the loss of separation whose magnitude is more than the pleasure that you get by receiving such a thing from someone else.
In a game, the gold medallist obviously feels the happiest because they achieve the highest possible rank. However, a very strange observation reveals that mostly, a bronze medallist feels happier than a silver medallist. This happens because, a silver medallist feels the loss of losing the first position but the bronze medallist feels happy because they consider themselves more fortunate than others who didn’t even get the third position! The only difference lies in relative level at which these people are comparing their present situation. This example reveals a lot about how behavioural economics can lead to happiness as well as sadness, even when you, being sad are absolutely better-off than the person who is happy.
Dr. Borah enlisted certain other concepts like risk aversion, whereby, one tries to avoid risk as much as possible and go to the definite or confirmed aspect of an argument/ proposal. He talked about heuristics and biases. Heuristics are certain thumb-rules which help a person simplify complex problems. A person in his attempt to simplify a problem may knowingly or unknowingly resort to his own personal biases. For example, in a poll on public perceptions of health risks in the US, it was asked if more people lose their lives in tornadoes or to asthama, the majority said tornadoes. However, the correct response was asthama. Just because news covers deaths due to tornadeos does not mean that more people die due to tornadoes. This is how biases can operate which may lead to certain statistical errors in economics.
The concept of ‘Libertarian Paternalism’ is a very famous one in Behavioural Economics. In short, it is called ‘nudge’. For example, a GPS. A GPS is a kind of ‘libertarian paternalism’. It tells you the route to a cetain place, perhaps the best way sometimes. You are at your liberty to choose which route you like best. If the GPS gives you a route within a concretised area, you might tell that ‘puny’ machine, “No, I’ll choose the route which is more picturesque and has a scenic beauty”. However, you mostly end up following the GPS, because you know it very well that it mostly tells the shortest or the best way. It saves you money. Even though you are at liberty to flout the machine but you rarely do so. It is an example of a nudge. It leads you to do a thing, even when you don’t wish to. Sir discussed how Behavioural Insights Teams are being made all across the world, because the governments recognise the need of Behavioural Economics and the potential it carries to transform bad policies to good policies.
The session was as an enriching one, which allowed the students to strengthen their concepts in a very advanced way. The examples form the real world, taken by Dr. Abhinash Borah were exceptionally relevant and his intellect was impressive. His lecture ‘nudged’ the students to think beyond books full of rational beings, to attain logical understanding of how the world functions and how social structures influence decisions of the government.
The Editorial Board of the Economics Society interviewed Dr. Abhinash Borah and got to know about his college life and his Ph.D. programme as well. His inputs and answers to the questions posed are worth considering.
Read them here-