Interview with Dr. Anirban Kar

By Khushi Gaur (KG) and Ananya Iyengar (AI)

It gives us great joy with share with you the transcript of our interview with Dr. Anirban Kar (AK), following his very enlightening talk on Behavioural Economics and its applications. Happy Reading!

AI:  Sir, in your lecture, you mentioned the concept of measuring intentions. Can behavioural economics create mathematical models to incorporate qualitative aspects like altruism, norms and reputation? Usually, economic models measure only quantitative aspects. So, can we measure intentions mathematically?

AK:  We can. In fact, the paper I wanted to cover actually does that. So, let’s take a step back. Any mathematical construction in economics has a certain structure, a certain mathematical representation of it. It’s another question, and an important question as to how much of that is empirically true. A mathematical structure will have certain parameters which are taken as exogenous. So, one particular empirical objective could be to estimate those exogenous parameters: compute that from real life data. A second objective could be- even after computing that, to check that the structure that we had is really capturing that qualitative aspect you were talking about. The empirical validity of a theoretical model will always remain a question.

So, think of it this way. As economists, we are observing certain real-life situations and theoretical economists essentially are trying to tell a story- about why such situations occur. No matter how mathematically you represent it, it is ultimately a story. You are only expressing that story in terms of some mathematical equations. That mathematical representation is important because the implications of the story has to be consistent with the assumption of the story so that we can make sure that our conclusion is consistent with the starting point. Consistency is important.  So, all that theoretical-mathematical models are doing is telling a consistent story; making sure that you didn’t bring in something you didn’t specify. Often, with the verbal telling of a story, you can bring in certain aspects you didn’t start off with. Here, there is a rigorous check that you have actually specified everything that you need for that story.

 Now, the next question is whether the story is the right story or not. That is the job of empirical economics. And, that is a major area of research right now. In the last twenty to thirty years, the discipline has changed. In the times before 2000, the emphasis was on theory.  Now, it is entirely that empirical aspect of those theories that is being investigated.

KG:  Sir, behavioural economics has often been critiqued for its paternalistic approach. It can be used by parties in power to reap more dividends-electoral and strategic. Some say that an economic, imperialism has come about. So, in this context, how can this criticism be justified and how can the activities of nudge units be regulated to prevent manipulation of behaviours in the self-interest of the state?

AK:  See, in the way you posed the question, I think you have a starting assumption that paternalistic behaviour is bad.  Let us detach this from behavioural economics and go to the standard rational theory. A paternalistic attitude can be embedded in any regulation. It doesn’t have to be the behavioural understanding of human behaviour of the “rational” understanding of human behaviour. So, the first question I will take, the way I interpret it, is about the understanding that paternalistic behaviour is bad. I don’t agree. Paternalistic behaviour, as it is, can be studied in different contexts. For example, smoking. Public smoking is banned and a very heavy tax is imposed on cigarettes; and this is of course coming from a paternalistic attitude, that you are doing harm to yourself as well as to others as it is a public bad. So, we are making a value judgement, right? That something is not good for you. And that is what you are calling paternalistic.

Let us think about it. Not making this value judgement is also a value judgement in itself. When economists pretend that they are not making a value judgement, they are not letting nature ease on its own. That’s not what they are doing. When they argue that no rule is to be imposed, say no tax is to be imposed on cigarettes, they are also making a value judgement. That can take two forms. One, that we have no business is telling people what to do. That could be one moral point. The second philosophical point is that whatever people do is the right thing. Based on that, they are making a value judgement that interfering is not the right thing to do. That itself is a value judgement. So, all this pretension that the 101 Economics textbook is not making value judgements is rubbish. Now, think of this. What is the starting point of economics? Property rights. Isn’t that a value judgement; that property rights are someone’s fundamental rights? Whenever we are deciding that the state has no role in XYZ, it is on the basis of a value judgement.

So, it is not the value judgement that has to be questioned. I think the real question is what is the right value judgement and what is the wrong value judgement. We need to go beyond this façade that value judgements are wrong. Every minute we make value judgements. Every policy is a value judgement. Not implementing a policy and leaving it to the free market is also a value judgement. So, we have to go beyond making such comparisons. If there is no intervention in anything, what you are saying is that the market price, given that you have ensured property rights, takes care of everything. That itself is a value judgement. Think of another extreme. The idea of justice- whether you are right of wrong- is up for bidding.  Whoever can pay the highest price can get the judgement in his or her favour. No economist would go that far. Are not they making value judgements here? This blanket vilification of moral judgement is wrong. We need to think carefully about what spheres the state should intervene in. For example, it is okay for the state to intervene in the smoking behaviour. But it cannot intervene by saying that non-veg food is banned. So, we have to make a distinction there and think thoroughly about why one intervention is right and why one intervention is wrong.

AI:  In 2016, the NITI Ayog came up with a Nudge Unit so that behavioural economics could play a major role in policy making in India. However, until now a large-scale impact hasn’t been made. In the Indian context, especially since the country is so diverse and as you said we have things like lynch mobs happening in the country. So what sort of role can behavioural economics have in policy making in the future?

AK:  Well, I don’t differentiate between behavioural economics and say, the neo-classical paradigm. I would say the broader question is what role economics can play in policy making and there I think that indeed economics can make a difference. What behavioural economics is doing is that it is broadening the horizon and if we think of it that way, then naturally it has some role to play. Once again, the question is what kind of role it is playing and once again there’s no general answer and you have to look and understand it on that basis. Behavioural economics is allowing for such possibilities that norms can be different in different places and there is a possibility that it can be more effective than the standard solution. However, that being said, there is a lot to learn from the rational paradigm. Behavioural economics should not become a fad. It is important if it is saying something extra but if it is not, then there’s no point in jumping into this fashion of behavioural economics.

KG:  The most famous experiments on the nudge theory have been implemented on a small scale in privileged countries. For example, in Spain, the organ donation rates have increased because of automatic enrolment and in the UK, the savings in the private sector have increased due to enrolment by default. So, can behavioural economics help in solving basic fundamental problems in third world countries like unemployment, poverty, crime?

AK:  Well, once again, I wouldn’t suggest behavioural economics. Economics has to get richer and so it’s an interaction of many things. Behavioural economics is identifying patterns everywhere. You need to ask where this pattern is coming from, what is triggering such behavior? So, it must be embedded in the institutional structure and the ‘political economy’ structure of a place. We need to establish that link between that institutional structure with the behavioral pattern and the feedback on the institutional structure. So, this is a complicated cycle and it’s an economist’s job to understand this cycle. Behavioral economics has opened up that possibility. It says that if you change the institutional structure, the nudge experiments there, you can change the behavior. But that change in behavior has an impact on the institutional structure as well. To take a concrete example, if you have a more democratic country where your voice is heard, you might feel that a judge can change your aspirational level and that can have an effect on whether you can move out of the poverty trap or not. However, in a developing country like ours, the constraint might just not be my ambition. There might be a real poverty trap embedded in the political economy structure. So, my lack of aspiration is probably holding me back, that’s true, but I need to understand why I don’t have that aspiration. Is there a lack of democratic structure in the society which is stopping me from having that aspiration and hence preventing me from getting out of that poverty trap? So, the more you understand these linkages, you’ll be better informed about these policy changes.

AI:  Economics, as a discipline, is going in a completely different direction due to behavioural experiments and increasing technologisation of the workforce. So as students, what can we expect the future of economics to look like?

AK: (A pause and then laughs) I don’t think economists are good at making predictions! They’re really bad at explaining things. So, let’s just not predict the future!