• EconAfterHours

On Vampire Bats and Lynch Mobs

Updated: Mar 10, 2020

Academic Summit 2018

By Khushi Gaur and Ananya Iyengar

The Economics Society of St Stephen’s College, in collaboration with the Centre for Economic Research, organised the Academic Summit 2018 on Behavioural Economics. The first speaker at the Summit was Dr. Anirban Kar, PhD in Economics from the Indian Statistical Institute (ISI) Delhi, presently an Associate Professor in Economics at the Delhi School of Economics. This article summarises his very enlightening lecture. We also had the privilege of interviewing Anirban Sir about the field of Behavioural Economics post the lecture and it gives us great pleasure to share the link of the transcript of the interview below.

Cooperation and reciprocity are not unique to the human race. Vampire bats are bats that feed on the blood of animals, mainly livestock. When a bat gets hungry, other bats feed it by regurgitating their own blood. Indeed, helpfulness and mutual dependence are characteristics of most forms of life and yet economists have not been able to model human behaviour in its true form. Consumer theory, for instance, assumes that consumers are ‘rational’ and to that end take selfish decisions in order to maximise their own satisfaction. Neoclassical economic models assume that when everyone in society maximises their own utility, the satisfaction of society as a sum of all individual economic agents, rises. An example Anirban Sir cited was that of smoking. A ‘rational’ smoker maximises his own satisfaction when he smokes to his heart’s content but not only is smoking injurious to the smoker’s health but also creates a negative externality in terms of the ill effects of passive smoking on society.

Behavioural Economics is questioning this role of an economic agent as a ‘utility-maximising machine’. The lecture began with a very interesting example introducing the audience to Game Theory and how game theoretic agents make decisions. A prisoner has fled jail and is being pursued by a group of policemen. In his flight, he reaches the banks of a river and has to cross it in order to escape. There are three bridges he can use to cross the river – the short bridge, the medium length bridge and the longest bridge. On the other bank of the river is an officer, who will receive a hefty cash reward if he catches the prisoner. Both the prisoner and the officer have to make a choice. The prisoner can choose only one bridge to cross and the officer can choose only one bridge to man.

Here, we assume that the prisoner and the officer know about the choices the other faces and the payoffs the other receives. The prisoner has an incentive to take the shortest bridge to flee as quickly as he can but he knows that the officer will expect him to make such a choice. Similarly, the officer knows that the prisoner wants to flee as soon as possible but he also knows that the prisoner expects him to think that the prisoner will take the shortest route. This chain of assumptions can go on indefinitely. This mutual knowledge of the other’s payoffs and incentives influence the behaviour of the ‘players’ of the game. This example shows the superiority of game theoretic agents over rational microeconomic agents. Both microeconomic and game theoretic agents are rational in terms on consistency of decision making, however while the homo economicus does not take into consideration anything or anyone besides his own self-interest, the game theoretic agent bases his decisions on what he knows about the incentives of others (Mutual knowledge). The lecture went on to describe the basics of Game Theory – the Prisoner’s Dilemma (although with a twist to study benefits) and Nash Equilibrium.

Behavioural economics tries to study why people don’t act like the rational agents of neoclassical economics. Human cooperation can take market and non-market forms. Market interaction includes lending money and incomplete contracts (enforceable contracts that do not specify all the intricacies of the deal). When an agent lends money to another, there is a certain inherent cooperation between the two to adhere to what the loan contract stipulates. Non-market interaction includes maintaining queues and donating blood as some examples. Thus, a rational agent only gains by jumping the queue, yet people don’t do so, and wait patiently for their turn. This led the topic of discussion towards trust – a very important aspect in the study of human behaviour.

The rationale behind trust and cooperation among human beings can be explained by the following points –

  1. Reputation – People tend to cooperate with others in society in order to maintain their reputation and social order. So, a person stands in a queue and waits for her turn even though rationally, jumping the queue will give her greater satisfaction. This is because people are conditioned to follow certain social norms and moral behaviour and going against these can cause them to lose societal approval.

  2. Mutual assistance over a long period – An affiliation or partnership among people over a long period of time fosters trust between them. This influences their decision making and makes them more likely to cooperate and take actions which go against the rationality assumptions.

  3. Complete contract – An official contractual obligation between two parties, individual or institutional, bounds them and leads to compulsory cooperation in most cases.

  4. Warm glow – Many people engage in philanthropic behaviour and social service activities because it gives them a warm glow i.e. a feeling of self-satisfaction. Again, a rational entity would never engage in charity but in reality, we see the opposite happening.

An interesting example of cooperation is the increasingly common phenomenon of mob lynching seen in the country. Mob lynching is a consequence of herd behaviour in people. When a person sees a huge crowd beating someone, he stops making value judgements and assumes that the person must have done something wrong to warrant such punishment. He stops making his own inferences and joins the crowd. So even a practice like mob lynching can be explained within the purview of ‘rationality’, in the sense that such behaviour is not inconsistent, as hence ‘rational’ (although unethical). Economics is so often criticised for assuming rationality. Sir explained how behaviour that differs from any established model is not irrational as long as that behaviour is consistent, providing a fresh perspective to the understanding of rationality.

The main focus of behavioural economics is to extend the rationality paradigm set by neoclassical economics that has made economic research stagnant and monotonous. This field of study will usher in a brand-new era of economics that is more practical, relevant, flexible and adjustable to its surroundings. Governments and private institutions across the world are incorporating psychological and behavioural theories into their policy structure. Undoubtedly, the Academic Summit gave the students an insight into the future of the field of Economics and the latest developments in the academic world.

We take great pleasure in presenting the interview transcript! Click on the link below to read on!

Academic Summit Interview 1 with Dr. Anirban Kar

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