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Why do most of us lie to others? Why do most of us lie to ourselves? Why do we think of
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human beings as a rational species when we clearly are not ruled by reason? Why do we
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imagine that we are the masters of our destiny when in reality we behave the way we do because
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of the way our brains are wired? What makes you who you are? Why are you even listening
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Welcome to the Seen and the Unseen, our weekly podcast on Economics, Politics and Behavioral
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Science. Please welcome your host, Amit Verma.
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Welcome to the Seen and the Unseen. Today's episode is about behavioral economics. Richard
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Taylor, one of the pioneers of this field, won the Nobel Prize for Economics recently
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and honestly he might as well have won the Nobel Prize for Understanding Human Nature.
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I keep telling friends that while the term sounds geeky, behavioral economics is, simply
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put, the study of human nature.
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To celebrate Taylor's Nobel Prize and in fact the whole field of behavioral economics,
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I asked Nidhi Gupta to join me on this show. Nidhi is the head of postgraduate programs
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at the Takshashila Institution in Bangalore and is a graduate of the London School of
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Economics and Political Science. One of her main research interests is behavioral economics.
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I caught up with her a couple of weeks ago.
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Nidhi, welcome to the show.
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It's a pleasure to be here, Amit.
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Nidhi, we are both pretty much fellow behavioral economics geeks in the sense that, you know,
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we've studied the subject and are both fans of Richard Taylor who won the Nobel Prize
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Absolutely, yes. And I'm very excited that, you know, finally behavioral economics is
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getting its due and it's being recognized and now...
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And of course, Daniel Kahneman won it so many years back as well. And, you know, I often
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think that the term behavioral economics makes it sound more niche and specialized than it
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should be, that what it really is, is the study of human nature. And therefore, if you
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want to sort of understand the unseen effects of many things, understanding human nature
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is a key to that and therefore behavioral economics is a key to that.
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Right. In fact, you know, economics is finally about the incentives that people respond to
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or how they use the scarce resources. And if you're talking about people, you can't
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take the psychology of people away from it.
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That's what behavioral economics does, right? It brings that psychology back into the hard
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science that economics is kind of touted to be.
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And you actually teach behavioral economics in the Takshashila courses. And therefore,
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what I'd like to sort of do today is, let's talk about some specific funders of behavioral
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economics and which have come from behavioral economics. Our first example, in fact, being
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a term coined by Thaler himself. And then illustrate that with what is happening in
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the world around us, both in politics and otherwise.
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Perfect. So I like to think of behavioral economics, I kind of separate heuristics and
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biases. So heuristics are basically shortcuts that people use to make decisions and heuristics
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kind of lead to biases. So what I'd like to talk today is biases, you know, we won't touch
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upon heuristics. So the first one that I'd like to start with is something known as endowment
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effect, which basically says that, you know, you value the things that you own much more
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than somebody else does. In fact, so much so that the moment you start owning something,
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you know, the value that you ascribe to it becomes higher than what you did just before.
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And this kind of, you know, plays out really well. If you think of how when a government
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is in opposition, how they are always critical of the policies that the government in power
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is, you know, coming out with or the policies that they have. But when they themselves come
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to power, they take a lot of these policies and continue with them. In fact, you know,
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you see now a lot of I think around 19 policies of the UPA have been taken by BJP and renamed.
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And now they are suddenly, you know, they've become these very nice policies that are going
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to change India and that are going to bring about prosperity. So whether you look at the
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Jan Dhan scheme, you know, the Pradhan Mantri Jan Dhan Yojana, there was a UPA scheme which
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was called Basic Savings Bank Deposit Account. Or you look at Swach Bharat Abhiyan, you know,
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the flagship scheme. There was the Nirmal Bharat Abhiyan or a total sanitation campaign
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that the UPA had. There isn't a lot of change in what these policies, the details of the
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policies. But it's just that now because the government, it's the BJP's policies or the
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India's policies, they suddenly, you know, are the right… they have all the right elements
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to it. Or you look at Indira Awas Yojana, which was UPA scheme, and now it's called
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I think Pradhan Mantri Awas Yojana. And it's funny that when you even go to Pradhan Mantri
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Awas Yojana's website, actually some of the documents, if you open them, they actually
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still refer back to Indira Awas Yojana. So it's funny that, you know, they say, oh, Indira
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Awas Yojana was all crap. And, you know, how it would not meet the goals. While you yourselves
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are, you know, incorporating most of the things of that policy, just a different name.
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And you'd argue that this is not just a question of political convenience, but that humans
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are actually wired to value something more when they own it than they would if they did
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Exactly. I mean, you could find a lot of individual examples that, you know, for example, if you're
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in a secondhand market, right, you want to sell your car, you would almost always think
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that your car, you know, should fetch you higher than what anybody else is willing to
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pay for it, right? That's a classic example.
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Right. And I like I was a professional poker player for a few years and I always use poker
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to give to illustrate examples of behavioral economics. And the classic example of this
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in poker is that if someone tells me about a hand that he's playing and ask for my advice,
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at some point, I'll be able to say, hey, no, man, you should fold it. It's not classy.
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We do keep playing. But if I'm myself in the same situation, you'd continue playing. Instinctively,
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I want to continue playing. I have to fight that impulse because now that it is my hand,
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I value it more somehow magically and can't think objectively about it.
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Right. So this is one example that we can think of. This is one of the biases. The other
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one that I like to talk about is the sunk cost fallacy. So traditionally, economics
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would tell you that if you've put in your time, effort or money in a particular, you
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know, endeavor, you should stop continuing further if you don't see benefits coming off
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it. But as humans, if we've invested time, effort and money in a particular thing, we
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actually keep adding on to it. And, you know, there is this fallacy that now that I have
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put in some effort and money, let me just, you know, continue and see what comes of it.
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For example, if I bought a movie ticket and then I hear a lot of people saying, oh, the
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movie was crap. But now that I've bought the ticket, let me just go and, you know, watch
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the movie anyways. And it's a fallacy because the time you're spending is also worth something
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and you're wasting that time. And you should just think of the price of the ticket as a
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sunk cost. Absolutely. And in fact, it's not just individuals, right? Let's see how it
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plays out at a public policy or the government level. Now we all know that Air India, you
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know, it was known for a long time that it's not making profits. It does not even provide
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the quality of service that's expected of an international airline. But look at how
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long it survived. Look at how much money went into keeping Air India and Indian Airlines
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alive. Even though we got so many budget airlines and really good quality international airlines,
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you know, in the market, why has the government not done away with Air India? It's only now,
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you know, in the last two years that we're talking about privatization of Air India
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or, you know, doing a mix of like a PPP or actually just doing away with it. It's only
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now that we're actually skeptical. To me, it's just talk. It's just yet to see what happens.
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Or for example, think of bailouts for public sector banks, right? Right. Now that any public
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sector unit, now that you've put in money, you know, you, you kind of think, oh, let
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me just put in a little more and see, maybe it will get better. While the rational, you
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should think that, well, that money is gone. That effort is gone. Why put in more resources
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and why unnecessarily, you know, enhance the costs, the overall costs. Would we continue
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the recapitalization of banks is not something that, you know, is very old. Maybe three,
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four days ago is when we heard of recapitalization again of public sector. And it's going to
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happen again and again. It's going to happen again and again. I can think of various examples
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of this from everyday life. I mean, the standard poker example is that you continue in a pot
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when you should fold because you're, you're thinking, oh, I've already put in money. Even
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though the rational decision at that moment in time, the plus CV decision is to fold.
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And there are trivial examples in real life. Like I may pack a Tiffin from home, but then
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my colleagues say, Hey, let's go to that nice Japanese restaurant. And I really want to,
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but I'm saying, no, I made a sandwich in the morning and it's in my Tiffin and it'll get
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better, you know? And that's again, you should treat that. I love how you understood all
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of behavioral economics with poker in mind. I just love it. With poker in mind. And it
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actually, and fallacies like this is serious real life implications. Like I think a lot
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of bad marriages, for example, continue long past the point where they should because of
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the sunk cost fallacy, because of some battered woman saying, I've already spent 20 years
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with this guy. How can I walk out now? Or maybe it will get better. Maybe if I put in
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more, sure. And you can rationalize all that. You know, what Taylor mentions is that a lot
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of people in the U S thought that, um, we should get out of Vietnam war, but it continued
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exactly. And that he at least says that, you know, that's an example of sunk cost fallacy.
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And therefore, you know, these little fallacies would seem like, you know, fancy phrases in
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textbooks actually have real world humanitarian consequences and affect millions of people.
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Right. What's your next example? So the next example I, uh, would like to talk about is
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called present bias in easy terms and hyperbolic discounting in very technical terms. But that
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is something that all of us can relate to an individual level, which is I value the
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now much higher than I value the future. So I want a smaller, sooner reward than a larger
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later reward. I would rather have the pizza now than think about, oh, in the next five
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years I will have put on weight and I will have to exercise or I would rather break my
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new year resolution now than worry about how I will feel bad about it sometime later. Right.
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And we all do it all the time. Procrastination, laziness, overeating, indulging. We do it
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all the time. I feel like you're describing me or myself and even not saving enough, for
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example, not saving enough. And, uh, at individual level, you know, you can tackle these things
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by committing to certain things. So you say that, okay, I will enroll myself in this marathon
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and only if I have run so much, am I going to indulge in a big dessert, right? A lot
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of people do that. But where I see this playing out in public policies, look at how the Germans
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in the U S for example, have the 401k savings or in India where we have the employee profit
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and fund schemes, right? It is a welfare scheme, of course, but somehow the Germans have under
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that if we don't kind of force people or make people commit to their own future savings,
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they would not do it. So what they essentially do it, they, they say that, no, you must save
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this much. And they also have your employer put in, you know, an equivalent amount. And
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when you retire, you have this big fund, you know, there for you. And this is especially
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relevant for people who don't earn really well. So, you know, the EPF is mandatory for
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people for companies with more than 20 people, I think, and for people who earn whose wages
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are below 21,000. So maybe not for, you know, people who work in big private companies,
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it's not mandatory, although even these companies register for it. But think of somebody who
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earns 15,000 16,000 for them building up this sum is really important. And they might not
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do it because there are always priorities, competing priorities in the here and now that
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you want to take care of. So like, like they say, right, eat, drink and be merry for you
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may die tomorrow. But you actually do not die tomorrow. And you continue to live for
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a long time. And it's better for you to save, save up for that. And if you can take a slight
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tangent, this brings me to one of the criticisms many people have of Taylor per se, not the
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field, which is of the term that I think he coined called libertarian paternalism, and
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which the book nudges about, which he co wrote with Cass Sunstein is almost that the government
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has a duty to nudge people in these directions to mitigate the effects of their biases. And
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you know, my typical instinctive criticism to that is that while it is one thing to understand
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human nature, it is another to then coerce people in different ways, which you know,
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the EPF being compulsory for firms over a certain size is an example of that. It is
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another to coerce people and take that agency away from them. It's almost like saying, Hey,
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you're too stupid to make your own decisions. That's the big criticism of the whole field
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of behavioral economics. In fact, if you think of it, libertarian paternalism is an oxymoron,
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right? Exactly. You can't have libertarian and paternalism in the same. Exactly. And
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you can't speak of them in the same breath. But that's what Taylor and Sunstein, at least
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how they feel it is that we do not take choices away from people when we are thinking of behavioral
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interventions. They always are free to choose what they want. It's just nudging them in
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a particular direction. And, and of course there are critiques and critiques of critiques
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and it never ends. Yeah. I mean, yeah, I just feel that if a guy is earning 15,000 a month
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and he's saying, no, I don't want to give any of this away to a fund for when I'm 60,
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I need the money now. That choice should really be up to him, even if he recognized that this
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bias exists. Well, you also can then think of if these people haven't saved enough, then
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it's up to the government to then provide for them. Right. We also say that, Hey, well,
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the government should provide healthcare. But if the government says, well, you should
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pay for your health insurance so that when you are sick, you know, we will be able to
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fund that. That's the example that at least NHS in the UK, you know, they, they say that
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the burden of healthcare is increasingly becoming larger. And if the people don't save up for
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their health or save up for their life insurance, it is for the government to then spend money.
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We also criticize the government then that, Oh, you know, where's the money for it? So
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I agree with you that, you know, it shouldn't be coerced upon people. It should rather be
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voluntary profit and fund. But, and I'm not one for EPF, but that there is a mechanism
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that is provided as a public policy that, you know, there are these commitment devices
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that are provided by the government itself. And you can then draw this pension that I
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think is an example that we can look at. But I mean, I will certainly say that wherever
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one stands on this issue and one can agree to disagree, it's an unfair criticism of behavioral
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economics because behavioral economics, I, the way I see it is descriptive. It's not
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prescriptive. A lot of these specific prescriptions from which, you know, um, coercion comes or
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agencies taken away from individuals is comes from individual economists, but the field
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itself is just describing what human nature is. And, and that's what it tries to do that.
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This is how humans behave. Look, you know, we tried to do this, but this is what happened
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in reality. And it just tries to describe the behavior and then maybe draw insights
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from it and then say, next time they are behaving this way, maybe we could, you know, and then
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that argument can happen, but at least it's an informed argument. For example, this whole
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thing of default options, right? Right. Where, uh, and I like to give the example of, um,
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this give it up scheme where the LPG scheme, uh, you know, our prime minister went about
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saying everybody now is enrolled in the subsidy and now give it up. I wanted to say that,
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you know, I mean, my prescription for it would have been that let nobody be subscribed to
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it. Say that you are entitled to it as a citizen, you are entitled to it, but your default position
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is that you're opted out and let only those people who really need it, you know, then
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opt in and make the opt in really easy, make it really easy for people to get the subsidy.
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And again, how you give subsidy remains the same, but now a lot of people are not giving
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it up just because that's the default position. I'm just lazy to go to some place and you
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know, inertia inertia is the most present bias is all about. Yeah. But I would also
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my, my instinctive reaction there is that if you make it an opt in thing, then you inevitably
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create rent seeking, it's easy to say in theory that it should be easy to opt in, but you'll
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create rent seeking and you'll, you know, everything else that follows with it. That's
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true as well. Let's move on to the next example. All right. So the next example I like to talk
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about is about social norms. And there are a lot of things in behavioral economics that
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revolve around this. So, you know, there are things called herd behavior, confirmation
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bias or social desirability bias, which all essentially talk about how human behavior
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is set in a social context, right? You're influenced by the society, by the people around
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you and the decisions you take or the preferences you have are not just your preference. Maybe
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they are your preferences, but yet they're almost always influenced by the people around
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you. So what, how you behave is set in a social context and their people want to behave how
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their friends behave. So you see, uh, you know, echo chambers forming on social media.
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That is, I want to talk like my friend. So I will, you know, adopt that line of opinion.
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And it is similar set of people who get, you know, um, who get caught in these echo chambers
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or look at confirmation bias where I have a certain viewpoint and I'm always looking
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at or reading something with this thing of, Oh, this, this is an alignment with what I
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was thinking. What didn't I say? So, you know, you're always trying to value the information
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which confirms your bias, but you ignore everything else. And that's just human behavior, right?
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I mean, you would do that, but what this results in is, um, something known as private truths
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and public lies. And you would know of it, you know, so what we do is in private, we
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might hold certain preferences, but because of the social norms, because of this social
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pressure that we have in public, we might state our preferences very differently. Right?
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So, um, for example, Timur Quran and economist talked about preference falsification that
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in public, we tend to falsify our preferences. Now look at how after the new dispensation
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the BJP has come to power, we suddenly have this surge in, you know, uh, anti-Muslim riots
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or the Hindutva bigotry that we see suddenly, you know, there is just so much of it, whether
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it's Pelukan or it's Akhlaq. Why was this not happening for the last 60 years? Because
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maybe the social context was such that this was taboo and maybe people wanted to talk
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about these things, but they were not doing because of the social context. And maybe the
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context right now is changed that, you know, some people have, they are the norm entrepreneurs
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and they've set this norm. They took that extra chance and said, well, we can talk about
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this. And suddenly this whole bunch of people find that they can now express their hidden
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preferences. I didn't know column about this a couple of years ago when the whole Trump
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wave was happening. And, um, uh, and I think to a large extent, social media empowering
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as it is, and I think it's a net positive good enormously. So, but social media has
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enabled this in the sense that a lot of the phrase I use is closet bigots. There'd be
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a lot of people who are closet bigots, but they don't express a bigotry because it's
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it seems impolite or unacceptable around them to do so. But suddenly through social media,
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they realized that there are actually a lot of people like that. They can come out. There
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are a lot of them and they feel empowered to come out and express a bigotry. And as
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more and as they start doing that, it becomes a cascade. In fact, Timur Karan called this
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a preference cascade. You know, first, I think the example he gave was of the Soviet union
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where everybody assumed that all the individuals were for the Soviet state. But once people
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began to express otherwise, it kind of cascaded and the downfall of the Soviet union actually
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seems very sudden, but had been building up. That's what he talks about. That social revolution
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seem very sudden, but they're always building up because there are these individual preferences
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that are hidden. And then suddenly some people and which Cass Sunstein, you know, calls them
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norm entrepreneurs that these norm entrepreneurs take the chance and you know, they say, okay,
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we'll speak the opposite. And then suddenly they find a bandwagon and social media enables
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and magnifies this. You've seen it happening, right? The polarization that social media
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is doing. Yeah. And you've seen this with Trump and the alt-right in the US. You've
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seen this with the white supremacist rallies. I mean, the increasing number of rallies that
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we see. So that's what I, and the interesting thing is we don't even know if these are the
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real preferences now or other people again falsifying their preferences, you know, in
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their heart of hearts, it's actually something else. But because of this new context, the
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social context or the new language that people are speaking, they start to speak this. They
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start to confirm to, you know, what is the current content. And the interesting thing
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is that when you, when we talk of preference, falsification is not just falsification for
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the sake of others. You're also lying to yourself very often. And for example, you know, a classic
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example of how even these preferences which seem to now be truly expressed might actually
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be falsified as you're saying, is that if you sort of conflate criticism of the government
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with being anti-national and, you know, bring nationalism and Modi together in the same
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sentence, then people are afraid to, for example, during demonetization, it was framed in such
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a way as we're attacking black money. And if you speak up against it, you're speaking
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against the nation. And you would have had people expressing support for demonetization,
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even though if they really thought about it, they might not feel that way. Right. And even
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though right now, I mean, I'd like to think that, you know, if suddenly the cut and dispensation
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actually came out and said, oh, yes, this was a mistake, it's never going to happen.
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But let's assume, let's, you know, think that it happens. I'm sure a lot of those people
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who were, you know, singing songs about how demonetization is going to, you know, clean
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all the black money will actually then start again saying the same thing that the government
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says that, oh, yes, it was a mistake. So it's just about keeping in tune with the current,
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you know, another bias, a hindsight bias would begin. And they'd imagine that, hey, we thought
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it was crap all along. Yeah. And it happens all the time. I mean, let's not blame others.
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You and I would do it as well. Right. Everybody would do it. I mean, we are not standing on
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a pedestal and saying, oh, you humans are like that. We are also like this. We suffer
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from it. But what's important about behavioral economics is that it then helps you understand
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these biases within yourself. And within the context you operate. Exactly. Yourselves and
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the policies that you have, you know, what your government does. And the quality of that
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self reflection can help you either live a happier life or be more aware of your unending
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unhappiness. Yes. Let's move on to the next example. So the next example I'd like to talk
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about is, it's called peak end rule. What that necessarily says is that the sum total
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of how a person remembers an experience is defined by how they felt at the peak of it
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and at the end of it. People tend to ignore the rest. So if I were to ask you, hey, Amit,
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how was the Bangalore Lit Fest? You would possibly remember the highlight of it. And the, you
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know, if you attended the last few sessions, you would forget the rest. And the example,
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a rather controversial one that, you know, I'd give you is that think of Indira Gandhi's
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rule. If you'd ask most people, you know, how was her rule? They would talk of emergency,
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which defined the peak of her rule. And they would talk of, you know, how she was assassinated.
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So her becoming a martyr. And that's how we think of as her rule. So there was a lot more
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to it, by the way, she ruled for a long time. Yeah. Right. And I'm not taking sides of whether
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she was good or not. So they remember the peak of it and think of her as an authoritarian
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the spot and they'd remember the end of it. And they'd think of her as a martyr who died
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for the nation. Absolutely. And both of those may have an element of truth, though I think
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the former has far more truth. I would agree, actually. But that's also how I mean, so we
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tend to forget that there would have been other elements of it. And most of it actually
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in her case was not that great. But that's how we remember most of the things. And that's
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how we look back on our own lives and which is why, you know, memory is selective. What
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we remember is not really what happened. Yeah. So we are fabricating a lot of things in between
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what we actually remember is the peak and the end most of the times. The rest of it
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is we are just filling it up, right? We are fabricating it. Right. And we've reached the
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end of the podcast. And at this point, I will ask my listeners to reflect on what you remember
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of this podcast. Chances are it will be the peak and the end. Nidhi, thank you so much
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for coming on the show. Thank you so much, Amit. It was a pleasure.
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If you enjoyed the show, you can follow Nidhi on Twitter at Nidhi1902. You can follow me
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at Amit Verma, A-M-I-T-V-A-R-M-A. And if you want to hear earlier episodes of The Scene
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and the Unseen, please hop on over to sceneunseen.in. Thank you for listening.
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If you enjoyed listening to The Scene and the Unseen, check out another show by IVM
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Podcast, Simplified, which is hosted by my good friends Naren, Chuck and Shriketh. You
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can download it on any podcasting network.
