People and patience, post demonetization

(The piece originally appeared in The Hindu, on 2nd January, 2017)

Patience is hardly an attribute that is associated with the Indian psyche, particularly of the male variety. Instances of road rage at the slightest pretext leading to death are far too common. A flock is way more common a formation than a queue. Even if a queue is to be formed, violators run amok in total disregard for the conscientious and often the geriatric in the waiting. The urban phenomenon of delirious honking is yet another manifestation of patience running wafer thin, perennially. The recent past, however, has thrown up a remarkable exception, namely, general attitude in demonetized India.

As we near the two-month mark, a consensus seems to be emerging among economists, from either side of the ideological spectrum, that demonetization will lead to a significantly lower real GDP growth in the transition phase than expected but will have no effect in the long run. Estimates from academics and financial analysts suggest that demonetization may lead to a decrease in annual real GDP growth of anything between 1 and 2 percentage points than expected. One of the many crucial assumptions of course is that the national accounting norm remains the same. Irrespective of what the exact number is, evidences suggest that demonetization has left behind a trail of economic consequences in terms of job loss and diminished economic activity, particularly in the informal sector and will continue to do so in the near future. Besides the pure economic cost, the psychological cost of having to wait in serpentine queues for a couple of thousand rupees is enormous. And queueing up may not yield rewards anyway as ATMs continue to run dry, especially in the semi-urban and rural areas. Initial reports suggested that the queues in the second month has been significantly shorter than the first. Now it seems the shortened queues have a different explanation - people have a fair sense of how long cash will last, if at all, and rational that they are, do not wait if they think their turn will not come. And all this for money that is rightfully theirs and this makes demonetization even more exasperating and psychologically costly.

For the pain that demonetization has inflicted, the aam aadmi has shown an extraordinary restraint and patience. There has been no major threat to public order despite considerable hardship, there has been no major protest, let alone violent ones, against demonetization. This is quite unlike other instances of sudden and unexpected economic downturn across the world – the Argentinian riots in 1989 has largely been attributed to sustained hyperinflation in their economy. The 1991 structural adjustments driven economic reforms in India led to considerable labor unrest in the mid 1990s. Arab Spring, which promised to change the political landscape in the middle east earlier in the decade, has partly been attributed to the widespread unemployment and economic hardship of the Arab youth. Further, research suggests that negative income shock across the world leads to greater conflict – in fact even scarcity of rainfall, which is entirely natural and thus exogenous, has been found to have a strong effect on violence and conflict in India.  It is remarkable that the overall sentiment post demonetization continues to be largely positive, despite its obvious immediate economic impact, so much so that there is hardly any wind in the oppositions’ sail. The moot question is why.  

Some have argued that the idea of sacrifice is seen as the hallmark of Indian civilization and the current dispensation has effectively appealed to it. It has given an impression that any act which is critical of demonetization is in effect a violation of the spirit of sacrifice, which is an elemental part of our history and culture. But this is only part true. While sacrifice in itself provides a moral tone, sacrifice for a greater common good offers the temporal foundation. And that temporal foundation was initially to eliminate black money and is now to engender a cashless society. But that is not all either. The government and its social media allies have gone a step further to situate demonetization on the tried and tested plank of nationalism. So a dissent to demonetization is being treated as a dissent to the idea of Indian nation state. So much so that the Indian military, which till now had been the most luminous emblem in the pantheon of nationalism, has been replaced, however temporarily, by the Indian bank teller. Given the automatic tellers have been rendered substantially ineffective, the hardworking, resilient and ever alert human tellers have been accorded the status of the jawan. An unfortunate death in the ranks of bank personnel has even been conveniently co-opted into the narrative of martyrdom.

It is true that the cashless, opinion making, upper-middle India has not faced the brunt of demonetization. But even the section of the people which has been directly hit as a result of the policy, has exhibited an impressive composure, often found wanting on other occasions. Understanding how human behavior can be changed is a fascinating academic discipline. Much advances have been made here in the recent past, but none as spectacular as the effect of a generous dose of nationalism, however devoid that idea may be of the very people who constitute the nation.

Kahneman's lecture notes on endowment effect

Here is a succinct summary of two standard market anomalies, which were demonstrated by some early experiments by Thaler and Kahneman. It is also quite exciting to see a conference proceeding from the early days of Behavioral Economics - some of the initial ideas may not survived, those that have, is in some distilled form, the bedrock of modern Behavioral Economics.  To that extent this lecture note has quite an archival value.

Daniel Kahneman's lecture notes on endowment effect

Rethinking Public Policy with Nudges from Psychology

The piece first appeared in The Wire.

Economics, which usually provides a useful framework through which public policy issues can be analysed, often assumes that people are rational actors; meaning that people are selfish, wilful, have perfect foresight and remarkably precise beliefs. However, evidence suggests that our behaviour in day-to-day life depends on a richer set of factors than classical economists would have us believe.

Sample this. Sixty-seven years since independence and our republic is still taking baby steps to induce people to avoid open defecation and use covered toilets instead. A well-intentioned policy helped construct toilets in rural areas. It turns out that that these toilets have attracted few users. What went wrong? Classical economics will find it difficult explain this.

The answer to such vexing questions might lie in the deeper recesses of the psychology behind such decision-making. For example, one possible way to attract more users to public toilets may simply be to rid the toilets off their roofs.

Advertisers have long exploited consumer psychology to sell their products, politicians have leveraged voter psychology to garner votes but not policy makers. In fact the global recognition that insights from psychology can play a crucial role in shaping equitable, efficient and well-targeted policy is one of very recent vintage.

Take the case of obesity for example. More than one third of the US adult population is obese. Given that obesity has an adverse spillover effect on health, financial and other aspects of life, what should society propose be done about this? It turns out that there are some simple yet cheap solutions to induce people to make healthier food choices. In one study, researchers placed attractive but low calorie and nutritious food such as fruits in strategic locations of school lunchrooms. In another one, they created a “healthier choice only” convenience counter. They found that consumption of healthier food increased considerably in these “smarter lunchrooms” and thereby helped achieve better health and educational outcomes. Classical economics, with its emphasis on prices and incentives, has little to say about what induced a change in behaviour in this case.

The explanation may instead be found at the fault line between classical economics and the psychological aspects of our decision making process – namely, Behavioural Economics. Behavioural Economics, in many respects an antithesis to the classical rational actor framework, introduces a psychologically nuanced conceptual framework where many of the unreasonable assumptions are replaced by empirically founded axioms of behaviour. Needless to say that the BE revolution led to a richer set of predictions in a wider variety of settings.

Richard Thaler and Cass Sunstein – authors of the bestselling book, Nudge,  provided the intellectual foundation of such strategies where people’s choices are altered by making subtle changes in the choice architecture. They named it “Libertarian Paternalism” and argued that people often make poor choices for themselves – it is possible to help them make better choices while at the same time preserving their freedom to choose. Such nudges, concurred Nobel Laureate and the father of modern day behavioral economics Daniel Kahneman, “yield[ed] medium sized gains with nano-sized investments.”

A Cambridge academic turned bureaucrat, David Halpern noticed the power of such psychological nudges in the early 2000s. During a stint at the Prime Minister’s Strategy Unit in UK, Halpern convinced Prime Minister David Cameron that a comprehensive Behavioural Insights Team be formed with an aim to help people make better choices for themselves and the society.

The “Nudge Unit”, as it is better known, was born and has since made some spectacular advances: their simple interventions have helped augment tax revenue, increase electoral participation and encourage organ donation. The success of the unit has inspired similar units in the US and in other international organisations. The World Bank, for instance, has published the 2015 World Development Report on the theme of “Mind, Society and Behaviour”. The volume makes a significant pitch to reorient developmental policies, by articulating the need to interpret the beneficiaries of such policies as homo behavioralis rather than homo economicus.

The root of the many failings of public policy in India is perhaps misaligned incentives. However, given a set of incentives, considerable gains can be achieved by making sure that the design of policies conforms to the psychological insights about how people think, operate and choose. Some of these insights may be intuitive, but most are not. Even for those that are, arriving at these require a deep understanding of how our mind works and choices made. Most of all, they require rigorous and independent scientific evaluations, in order to arrive, as far as possible, at objective and de-ideologised understanding of what works and what doesn’t.

Unfortunately, the current monitoring and evaluation departments in India are hardly capable of providing an intellectual direction in this regard. Effective social and public policy interventions will require a near universal overhaul of the existing evaluation department into an independent and comprehensive Behavioural Insights and Evaluation Unit – one that will be strategically positioned to collaborate and coordinate between academia on the one hand and policy makers on the other, and thereby help harness medium-sized gains with nano-sized investments.