Why do most of us lie to others? Why do most of us
lie to ourselves? We do we consider human beings as rational species when we
clearly not rely on reason every time? What makes you who you are? The answer
to this lies in the field of Behavioural Economics. Richard Thaler, one of the
pioneers of this field, won the Nobel Prize recently this year. Behavioural
Economics is simply the study of human nature. Here are some concepts related
to this field which explain our everyday actions and how we are wired. We will
also look at examples from Government and Policy perspective as well as at an
effect- We value the things that we own much more than
somebody else does. The moment we start owning something, the value we ascribe
to it gets higher.
Level- The government in opposition is always critical of
the policies of government in power. When they themselves come into power, they
take a lot of these policies and continue with them. Around 19 out of 23
policies of UPA have been renamed and adopted by BJP. Here are few of them:
Jan Dhan Yojna
UPA- Basic Savings Bank Deposit Account
Swacch bharat Abhiyan
UPA- Nirmal Bharat Abhiyan (Total sanitation
Beti Bachao, Beti Padhao Yojna
UPA- National Girl Child Day Programmes.
level – Participants in a study were given, at random,
either a lottery ticket or two dollars. After some time, they were given the
option to switch. Most of them refused, because they had come to value whatever
they had been given because it now belonged to them.
2. Sunk Cost Fallacy- Economics would tell
us if we have invested time, effort and money in a particular project, we
should stop it when we don’t see results. But if we have invested something, we
tend to put in more money in it even when we don’t see results.
level- Air India was not making profits. Look at how much
money went into keeping Air India functioning. Only now, they are mulling over
other options like PPP and disinvestment.
at individual level- A classic example is -A lot of bad
marriages. “I have already spent 20 years, maybe it will get better.”
Norms- It describes how human behaviour is set in a social context. The
preferences we have are always influenced by people around us. People want to
behave how their friends behave.
Echo chambers forming on social media. According to Wikipedia, An echo chamber
is a metaphorical description of a situation in which information, ideas, or
beliefs are amplified or reinforced by communication and repetition inside a
defined system. Inside a figurative echo chamber, official sources often go
unquestioned and different or competing views are censored,
disallowed, or otherwise underrepresented.
A classic example can be of Demonetization. The
Government projected demonetization in a way so as to curb black money. So if
you are speaking against it, it suddenly meant you are speaking against the nation,
even though you might think differently. People prefer keeping in tune with the
current trend. We don’t even know whether these are their actual preferences or
they are again falsifying their preferences.
4. Peak-end Rule-
It says that the sum total of how a person remembers and experiences is defined
by how they felt at the peak of it and the end of it. They forget everything
else. We always remember the highlights or the ending.
Think of Indira Gandhi’s rule. If we ask people about her rule, they would
always talk about emergency and how she was assassinated. We tend to forget
there might be other elements.
Thus, the integration of economics with psychology
can play an important role in understanding various aspects of public policy as
well as human behaviour. Behavioural Economics shows us how can we have a
better understanding of risk and our reaction to risk so that we don’t miss out
an opportunity or don’t go overboard. The cognitive forces which impact our decision
making every day can be studied deeply and help us remove our greatest threats-