India can gain immensely from 2017 economics Nobel winner’s work

India can gain immensely from 2017 economics Nobel winner’s work

Ram Prasad | 10 Oct 2017 04:07 PM

FILE - In this June 22, 2014 file photo US economist Richard Thaler poses for a photo during the award ceremony for the world economy prize in Kiel, Germany. The Nobel economics prize has been awarded to Thaler of the University of Chicago for his contributions to behavioral economics. (Carsten Rehder/dpa via AP, file)

It has happened to all of us. The Nobel Committee announces winners and we are not always familiar with the names, leave alone their work. There are some experts who talk about their work and we often struggle to find relevance of it in our daily lives.

This year’s Nobel in Economic Sciences is a bit different. The winner as most of you know is Richard Thaler, for his contribution to Behavioral Economics. His partner in academics, Daniel Kahneman, won it in 2002. Many people know Thaler as the co-author of the book ‘Nudge’, which democratised Behavioral Economics.

In simple terms, Behavioral Economics takes a more realistic view of human decision making, that we are not as rational, as objective as it is made out to be.  In Thaler’s words  “In order to do good economics you have to keep in mind that people are human”.

His work combines economics with good psychology.. He talks of Econs, as in rational agents and humans, as in people like you and me, who break New Year’s resolutions, who buy gym memberships but don’t visit the gym very often. Most of us think we are better than average drivers, we are afraid of wrong things like air travel and worry not so much about real dangers like road travel. We treat salary money differently to bonus money, though rationally speaking, it’s money. We place a higher value on what we already own.

Thaler’s books, ‘Nudge’ and, the more recent, ‘Misbehaving’, connect at a personal level, irrespective of whether or not you have a degree in economics.  This I think is his biggest contribution to the field of economics.

There are enough pieces out there that talk about his work across a range of topics. I want to focus on the relevance of his theories to solving some of our key challenges in India.

Consider some of the flagship programmes of the Modi Government: Swachh Bharat Yojana and Jan Dhan Yojana. There is a strong behavioural component to these problems. Building toilets is the easier part. Getting people to use them is tough. Opening bank accounts is the easier part, getting people to save and become better money managers is tough. Close to 80 per cent of road accidents are due to driver behaviour. Prime Minister Narendra Modi has talked about the behavioural nature of these problems several times.

The ‘rational’ policymaker in Government wrongly thinks that people will always do the right thing. That they will use toilets, that they will eat healthy, that they will save and they will drive safe. A healthy dose of Behavioral Economics in policy  can help in making them more effective.

People are human, they don’t understand long-term health risks of open defecation. What is the near term benefit we can offer? People discount long-term benefits of saving. How can we use Thaler’s concept of mental accounting to tie savings to short-term goals? How can we use defaults and prompted choices to help people do what they intended to do.

The Governments of several countries have set up units to infuse behavioural insights into public policy, including the UK, Australia, Singapore and Qatar, with very good outcomes.

There has been talk of setting a Behavioral Economics policy unit under Niti Aayog for a while. I had the pleasure of accompanying Prof Thaler to meet two senior Cabinet Ministers to present application of Behavioral Economics in the Indian context. One Minister got the concept while the other was focussed on the solution, which is a typical problem in this space. Many get smitten by narrow examples rather than the philosophy behind Behavioral Economics.  Irrespective, I was surprised at the lack of progress in spite of strong intent, thanks to our inefficient bureaucracy. Perhaps one of the areas we can use Thaler's work is in changing the behaviour of bureaucrats!

At a personal level, for someone who is into application of Behavioral Economics, this year’s prize is very gratifying. I have had a handful of interactions with Prof Thaler and was impressed by how funny and approachable he is. More importantly, how extremely optimistic he is, quite in contrast to his partner in this journey, Daniel Kahneman.

His answer when asked how does he plan to spend his prize money sums up his nature: “I will try to spend it as irrationally as possible.”

A perfectly rational world would be incredibly boring, don’t you think?

(The writer is an entrepreneur and innovator who works on behavioural science and economics. He tweets @ramprasad_c)

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