Why Modi needs to un­der­stand Thaler



econ­o­mist Richard Thaler has de­servedly won the No­bel Prize in eco­nomics. It is im­por­tant that his splen­did work is taken se­ri­ously by the In­dian govern­ment.

Thaler is one among a bunch of pi­o­neers who have used in­sights from psy­chol­ogy to craft a more re­al­is­tic pic­ture of how hu­man be­ings in­ter­act in an econ­omy. It is a pow­er­ful chal­lenge to the dom­i­nant view till re­cently that hu­man be­ings are per­fectly ra­tio­nal cal­cu­lat­ing ma­chines. Thaler has shown in his work that our eco­nomic be­hav­iour is marked by lim­ited ra­tio­nal­ity, strong per­cep­tions about fair­ness, the in­abil­ity to stick to goals and what is called hy­per­bolic dis­count­ing.

Hu­man be­hav­iour is cen­tral to eco­nomics, and be­came even more so af­ter a new gen­er­a­tion of econ­o­mists af­ter the mid1970s be­gan to weave as­sump­tions about in­di­vid­ual hu­man be­hav­iour into their mod­els of the macroe­con­omy. The role of ex­pec­ta­tions was also un­der­lined. Th­ese con­cepts have a tinge of psy­chol­ogy to them, and even though ra­tio­nal ex­pec­ta­tions were the dom­i­nant as­sump­tion, it should not be for­got­ten that Her­bert Si­mon won the No­bel way back in 1978 for his work on bounded ra­tio­nal­ity, an idea that re­peat­edly crops up when one is read­ing Thaler as well.

Thaler is not a pure man of the­ory. His work has im­por­tant ap­pli­ca­tions in pub­lic pol­icy. Thaler and his co-au­thor Cass Sun­stein have given us the idea of a nudge, or the de­sign of rules in such a way that peo- ple make choices that a govern­ment thinks is bet­ter for them.

The para­dox­i­cal name they give their idea is lib­er­tar­ian pa­ter­nal­ism—where peo­ple are not de­nied choice, yet nudged in a par­tic­u­lar di­rec­tion. One pop­u­lar ex­am­ple has to do with com­pul­sory sav­ings. A new em­ployee has to choose whether to sign up for a pen­sion plan or not. Be­havioural econ­o­mists have shown that most peo­ple choose the lazy way out by stick­ing to the de­fault op­tion. So a govern­ment can nudge peo­ple to­wards sav­ing more for old age by mak­ing the pen­sion plan the de­fault op­tion, while em­ploy­ees con­tinue to have the choice to opt out.

Sev­eral gov­ern­ments have set up nudge units, with be­havioural econ­o­mists work­ing to cre­ate new types of choice ar­chi­tec­ture. The Naren­dra Modi govern­ment needs to fol­low suit, es­pe­cially as it is keen on chang­ing cit­i­zen be­hav­iour in ar­eas as di­verse as clean­li­ness to use of dig­i­tal money to the ed­u­ca­tion of the girl child.

Here is one ex­am­ple. Should the com­mu­ni­ca­tion about a pro­gramme such as Swachh Bharat fo­cus on the gains from clean neigh­bour­hoods or on the risks from garbage on the streets? Be­havioural econ­o­mists have shown that peo­ple pre­fer avoid­ing losses com­pared with mak­ing gains— or loss aver­sion. So the govern­ment would be bet­ter served if the Swachh Bharat mes­sag­ing is fo­cused on the risks rather than the gains.

This is a triv­ial ex­am­ple, but the broader point is im­por­tant: The Ti­tanic of pub­lic pol­icy of­ten crashes into the ice­bergs of our be­havioural quirks. Thaler and his peers need to be stud­ied in New Delhi and In­dia’s state cap­i­tals.

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