Archive for May 6th, 2008

My Financial Inclusion paper is on OECD website as well

May 6, 2008

I had pointed to my paper on financial inclusion which I presented at IFMR as well. This paper has now been put on OECD website as well.

It has also been included in the Financial Education portal of OECD as part if India reading list

How restaurants use behavioral economics to increase bills

May 6, 2008

Last Sunday, I visited a restaurant in a suburb in Mumbai. I had gone with a couple of friends for dinner. We ordered dinner and despite the person taking the order’s best sales pitch, we resisted any starters/drinks. Firstly, these accessories are costly and secondly, the food is usually wasted.

We didn’t order any Salad but the restaurant served it first. This is usually the practice in most places and you get things like cucumber, onions etc along with the food as complimentary. This brought a smile (I thought it is customer delight) to my friend who loves salads. And then the food arrived and we carried on.

I went home and was about to throw the bill in the bin but something caught my eye. I realised the salad (it was nicely called Green Salad) was included in the bill! On top of that the amount was almost equivalent to the other dishes we ordered.  I mean how can raw vegetables be at the same price as cooked veggies. Clearly the margins are very high in this offering. Nobody seems to have checked the bill properly and we just paid the amount. This wasn’t a customer delight at all.

We should have  checked the bill but it reminded me of an incident longback. It was a similar situation but we checked the bill and asked the restaurant to remove the salad from the bill, The authorities said we include it in the meals as customers usually want it and we should have asked them before eating the salad! I have actually seen this practice at many a places (atleast in North India) and saw it in Mumbai as well. Means it is catching up. Since then, we always ask whether salad is billed or not. Somehow not seeing it in Mumbai, missed it.

It struck me then that the hotels/restaurants are very cleverly using learnings of behavioral economics (not necessarily knowing it though) . In Behavioral economics we have the “default strategy” (see some explanation here as well) where by using appropriate defaults, we can increase the usage.

The best example is-  earlier to enrol in  a savings plan people had to “opt-in” for the plan (as in tick the option) . Most didn’t and savings remained low. The default was “opt-in”. This was changed to “opt-out” where if a person didn’t want the savings plan he had to choose it. The default was a person was enrolled in the savings plan. Again most didn’t and as a result savings increased. This strategy has been used in many organisations and pension savings have increased.

Similarly, earlier the restauarnts asked you whether you wanted the salad or not, the “opt-in” plan. Seeing it not work most of the time, they have been following “opt-out” strategy and if you don’t want the salad you have to tell them. Otherwise, you will be given and billed for the same.

Behavioral economics can be apllied at quite a few places. And the best part is you see people applying it without studying it in any college etc. It is being practiced in many areas. Somehow economic policies continue to ignore it. 

Assorted Links

May 6, 2008

1, WSJ Blog points to subprime crisis comparison with 1997-98 crisis in Korea

2. PIB has a fantastic post on psychology

3. Blattman points to Paul Collier’s view on food crisis

4. FC Blog points to a fantastic article on credit rating agencies

5. TTR is optimistic on world economy

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