Archive for the ‘Behavior Eco/Fin’ Category

You sound cooler if called a behavioral economist instead of a psychologist…

July 15, 2016

Adam M. Grant of Wharton School has a piece highlighting this dilemma. He is a psychologist but is often introduced as a behavioral economist on order to sound cooler and be heard.

He says this change in events is ironical as most contributions to so called beh eco comes from psychologists:


Revisiting the tax compliance problem using prospect theory

July 12, 2016

R. Kavita Rao and Suranjali Tandon of NIPFP have this interesting paper.

Should one file or not file a tax? What are the behavioral implications?

The paper presents a model for tax compliance based on prospect theory wherein an individual makes the decision whether to file, and declare a certain amount of income, or to not file based on a set of policy parameters as well as his/her preferences. The paper poses the question- at what incomes would individuals choose to file a return and answers the same using a model based on prospect theory. Further, simulations are presented to illustrate the impact of changes in tax rates, penalty and audit probability on the individual’s preference to file. The results from the simulation show that for different values of policy parameters there exists crossover income at which individuals would choose to file a return. Given all else, at the exemption threshold of 0.1 million, individuals would choose to file a return at incomes greater than or equal to 0.6 million.


One would like to also read on an experiment verifying the model..

How behavioral economics explains voting for Brexit..

July 8, 2016

Chris Dillow, uses ideas from behavioral economics to explain why people voted for Brexit despite it harming their economic opportunities.

This Brexit vote is actually nothing new. People have voted in the past which doesn’t explain

We economists – especially those of us who are on the left – have got a problem: voters don’t agree with us.

Events a few days ago demonstrated this. But it is in fact a longstanding issue. For years, and around the world, voters have had attitudes opposed to ours. They have been more hostile to immigrants and benefit claimants and more supportive of austerity and inequality than we would like. (This isn’t just an issue for the left: voters also have anti-free market attitudes.)

Why is this? I want to suggest that it is because Marxists were right all along. It’s because capitalism generates an ideology which opposes sensible radical reform. The idea of false consciousness should be taken a lot more seriously.

I came to this view via an apparently circuitous route. In my brief and ignominious career in finance, I learned about behavioural finance. This field, inspire by Daniel Kahneman’s work on cognitive biases, is the idea that people make small but systematic errors of judgment when managing their money. But this raises a question. If people are subject to cognitive biases when they have big incentives to be right – when they are investing their own money – might the same be true in politics, where their incentives are less sharp?

Some experimental research suggests the answer is: yes.

So what explains?

I suspect three mechanisms helped here. One was wishful thinking.

Another is prospect theory. This tells us that people who feel they’ve lost want to gamble to break even. This is why they back longshots on the last race of the day or why they hold onto badly performing stocks. The thing motivated many Leavers. People who had lost out from globalization, or felt discomfited by immigration, voted Leave because they felt they had little to lose from doing so.

The third mechanism has been discovered recently by David Leiser and Zeev Kril. They show that laypeople’s thinking about economics is dominated by what they call the “good begets good” heuristic. People believe that good things have good effects.

This, I suspect, explains a lot. People think controlling the public finances, or controlling immigration, are good things, so they must have good effects. I shouldn’t need to tell you that it ain’t so. In this context, the slogan “Vote Leave, Take Control” was an act of genius. It appealed to the “good begets good heuristic as well as to the fact that people facing uncertainty and feeling distrustful of elites want more control for themselves. (Perhaps this is fuelled by yet another cognitive bias – overconfidence about the benefits of such control)

It is interesting how prospect theory helps us understand so many things around the world. Its usage is limited but is catching up…

Railways nudge to sensitise people towards subsidy on train tickets

June 24, 2016

Interesting bit from Indian railways. It will now be printing the subsidy on the railway tickets:


Applying behavioural economics to public policy (Is Indian polity listening?)

June 6, 2016

The post is on Canadian public policy but I guess it applies to most countries. There is an interesting video on nudging people to use stairs instead of elevators. Though the nudge is slightly noisy. Do see it.

There are numerous ways in which nudges can work:


A parable about incentives backfiring…

June 3, 2016

Pick up a basic economics textbook and it most likely will start with incentives. All that seems to matter in economics is incentives. If you get the incentiving right, people are likely to respond in the desired way. Any behavior away from the norm defined by economists is blamed on incentives.

However, life is hardly that simple. People react differently even if incentives are supposedly right. This is where behavioral economics also comes in. This post by Samuel Bowles (HT: INET Blog) also points to a story with people responding negatively to certain actions:


Should railways offer opt-in or opt-out for meals in privileged trains?

May 30, 2016

As a railways and beh econ buff it is exciting to read this bit. It is even more exciting to see something come into action which this blog argued nearly three years ago.

One always wonders the logic behind food being compulsory in India’s privileged trains like Rajdhani and Shatabdi. Most of the time food is bland and hopeless. If one takes a Rajdhani on a longer route rest be assured food is going to be the same across meals. As one has paid for it either one takes it or just wastes it. There are quite a few cases who carry their own food despite paying for it in tickets.

In 2013, this blog argued to change this default choice:


How taxmen are tracking your Facebook pictures to ensure proper filing of taxes…

May 23, 2016

Never underestimate the government especially when it comes to collecting more and more taxes. One may be posting his/her pics on EB to draw several likes and neighbor’s envy but is now also drawing attention from tax authorities.

Next time you are hiding your taxes saying low business income etc for the year, pop will come a picture from your Facebook showing a foreign holiday recently. The question the tax person will ask is if incomes are indeed low how did this holiday come about?


Endowment bias due to modern capitalism?

May 10, 2016

David Berreby has this fascinating post summarising this paper on what drives endowment bias.  What is endowment bias? There is a cup to be traded. AS a buyer you are willing to pay Re 1 for it but as a seller you want Rs 5 for the same cup. If one believes in markets, then price of the cup should be same whether you are a buyer or seller. This is called endowment bias where you value something more just because you owe it. This is one the classic anomalies pointed by behavioral economics.

The question is what drives this bias? In this experiment on hunter gatherers they start to show endowment bias as exposed to markets:


Why Nudging Your Customers Can Backfire

April 20, 2016

This blog has been really quiet on behavioral economics/nudging for a while. It was once the favorite topic and quite a few posts were written on it. Perhaps, have not stumbled on something interesting in the space.

Prof Utpal Dholakia (Professor of Marketing at Rice University) has a post on how nudging could backfire.


Why not include behavioal approaches in Indian policymaking?

January 25, 2016

One does not know why really.

Debhashish Basu of Moneylife says by nature people are lazy, selfish & vain. We should be aware of these traits while making policy.

famously said: “All writers are vain, selfish and lazy”. He could have said this for almost the entire human race. There are many altruistic people, and most of us sometimes do not fit this characterisation, but these are undoubtedly our default traits. Anybody who tries to persuade the public to behave in a certain manner must accept them or risk failure; or at the very least, be prepared for a long hard slog. The has understood this very well and created billion-dollar businesses that millions of people use daily for a cab ride (Uber), purchases (Amazon), information (Google) or other social purposes (Facebook, Twitter). Can intelligent policymakers and well-meaning politicians, who try to persuade millions to either clean up garbage, follow traffic rules, stop taking or giving bribes, learn from them? Lets first look at these characteristics.

As we tend to copy whatever west does in economic policies, there is an incentive to copy. British are already doing it:


SEBI nudges towards an abridged IPO prospectus…

October 29, 2015

This should have come long ago. One keeps wondering why should an IPO prospectus be so so long? There is close to zero chance any investor (barring the biggies) reads the mammoth prospectus leave alone the retail investors.

As per recent SEBI notice, a company going for an IPO needs to issue a 10 page abridged prospectus as well. It has issued broad guidelines on what to be included in the abridged version:


Flawed mental model and investing

August 31, 2015

Dhirendra Kumar of Value Research has a superb piece on this topic.

Starts with this story:

Here’s a joke that has a great pedigree in the investment world. The father of value investing, Benjamin Graham, apparently used to narrate this story to his students and draw a parallel to the behaviour of stock market punters.

So this oil prospector dies and goes to heaven. At the gate, St Peter reads the account of his life and tells him that he’s qualified for heaven, but there was a problem. “See that crowd over there? They’re all oil prospectors who’ve arrived before you. And the way things work here, you can’ get in until after them. So I’ afraid this looks like a long wait for you.” “Not a problem”, replies the man, “I know how to get rid of that crowd.” So he turns towards that crowd of oil prospectors and shouts out, “Hey, did you hear? Oil has been discovered in Hell.” And sure enough, as soon as they heard him, every single one of them ran off towards hell. Looking at this, St Peter reluctantly said, “Well, it seems your way is clear. You can enter heaven now.” But the oil prospector had his doubts. “You know what? I think I’ll follow the guys. The rumour could be true.”

As Graham used to point out, the oil prospector’s behaviour has much in common with what passes for investment research nowadays. As sophisticated commentators would point out, their mental model of how the market works probably leads them to believe that if a lot of people believe in something, then it must be true. A mental model of something is our idea of how it works internally.

He points to a few more mental models..

Stock market investments have captured human minds for a very long time. There is no other area which can make you both rich and pauper overnight. The former likelihood keeps bringing people to the investing world only to be trapped in some mental model or the other..

A unique nudge experiment from Hamburg to stop urination at public places

August 25, 2015

Gulzar points to this interesting nudge:

It has covered nine public walls with repellent paint which makes pee spray back on the person’s shoes and pant! Public urination on city walls by night revellers is a big problem in the city and has not been controlled despite a legislation banning it as well as fines of upto $500.

Using Anacondas, Crocodiles to nudge maintenance of Bangalore roads

August 11, 2015

Interesting article on how an NGO is using clever ideas to make its points on road maintenance in Bangalore:


What would Prof. Daniel Kahneman eliminate if he had a magic wand?

July 22, 2015

Nice interview/profile of Prof Kahnemann who remains as active as ever in his 80s.

He says if given a magic wand he will eliminate overconfidence from humans:


Finance Ministry brings out new 3-page income tax forms..Keep simplifying and nudging

June 1, 2015

India has actually gone backwards in trying to simplify filing taxes.

There was a time when there was just a one page form called Saral (simple in English) which was just a one page form. It required minimal details and was a huge step forward given complexities of Indian system. This was replaced by ITR sort of form which required many more details. Though e-filing has made things really easy but many people still use the paper forms given limited internet penetration and knowhow.

So this is an interesting development. The form has been simplified:

The Finance Ministry today came out with new three-page income tax return (ITR) forms, dropping the controversial provision for mandatory disclosure of foreign trips and dormant bank accounts, while it also extended the last date of filing to August 31.

The new forms – ITR 2 and ITR 2A – will have only three pages and other details will have to be filled in schedules, said a Finance Ministry statement.

A new form ITR 2A has been brought out by the ministry which can be filed  A new form ITR 2A has been brought out by the ministry which can be filed by an individual or HUF who does not have capital gains, income from business/ profession or foreign asset/foreign income.

The statement also said that the last date for submission of tax returns will be extended to August 31, 2015.

With regard to the controversial provision of disclosing details of foreign visits, the release said that the assessee will be required to disclose only the Passport Number. “In lieu of foreign travel details, it is now proposed that only Passport Number, if available, would be required to be given in Forms ITR-2 and ITR-2A. Details of foreign trips or expenditure thereon are not required to be furnished,” it said.

Further, the Ministry has done away with disclosure of details of dormant accounts which are not operational during the last three years.“As regards bank account details in all these forms, only the IFS code, account number of all the c”As regards bank account details in all these forms, only the IFS code, account number of all the current/savings account which are held at any time during the previous year will be required to be filled-up. The balance in accounts will not be required to be furnished,” the statement added.

The simplified I-T return forms are being brought after the earlier version was opposed by industry, MPs and assessees for its cumbersome disclosure norms.

More efforts should be made to simplify the tax filing process. These are really simple nudges which are really useful and are more than a bang for the buck.

It is actually a good research topic as well. Get all the tax forms which have been released by the govt so far and see the evolution. Ideally one would want to see a relation like whether simplification has led to higher tax numbers and so on.  This will be really difficult. So, a perception study to see how various forms are perceived by public.

Behavioural development economics: A new approach to policy interventions

May 22, 2015

WB scholars explain the key findings of the 2015 World Development Report which focused on behavioral insights.

Economists typically assume people behave in a rational and self-interested way, making standard models limited in their explanatory power. This column argues that psychological and sociological factors – though usually ignored in economic models – affect decision-making. The findings, drawn from the World Development Report, further suggest that better behavioural understanding could subsequently aid development efforts.

They look at three insights:


How Indian govt is getting some nudging right..

May 14, 2015

It is a pity that all we look for in a government’s role in economy is some big bang, bold reforms (without anyone defining what they mean). It is even a bigger pity that governments fail to mention few small things they have got right and are quite useful. After all, small changes don’t matter as they are irrelevant (covered beautifully by Prof Thaler in a recent article).

R Srinivasan points to one such small thing which the govt has got right.

The other day, I got a text message from my bank. It asked me to send an SMS from my registered mobile number to signify my assent to taking accident insurance cover under the Pradhan Mantri Bima Suraksha Yojana, along with my nominee’s name. All I had to do was type in PMBSY, followed by a ‘Y’ (for Yes), and my nominee’s name. That was it. The premium of ₹12 would be automatically deducted from my account, and I would be covered up to ₹2 lakh for a year, against accidents leading to loss of life, limb or livelihood. It was as simple as that.

The interesting thing about this little episode was not just the ease of the process, impressive though that alone was. The way the participating banks have rolled out the PMBSY, as well as the other major insurance-based social security scheme launched by this government — the Pradhan Mantri Jeevan Jyoti Bhima Yojana, which provides life cover of ₹2 lakh a year for a premium of less than one rupee a day — demonstrates what can be achieved by simply leveraging available technology, and using a customer-centric approach.

Of course, critics have carped that this was merely rebranding and repackaging schemes which already existed. True, but I am willing to bet a substantial chunk of my meagre earnings that this time around, a heck of a lot more people would actually realise some tangible benefit from the scheme, pre-existing or not. What’s even more impressive is that by removing red tape, by simplifying the process, by leveraging technology, and most importantly, by going to the beneficiary instead of making the beneficiary come to it, this government has done what its predecessors failed to do — treat citizens as customers deserving of service, not supplicants seeking largesse from the ‘mai baap sarkar’, who need to be made to jump through hoops in order enjoy that privilege.

But that’s not even the most impressive thing about this experience. To me, a middle-class Indian, the son of a middle-class bureaucrat, and the grandson of a schoolteacher, the most impressive aspect was that for the first time in my life, I had actually been at the receiving end of a government welfare measure (it would have been two, but I missed out on the ₹2 lakh life insurance because I am over 50!)

Hmm.. I don’t know really whether this has been applicable across the country. I dont recall getting any such message from my bank. But wherever it has seems like a good thing (without getting into economics of the scheme).

This is a good case of using a simple nudge – just frame the question properly and use simple defaults. The SMS just seems to have asked whether interested or not. If Yes, then it automatically withdraws Re 1 from your bank account. As simple as that. One could have easily complicated the whole thing as it happens in most govt schemes.

As the author says and this blog has been saying, one central purpose of public service/good is to see it is delivered with minimal headache. It is here behavioral knowhow/nudges can help. The skeptics might argue well no these have to still be designed by someone (read govt) who will be biased and get it wrong. Well, no harm in trying to get the nudge right. Instead of looking at all kinds of jazz to get public distribution right and wasting crore, simple nudges can do wonders..

Avoid bad teacher rankings/grades using behavioral tactics..

May 12, 2015

Nice article by Prof Thaler (HT: Prof Mankiw Blog).

He used how behavioral insights helped him improve his teacher grades: