Behavioral Economics 101

First and foremost, I would like to apologize for a very cliched title. But, somehow, this does capture attention; at least for a first few lines.

Talk to any classical economist and you will undoubtedly hear of rational being in the first couple of sentences he/she speaks. This concept of rational being was first propounded by Adam Smith, widely regarded as the father of modern economics way back in 1776. According to this concept, humans behave in a perfectly rational manner wherein they always strive to maximize their utility. This was the most fundamental axiom on which economic theories were based for almost two centuries. And it is somewhat fascinating to note that rationality was taken as an assumption for such a long time without anyone bothering to actually treat it as a variable while developing theories.

This finally changed when two brilliant guys, Daniel Kahneman and Amos Tversky put rationality to test and came out with surprising results. Their research married economics and psychology which came to be known as behavioral economics as a couple. This was late 1970s. Advancements in behavioral economics provided a whole new dimension to marketing, advertising, HR management, public relations, designing and several other segments.

This is a new and exciting science and though, it has taken the economic research world by rage, India happens to be largely insulated from this knowledge. Yes, it has made inroads in industry applications but research wise, country is still in very nascent stages.

OK, this is getting a bit textbook pattern. This is a science best learned best learned by practical experiments. So, let’s dive into knowledge.

THE MUMBAI LOCAL EXPERIENCE:

Everyone’s familiar with overwhelming crowd of Mumbai’s notorious local trains. But if you have traveled in them (Yes, you can. It’s easier than climbing Everest), you will notice an interesting behavior. First, let me give a little background. There are two classes in local trains – first and second. Only difference between the two is there are cushioned seats in the first class and plastic ones in the second. Dimensions, number of fans, ventilation and all other things are the same. Except for the fare. First class tickets are almost 10 times costly than the second class ones for the same distance. The seats are designed to accommodate 3 adults but can squeeze in 4. As you can expect, four chaps do cram up on seats in second-class compartments. But even during super-dense peak hours, you won’t see 4 people on a seat in the first class compartment.

Now, one might argue that this is because of significantly higher fares people pay to travel in first class. But consider that all the people in a particular coach or class have paid the same fare. So, a fourth guy might turn up and say to the seated passengers, “Don’t give me your shit about how much you paid to get into the first class. I have paid the same. So move your ass and give me some space!” But this does not happen in first class. Anytime.

The reason for this behavior lies in the fact that first class passengers are highest paying guys on the train. This gives an elitist complex to the people. They feel they should conduct themselves in a more civilized manner. To get a better perspective of the feeling, consider Indians following traffic rules when they visit developed nations and not giving a rat’s ass back home. Or refraining from spitting in a mall while all other public spaces are painted betel red.  

So, now one might wonder what would happen if the railways come up with a new class? Say, the super first class? It’s way more comfortable, has air-conditioning and always smells fresh in the humid city weather. And not surprisingly, fare’s almost double the fare of a first class. What would happen to the behavior of first class passengers? And more importantly, what would happen to the number of first class passengers?

Given the reason of elitist complex, it won’t be very difficult for many to guess the number of people on a seat in the first class coach. Yes it should be 4. And now shifting focus to the numbers. A very rational argument would be number of passengers in first class compartment would go down. This would because with the super first class opening up, passengers with a higher propensity to spend would move away for better facilities. And as second class passengers would have never spent on a first class ticket, they would definitely not do so after the super first class becomes operational. That’s classical economics for you – rational and convincing. Sadly, that’s not how people behave. We have inherent biases (technically heuristics) that clouds textbook rationality.

Let’s consider a situation before actually addressing this issue. You are on a first date at this fancy restaurant and your date is really confused about her wine. What would be your suggestion? You are uncertain about your future prospects with your date and the first rational thought would be to order the cheapest one. But at the same time you don’t want to look as a cheap steak and you too end up in a dilemma. And then you find a middle path and suggest a medium priced wine.

Extending the same behavior in local trains. Again, your reputation is under purview by the large number of people who see you getting into the train. Also, a factor of social confidence crops up which was rather absent in the date scenario. You again start thinking on similar lines. It would be outrageous to spend so much on the super-first class. But I am also not so poor that I travel in the cheapest coaches. I should definitely buy a first class ticket. Thus, overall number of passengers in first class compartments would increase. This line of thought is used in a variety of businesses and unknowingly, we succumb to our heuristics to make an irrational decision. A very popular application of this phenomenon is in designing of menus. Such menus would have items with largest profit margin as the second most expensive item. And not surprisingly, they would also be the best selling items!

Human brain is plagued with several such biases that lead us to making choices that might not be in our best interest. Many breakthroughs have been made in uncovering these faulty perceptions by some fantastic experiments conducted by eminent cognitive scientists. This article has convincingly (?) covered just one of those biases. If I have succeeded even partially in flashing up your interest in this fascinating science, I would recommend books by Dan Ariely and Tim Harford. They are a treat to read!

Note: I wrote this article almost 8 months back for my college magazine. But, the coordinator resigned and so did the idea of publishing this post. Also, considering the unfeasibility of the local train experiment, all the arguments I have presented are based and/or directly inspired on published research conducted by recognized cognitive scientists. All the observations regarding passenger behavior are based on regular travels in local trains for over 20 years coupled with discussions with several ‘local’ friends. A deviation was pointed out by my friend Apeksha that fourth seat syndrome does exist in ladies first class compartments. So, it would be considerable to exclude them from this hypothesis.

Forecasting life after college

First two paragraphs of this post are very general in nature. Obviously, outliers exist that don't fit this description. Personal views third para onwards.

Technically, it wouldn't be fair to forecast life after college as we all know, its a great shock and equations alter significantly. But I am referring my predictions on interactions, observations and literature (source: Quora) of the alumni. And even though we can always bullshit about the ideals of individuality, harsh truth remains almost everyone gets institutionalized willingly or unwillingly. Right from the time we enter these much-hyped residential campuses, our habits start converging - from GPLs to those panic driven 'one night stands' during exams (for the uninformed, that's the max action you can expect in one night stands at our campuses) to insane puke-filled nightouts, we all follow similar trends. Our trajectories are pretty similar even before entering college, in spite of very different histories. Class toppers, teacher's favorite, revered by juniors, you pretty much get the idea. So, yes alumni can be a decent proxy.

Here's my projection of life few years down the time. You have a stable job in your hand. Either after a MBA from IIM or MS or scraping experience from job(s). Money would be good, but might be less than personal, parental and societal expectations. Things like CPI are statistically insignificant now. You are married to a pretty lady your parents scouted for you or are in a relationship which is still a big deal among your friends (well, some things probably never change). A vast majority of your social circle still revolves around your college friends. You meet them over a beer almost every weekend. You come back to college once in a while and drench yourself in nostalgia. Supervisors have replaced professors but well, juniors are still juniors. No longer are profanities so common and finally you have mastered the MS Office point lingering in your resume since high school. Formal pants now dominate your wardrobe. Fine dining is no longer a taboo and saal mai ek vacation toh banta hai boss! Overall, life is peaceful.

And that's what I dread. A peaceful but mundane life. Not that I detest the mentioned pleasures but there would be something lacking. I have always dreamt of a life fueled by excitement and passion. Something that a regular 9 to 5 job fails to provide. And that seems increasingly likely that I will end up in one with the way I am progressing in my career. My college days have made me realistic enough to realize I am not one of those outliers to easily break free from the highly probable lifestyle. But I need to. If not the easy way, then by some other way. I so need to find a direction to live not only peaceful but also purposeful life. I have no idea how would I find my answers. People tell me everyone goes through this phase and one should not take drastic steps while in this stage. Sounds rational enough. But rational thinking also handicaps us to utilize the amazing potential trapped in 'leap of faith'. Sometimes, it is important to trust our guts and that's exactly how I aim to find my answers. Sounds vague and emotion-driven, right? And I have made a right start. This is something new for me. Here's to the new beginnings!