Mumbai: Behavioralist Richard Thaler won the Nobel Prize in Economics. It is important that his splendid work be taken seriously by the Indian government. Thaler is one of a group of pioneers who have used psychological ideas to develop a more realistic picture of how humans interact in an economy. It is a powerful challenge to the dominant view until recently that humans are perfectly rational calculating machines.
Thaler showed in his work that our economic behavior is marked by a limited rationality, strong perceptions about equity, inability to stick to objectives and what is called hyperbolic updating. Human behavior is at the center of the economy and more so after a new generation of economists began to incorporate assumptions about individual human behavior in its macroeconomic models in the mid-1970s. The role of expectations was also highlighted.
Herbert Simon won the Nobel Prize in Economics in 1978 for his work on limited rationality, an idea he repeatedly affirms when 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 gave us the idea of a push or design of rules for people to make decisions that the government considers to be the best for them. The paradoxical name they give to their idea is libertarian paternalism – where people are not denied the choice, but pushes in a particular direction. A popular example is mandatory savings. A new employee must choose whether or not to enroll in a pension plan. Behavioral economists have shown that most people choose the lazy way by sticking to the default option.
For example, a government can encourage people to save more by aging by making the retirement plan the default option, while employees continue to have the option of retiring. Several governments have created thrust units, with behavioral economists working to create new types of architecture of choice. The Narendra Modi government must continue, mainly because it wants to change the behavior of the citizens in areas as diverse as the cleaning and the use of the digital money for the education of the girls.
Here is an example. Should communication about a program like Swachh Bharat Abhiyan focus on the advantages of clean neighborhoods or the risks of garbage on the streets? Behavioral economists have shown that people prefer to avoid losses in relation to profits or aversion to loss. Therefore, government would be better served if Swachh Bharat’s messaging focused on risk rather than profits. This is a trivial example, but the broader point is important: The Titanic of public policy often hangs on the icebergs of our capricious behavior. Thaler and his companions should be studied in New Delhi and in the state capitals of India.