Cognitive Bias

On my recent trip to the library, I picked up 'The Intellectuals' by Paul Johnson, which is turning out to be an interesting satirical history of some of the biggest intellectuals of the West. When I googled the author, he turns out to be a conservative writer. And the book is turning out to be a conservative's paradise with broad swipes at all the major thinkers/intellectuals who are revered by the leftist establishment (he is particularly harsh on Rousseau and Marx). It is quite a witty book and definitely worth a read.

But the book got me thinking on the whole area of cognitive bias. I am clearly left-leaning (the type classical liberals despise) and would normally not venture into any conservative literature (e.g. Hayek, Schumpeter etc would normally not be on my list). Which raises a rather disturbing question - are we all victims of cognitive biases in the realm of ideas? This is especially relevant in the social sciences (economics included) where ideas tend to be clustered around major schools of thought. I read somewhere that your biases are firmed up by 25 and once that happens, we tend to gravitate towards our preferred bias, leading eventually, to group-think. And so I have decided to have a go at the liberal school of thought and at the very least, try to listen to their ideas. 

This just might be some harmless label in the space of ideas - but as it is with a lot of issues in the realm of social sciences, they extend into the real life itself. One example of this could be that someone like me would typically be suspicious of any policy that tries to push markets in, which is actually the cognitive bias pre-supposing a certain kind of outcome(s) which follows a market driven approach. Such a line of thought is obviously flawed but then this is the thing about cognitive biases - they trick you into believing that you are exercising your rational choice(s). 

Why we all tend towards such biases is equally fascinating - one theory is that it is born out of an evolutionary necessity, which goes like this - since you need to make split-second decisions (for the early humans, this could mean the difference between life and death), you cannot rely on using all the available data to arrive at a rational choice outcome. You have to rely on your gut instincts and these in turn, are developed over time based on your past experiences, learning from your elders, peers etc. Which was all fine when the sphere of activity was limited to dodging the next predator and hunting for food but now that we are all occupied in the sphere of conflicting ideas (and even ideologies), it is a whole new ballgame.

And finally, the recommendation on 'The Intellectuals' - worth a read, if nothing else for his acerbic wit. 

One more on the Economics of Begging

Thanks to Slumdog millionaire, people should now realize that begging is somewhat of an organized industry, at least in pockets (I suspect in most big cities). Given that, it probably makes sense to avoid giving, at least if you are at a busy intersection. The reason is obvious - your rupee is not going completely to the sympathy-generating person who has triggered the act - it is covering the rent that the alm-seeker has to pay to be able to be there in the first place. That is, if he/she is not just an 'employee' of the 'owner' of a begging business. In which it is even worse, since your rupee is going towards the recovery of investment that the 'owner' has made in building his business - right down to the costs incurred in the abhorrent act of dis-membering the person(s). And so the economic lesson here is this: Walk away from a situation where an alm-seeker is actively seeking alms since you will end up paying for all the externalities involved in getting the alm-seeker to that place. A better alternative would probably be to surprise someone who is not actively seeking alms but is clearly in need. How to identify that in the absence of a signalling mechanism is a different matter altogether. Suffice it to say that this is the paradox in  economic transactions (where information asymmetry is involved - which pretty much covers almost all transactions): to make a transaction happen between two parties (buyer-seller; seeker-donor), there is a certain amount of signalling that is required to bring the two together, which in turn - injects additional costs to the transaction, which in the strictest economic sense is non-value added. 

Mass Intelligence

There is an interesting debate that just finished on the Economist - topic is Mass Intelligence. The debate topic is: "This house believes that in its appetite for culture, the world is wising up more than it is dumbing down." See the link for the entire debate - an interesting topic and in many ways, relevant in our day and age, while many of us try to define what is best for our children - from 'enforcing choices' like TV vs. reading vs. computer games etc.

Economics of Begging?

More on the Economics of Begging - as usual, there seems to be quite a complex set of incentives that drive begging. The most interesting analysis is from Tyler Cowen (Discover your Inner Economist), who also runs an interesting blog: www.marginalrevolution.com

Also, see a discussion on this topic on:

http://freakonomics.blogs.nytimes.com/2007/08/09/freakonomics-quorum-the-economics-of-street-charity/

Homo Economicus?

If you drive in Bangalore (for that matter any city in India), the traffic stops come with a rather uncomfortable experience - interaction with beggars. To begin with the term 'beggar' itself is derogatory - and their very existence is a reflection of a failure of the economic system to provide a safety net for the poorest of the poor. 

Anyway, the other day, I was stuck at one of those interminably long traffic stops when an old man approached me - he was the archetypical 'beggar' with tattered clothes and a ragged look. There was a difference however - instead of pan-handling, he was trying to sell some ear-buds. The underlying approach appeared to be fairly straightforward - trigger a sense of guilt/shame/pity (whatever that is when you are accosted by a beggar), but then follow-it up with an attempt to sell something. A sensible strategy from that individual's point of view I would think - since there could be two possible responses from the 'giver' - 1) you really 'need' the product or you may rationalize that you may need the product at some point in the future or 2) you really don't need the product but you can still rationalize giving money in exchange -you could then rationalize that you are not really giving alms but performing an economic transaction. (The third option is to just ignore - but we shall not be bothered with that class of decision makers for now)

Then the interesting question is - how rational are either of these responses? It does qualify as an economic transaction and hence in a purely economic sense, qualifies as a transaction that contributes to the GDP. But from a utilitarian point of view, it is obviously a sub-optimal situation since the transaction has contributed to two distortionary events:

1. It has created a 'need' where none probably existed - the economic system will now be expected to take this information and feed into its cycle of demand/supply planning. Which in turn, means that the resource allocation has moved away from its pareto-optimal point.

2. It has contributed to creating a sociological dilemma - while everyone seems to agree that begging is demeaning and should not happen, this also sends a signal that getting a begger to sell ear-buds may be all right. Never mind that the actual driver for the transaction was similar to the one motivating the beggar being given alms.

Yet another reason to question the micro-economic edifice based on the purely rational homo economicus.

Third Worlds within a Third World

My job takes me to various cities in India and the breathtaking diversity never ceases to amaze me. India is clearly a multitude of nations within a country. Needless to say, what is germane here is not the cultural diversity but the seemingly vast economic variations that seem to exist in this country. Over the last few months, I have visited Delhi, Hyderabad, Chennai, Kolkata, Kanpur and Patna (from Bangalore where I live). You don't need to be a trained economist to realize that some of these cities - Delhi, Bangalore, Hyderabad, Chennai are on the opposite ends of the economic spectrum from Kanpur and Patna, with Kolkata somewhere in between. While there is the glitz, frenetic construction and the quintessential urban chaos that accompanies rapid and unplanned growth that is unmistakable in a Bangalore or Chennai, the opposite is true of Kanpur and Patna. It is almost as if the much talked about economic growth has bypassed these cities. This is not to say that the richer cities have managed to get rid of poverty - on the contrary, economic disparities may be growing wider in these cities. Despite that, there is an unmistakable feeling of optimism that comes with economic growth - a feeling that is conspicuously absent in a Patna or a Kanpur. There is no better place to see this than the railway station - the one institution that seems to capture the city's economic spectrum in a microcosm. While the Bangalore station even has a wi-fi hotspot, an internet cafe and umpteen Coffee Day kiosks, the Kanpur station is a drab, crumbling edifice dotted by just a couple poorly maintained kiosks. Walk out of the station and the differences are even more stark - the Kanpur station transport system is dominated by cycle-rickshaws, which are fast dwindling (thankfully) in places like Bangalore, Hyderabad and Chennai. In fact the single most striking fact in a Kanpur or a Patna is the vast number of cycle rickshaws that ply on the roads. One obvious reason for this is the fact that as older industries (e.g. tanneries in Kanpur) dwindle and are yet to be replaced by the newer ones, the surplus labour is driven to take up jobs with extremely low entry barriers like ferrying people. One naively optimistic view here is that some enterprising entrepreneur can spot an economic opportunity in these cities for setting up labour intensive industries (obviously, there is a lot more to an attractive investment opportunity than surplus labour). A more likely (and depressing) scenario is that these economic disparities are likely to continue to grow - as the richer states and their cities hope to climb into an economic virtuous cycle while the poorer states are forced to languish in their economic quagmires.

At a more macro-level, such intra-country variations, combined with other political trends (most notably the growth of regional parties) could lead to newer forms of friction. One obvious outcome of this disparity is the growing migration within the country. While little research seems to have been done on the demographic shifts driven by economics, there is growing intolerance on regional lines - the recent events in Mumbai being an example. Further, it is not inconceivable that some of the richer states begin to push back against the current taxation system, where the federal structure translates to the richer states subsidizing the poorer ones, something that is currently an undisputed outcome of the socialist nature of the Indian economy. One scenario could be a push towards a more decentralized form of taxation (moving towards a strongly regional bias similar to the Swiss system of Cantons). This, in a sense, will be an affirmation of the fact that this is a nation of individual states who were brought together by an accident of history and not bound together by a compelling cultural or economic glue. And if and when that happens, the already uneasy nature of this lop-sided growth could take a much uglier turn.

The Economics of Charity

To the economist, the concept of charity ought to be an aberration, at least when viewed through the lens of rational economics. For a profit-maximizing individual, charity will find no place in his calculations. What then, can explain the acts of giving - from the one rupee to the beggar at the traffic signal to more elaborate forms, ranging from supporting causes to even part some or all of your time to acts of giving. Clearly, the drivers are more than merely economic - and yet, little is known as to what motivates people to go out and part with their money, time or both without any clearly quantifiable economic returns. The Platonic view would be to attribute this quality to the 'goodness' or a sense of morality that is intrinsic to humans - but that is in the domain of philosophy, one area where economists fear to tread.

One immediate cause that comes up is Religion. Religions that were born out of socialist ideals have even taken the trouble of linking charity to social justice and in turn, justice as an essential objective of religion. And so there is the concept of 'tithe' in Christianity (which required individuals to contribute a tenth of their output - be it in cash or kind, to the church). Islam is equally formal about this and even empowers the state to collect such contributions and provide guidelines on spending them (http://www.alrisala.org/Articles/mailing_list/charity.html). The underlying message, of course, is that spiritual enlightenment is tied to charity - in other words, there is a potential upside (however vague that maybe) to charity. As the cynic would retort, would it remain charity any longer? Moreover, this fits in with the age-old role that religious establishments have played - that of custodians of an individual's path to spiritual enlightenment. However, this could easily be interpreted as a way for the individual to 'buy' his/her way to his/her spiritual goals. Which is probably why the more philosophical religions like Hinduism and Buddhism are not explicit about charity - they appear to club charity together with a larger basket of material and spiritual activities that drive a way of life leading up to Nirvana. Not that this approach is devoid of issues - for one, it is difficult, for the average person, to clearly identify what constitutes this way of life. It is precisely this ambiguity that created a 'market opportunity' for the Brahmins to step in and offer to be the guardians of an individual's spiritual roadmap. One rather unfortunate outcome of this is the seemingly paradoxical behaviour in India - lavish temples are built all the time in the midst of all the poverty and deprivation. One interesting area of research would be to assess the evolving trends in charity, as incomes grow.

One suspects, however, that in India, a paternalistic form of charity has always been more popular, given its very long history of caste based feudalism. Historically, the ruling, landowner and merchant castes used to indulge in charity - in its benevolent form, this was money doled out to people who worked for them, which only served to perpetuate the social hierarchy. In its more malevolent form, this would take the form of economic slavery, where the giver explicitly 'bought' out individuals (bonded labour is, in fact, still prevalent). In modern times, while economic growth has blurred the caste-driven social hierarchy, the increasing economic disparities have ensured that the opportunities for paternalistic giving have not gone away. Partly as a means to mitigate guilt and partly as a way of buying loyalty, the economic haves are not averse to paying for the maid's children education or the surgery that the driver's wife had to have. While it may give the warm afterglow that accompanies any act of giving, it also has the potential of buying loyalty. At least in this case, there is no doubt in the economics of charity.

And so the question remains - is charity driven purely by a sense of morality or is it the outcome of a sub-conscious (or deliberate) act of calculated cost/benefit analysis? That is a question for the philosopher to ponder.