Economics
assumes rational action by agents under perfect available information. Yet the
cognitive constraints in gathering and processing information makes agents take
decisions under uncertainty. Rationality thus is bounded by cognitive abilities
of the agents. In real life, contrary to theory, bounded rationality is
evident. It is not to suggest irrationality in decision making but each action
by an economic agent is a rational action undertaken through a grasp of cost benefit
dynamics under the existing constraints.
Information asymmetry
between agents and among agents necessitate different approach to decision
making. The buyer knows something about herself which the seller does not know.
This could have significant implications in industries like insurance and
banking. Suppose a person has a certain disability or disease while going for
insurance which he or she can hide the same. Alternatively someone is going for
fire insurance with a hidden objective of setting house or factory on fire to
claim insurance money. An agent approaches bank for a loan with hidden
intention of not repaying. The insurance and banking company does not know these
things. Therefore the cherry and lemon problem leading to adverse selection is
well known problem in economics.
Information asymmetry
pervades many industries. A producer or seller has greater information about
the product than the buyer. This in precise leads to the above described lemon
and cherry problem. Information asymmetry is best sought to be circumvented
through the theory of signalling. In economics agents convey signals either
explicit or implicit. The counterparty agents have to grasp the signals to decode
the same and thus strategize accordingly. Let us assume an economic agent
purchases a car. The next day, she decides to sell the same. The car might be
just a day old yet the price of the same as empirical research has proved will
reduce by more than half. To any prospective buyer, the signal is the intention
of the seller. They would be more than curious to understand why the seller
wants to dispose of the car when he or she would have purchased it just a day
before. Therefore it is implied that there must be something wrong with the
car. The same would probably go with the house which is out for sale let us say
within a month of purchase. Therefore the buyer accordingly changes her
strategy and bids for far lower prices than they would be otherwise. Even though
the sale might be on account of certain emergency reasons and nothing to do
with the quality of the product, the very timing in the world of asymmetries
would deter the buyers from paying the full price.
Signalling is something
prevalent for instance in education industry wherein a decision to spend extra
year in education conveys to the prospective employers about the agent’s
keenness to gain certain extra skillsets. A Harvard graduate gets high salaries
for the very reason of the barriers of entry that exist to enter into Harvard.
If somebody has cracked the same, then there must be some stuff in the guy/gal.
The same goes with the civil services exam in India. Despite criticism about
the IAS officers etc. the very fact they cracked the exam among more than lakh
or so who attempt it every year sends a signal that there is some material in
the person who has cracked the exams.
Coming back to
the current environment, there is uncertainty, possible despondency among the
entire section of the society. There are frontline workers in healthcare, security
forces and many others who are battling the pandemic of Chinese virus. With the
Indian population under curfew virtually locked in home, there is very little
between them to share information, share their problems, concerns and find
solace in each other. The only mode of communication would be the social media
tools but many are outside the realm of social media. There must exist a means
of communication to express solidarity, to express their belongingness, to
express their sense of concern among many other things. Therefore, on March 22,
the day of the Janata curfew, an acoustical drill formed a part to express the
support to all those directly or indirectly involved in the battle against the virus
from Wuhan. In a long lockdown, there needs to be occasions of expressions to
demonstrate each one is aware of the others efforts and concerns and are part
of the cooperation in the battle to save humanity. The lighting of the diya is
the expression of such an objective. ‘
Every agent can
choose in theory to signal their support to the battle and express solidarity. Yet
in the world where the flow of information is constrained, it might not lead to
intended results. To borrow from James Suroweicki, the problem of collective signalling
is one of co-ordination problem. There must be coordination in conveying a
uniform signal to the intended audience that would be appropriate to the occasion
and achieves the intended objectives of letting each one know that they are
together in this difficult phase of life. Yet a coordination problem necessitates
somebody taking the lead. Hence the nudge has to emerge from the top. Once a
message comes from the Prime Minister, it gets a moral sanction and thus builds
up a case for the bottom up coordination. Not that the bottom up actions of
similar hue cannot come. Instances range from Italy to Spain to UK around that.
Yet, aside of those, there needs to be a unifying moment for the whole country.
The country and the society has to come together to signal the frontline force
and to each other their own role, support and solidarity within the society.
As diyas are
lit, mobile torches are shone, it sends a signal to each other that they might
be physically distant, but socially and mentally together in handling the crisis.
In the world of physical distancing, the signals reveal the intentions active
or otherwise to each and every individual. It is just not the neighbouring
buildings that get the message, it is just not the locality gets the message
but the whole country gets a message. As the information is relayed through
television and social media, the amplifying effect of the signal multiplies and
gives a greater vigour to the battles that are uncertain in duration and
outcome. While the outcome is certain of victory for human mankind, the costs
of victory is what discourages and despairs most. Through a signal conveyed
through shutting down of lights and lighting of diyas, it is simple message of
all are together and sharing albeit implicitly or symbolically the sorrows and
despair which each one finds themselves in. Thus PM Modi’s message lies in the simple
economic concept of signalling in an universe of uncertainty amplified by
information asymmetry.
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