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Showing posts with the label incentives

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Economics and Eclipses!

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Eclipses evoke fear, mystery and awe alike. For ancients, it was certainly a mystery. They would have been ignorant of a natural phenomenon that does not experience a frequent occurrence. During total solar eclipse when sun disappears and darkness abounds in the midst of the day, they would have certainly been fear struck and panic ensued for those few moments before the sun began to take ‘rebirth’. Given zero knowledge of science, it would have been most likely to be attributed to super natural forces. Within perhaps centuries, mankind probably make sense of eclipses as phenomenon that occur though the natural linkages might not have been established. To some ancient civilizations, there were astronomers who could predict eclipses in advance. Evidences of eclipses are found in ancient Hindu scriptures and mythology like Mahabharata etc . Given the supernatural attribution to eclipses, it gave rise to several theories and practices. Astrological significance would have added
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Perverse Incentives!

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There is a proverbial story about snakes in Delhi. During British days, apparently there was a time when Delhi was infested with snakes. The authorities were challenged to find a solution to the snake menace. People respond to incentives and one might not take recourse to economics for the same and instead follow common sense. So the authorities announced a reward for all those who kill snakes. The condition was the dead snake has to be produced as proof for claiming reward. The story goes when the reward was stopped, Delhi was infested with far more snakes than it began with. In other words the problem had multiplied. Without doubt, one needs to look why the policy failed. Does this story remind us that economics is not infallible and incentive mechanism does not work? Let us probe it in some depth. As Adam Smith first pointed out, at least in documented modern times, people function in their self interest. The self interest as an aggregate is what culminates into enlightened c
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Pakistan and Role Model Dilemma

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As one comes to terms with the horrors of the recent massacre of school children in Peshawar, What probably went unnoticed were the names of the children who either died or escaped.   Names like Osama, Dawood Ibrahim seemed common.   In a world where names are usually associated with aesthetic or even predictive powers, these names mean something. If names are meant to convey certain signals, these do certainly reflect in a way contemporary mindset of an average Pakistani.   Stephen Levitt in his bestseller, Freakonomics goes on to discuss the economics behind names. Yet, the explanation does not answer satisfactorily, the state of affairs. Incidentally, the broader theme around which Levitt’s ideas revolves around- role of incentives; might help us in some way to understand what it means.   At the heart of the society and its inhabitants is the need to achieve, urge to succeed, climb the higher layers of the power pyramid, places oneself at the apex of the profession. Yet to
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Unlimited all the way- Diminishing Marginal Utility in Practice?

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As one walks in to a five star hotel, we find ourselves inclined to try Buffet Meals for a fixed price. Andhra restaurants have become popular for offering unlimited meals. As we visit few amusement parks, we find they charge a fixed entrance fee and let us enjoy unlimited rides. Mobile service providers woo customers by offering unlimited SMS per day at a flat fee. Bangalore Metropolitan Transport Corporation (BMTC) lures us to try its buses with a day pass (unlimited rides for a flat fee for the calendar day). Further for ages we have had the concept of Bus passes for students and frequent users as also the Suburban rail passes in Mumbai and other cities in India.   Internet service providers offer unlimited browsing per month for a flat fee. Unlimited rides in public transports, enjoy unlimited SMS, telephone calls, internet usage or even unlimited cuisine sound attractive and are part and parcel of our daily economic life. Yet step back and wonder what logic prevails here. Th
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