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Showing posts with the label signalling

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 Signalling: Beauty and Ownership of Durables

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  There is without doubt a fascination in many to look or appear beautiful or handsome. They want to score one up over their family members or friends or those in the social circle. There is no doubt an attraction towards spending on beauty products like cosmetics or dresses. There is further an attraction towards owning latest electronic gadgets, a keen inclination to own a car or at least a two wheeler, an innate desire to own house preferably in an upmarket belt, a tendency to possess and wear jewellery different from the rest. All these are instances which one observes around them in everyday life. To some it might be a necessity, to some it might be an aspiration, to others it might be fulfilment of desire to square up with their prospective rivals so as to speak. Yet in each of these actions or movements towards those actions, underlies a concept that is innate to economics. While as perceived from outside, economics might appear abstract, but as the explanation for these phenome
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Jan Bhagidaari, Signalling and Bottom of Pyramid Entrepreneurial Creation

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  In the presence of information asymmetry, it is difficult to gauge the intentions of the opposing party. The only way to detect any possible moves is through a careful observations of the signals they are likely to send. Thus signalling is of critical import in economics. In the past posts, the role of signalling has been discussed in certain contexts. The current post would seek to take it forward. Recently there was a communication from the RBI Governor to the players in the debt market be competitive and not combative to achieve the best results. There is a tendency in the section of debt players to act pro-cyclically in tune with RBI whereas the others might act counter-cyclically to the RBI stance. This often negates the RBI purpose and thus monetary transmission might not achieve the desired results. This of course in some ways reflects the tragedy of commons often discussed in economics literature but owes its origin to biology.   Yet in discussion on signalling, two dimen
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Information Assymetry, Diya and Wuhan Virus

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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
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The Mythology and the Separating Equilibrium

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In game theory, separating equilibrium is a scenario wherein each player is forced to reveal his or her private information. In normal circumstances agents send out different signals for different contexts. The recipient would be served best if he or she are able to decode the true self of the messenger and the mess. Often, the hiding of private information and preferences by the agents is to enable them to counter posit the strategy of the rivals. Ideally, any strategy must be aimed to garner the private information and preferences of the agent. Implied is the true self of the agent must be revealed. For example to an insurance company the firm must be in a position to get the exact status of health information of the person doing the policy. The agent knowing a great deal of their health would obviously have incentives in hiding the information from the insurance company. For the firm, the ideal scenario is wherein, the agent has to reveal his or her true health status. The equili
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Theorizing the R-Day Parade- Economics Approach

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January 26, the celebration of Republic Day has become synonymous with the military parade along the Rajpath. Besides being a tourist attraction it reinforces the sense of national pride and honour. While the Rajpath where the President takes the salute, is the cynosure of attention, the parade makes its way across parts of Delhi.   Yet, on and off, there have arisen questions over the necessity of parade.   It might not be far off when woke liberals might call for ending the parade on grounds of encouraging intense nationalism. To some in the right, it if often viewed as hangover of the Soviet style parades that dominated the Communist Soviet Union. Military parades are known to have existed for centuries with records documenting the same in Roman and Greek times. The modern counterparts are however, around a couple of centuries old, with the oldest perhaps commemoration of fall of Bastille. The evolution of parades is not uniform. Though objectives might be similar to varying
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