An Introduction to Behavioural Economics – A session by Mr. Udayan Rathore

In order to encourage students of Psychology to have an inter-disciplinary bent of mind, the Department of Psychology, LSR invited Mr. Udayan Rathore, Assistant Professor of Economics, LSR for a session on ‘Introduction to Behavioural Economics’. A topic which is merely touched upon in psychology lectures but never delved into was, conceptualized by Mr. Rathore in not more than fifty-eight minutes. The session started with an interesting activity wherein students were handed out a sheet where four seemingly easy questions were asked to answer. Everyone in the audience was confident that they knew the answers but alas, the seemingly obvious answers turned out to be absolutely incorrect and Mr. Rathore explained the point he was trying to make through this activity by taking us on a journey of foundations of Economics and how Psychology came into the realm of Economics. Mr. Rathore focused the entire session upon how Psychology has been integrated into Economics and that it has deployed in Economics, in Public Policy and Individual Decision Making. The session was taken further by an introduction to the viewpoint of the Father of Modern of Economics, Adam Smith. According to Smith’s ‘Theory of Markets’, an agent in pursuit of their goals is the best thing that is done for the society. Mr. Rathore says, “It’s not your bread or your wine, it’s not attributed to the benevolence of the baker or the brewer, but it’s your own self-interest”. Smith says that if one wants to pursue their interests, these interests would converge so that individual interests and the society’s interests come on the same level. Smith also says that markets shouldn’t be protected, but competition should because the moment competition is taken away, the market structure falls down. This led Smith to give the concept of “Invisible Hand” – the individual acting on its own best interest serves the society with the best means possible. This, in terms of Public Policy, gives rise to the Libertarian viewpoint where the concept of Laissez-faire comes in, which says, leave people for themselves, they will do the best that can be done, don’t intervene. However, this thought merely sustained up till the end of World War II. Then the Paternalistic viewpoint emerged which suggests that there is an active role of the state in decision making. This viewpoint means behaviour by an organization or state which limits some person or group’s liberty or autonomy for what is presumed to be that person’s or group’s own good. Paternalism can also imply that the behaviour is against or regardless of the will of a person, or also that the behaviour expresses an attitude of superiority. One similarity between these two viewpoints is the assumption of a rational economic individual who is able to process all information there is, with the most utility maximizing proposition and that they would not make any systematic errors (they would make an error but not a systematic one – a very important assumption). However, research in the 50s, 60s and 70s have identified that this is not true. The truth is that we have agents that are lazy, who procrastinate and who don’t look for more information. According to Tversky and Kahneman (1974), we resolve to heuristic devices which include concepts like Anchoring, Availability Bias, Representativeness and Status Quo Bias. Mr. Rathore pointed out that Psychology came into the realm of Economics in late 1960s to early 1970s as Behavioural and Cognitive Economics. The above mentioned heuristic devices are very similar to what psychology students must be familiar with as cognitive biases. Furthermore, Mr. Rathore talked about whether there is any reconciliation between paternalistic and libertarian viewpoints, wherein, a common ground is being argued upon known as the Libertarian Paternalism, which is the idea that it is both possible and legitimate for private and public institutions to affect behaviour while also respecting freedom of choice, as well as the implementation of that idea. Moreover, Mr. Rathore spoke about choice architecture, wherein he discussed how certain tools can be used to nudge people in a desired direction for example, how chips, chocolates and other junk foods are kept at eye level of children to encourage them to buy such products. He further talked about how according to neo-classical economics, individuals are risk averse, as mentioned before by Tversky and Kahneman, individuals will go for the quickest and safest possible option, which is explained by what Mr. Rathore explained as “the utility of the expected wealth is greater than the expected utility of wealth”. He gave an example of someone offering a choice between a sure Rs.10 as opposed to having 50% chance of getting either Rs.0 or Rs.20. A ‘risk-averse’ individual would opt for the sure Rs.10. However, in case people might face a loss, wealth becomes a ‘loss averse’ agent where “expected utility of wealth becomes higher than utility of expected wealth”. This frailing effect, as Mr. Rathore calls it, is the cornerstone of Prospect Theory, a topic elaborately studied in Behavioural Economics. The session ended with Mr. Rathore answering a few questions from the audience. The students thoroughly enjoyed the session and learnt a fair few things about predominant viewpoint of the foundations of Economics and the integration of Psychology in Economics. Prashansa Jaiswal, one of the audience members said, “It was pretty interesting to see how behaviours are merely a product of choice architecture”. The session provided much insight among students about the integrating arenas of the two disciplines of Psychology and Economics.

Reading recommendations by Mr. Rathore: 

1.Thinking Fast and Slow By Daniel Kahneman

2.Nudge By Cass Sunstein and Richard Thaler

 

Reported By – Sabeeha Alam

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