Mr. Ritwik Banerjee is an Associate Professor of Economics area at the Indian Institute of Management, Bangalore. His research interest lies at the intersection between Development Economics and Behavioural Economics. He particularly looks at the economic issues through the lenses of psychology and his Ph.D. thesis was titled "Economics of Misbehaviour". He is also a Research Affiliate at the Institute for the Study of Labor (IZA), Bonn, Germany.
Q1. Various facets of behavioral economics can be applied in policymaking to ensure the desired social changes are brought about in a structured manner, based upon a sound economic model, making more realistic policies that can easily be brought into effect. Why do you think India has not implemented this form of policymaking?
Mr. Ritwik Banerjee: The first thing to note is the connection between academic research and policymaking in India. Both of these, for a very long time, have operated in their own silo and this is quite unlike what happens in the US or UK or some of the advanced countries.
If we talk only about behavioral economics, in general in India, they are often in silos and academic research and policymaking haven’t had a lot of opportunity to converge. But having said that there are now forums that are emerging which want to bridge that gap between policy and academics. For this, the international group center, IGC has a platform called ‘Ideas for India’ with the main idea of such a platform is to do the best thing they could do, together. Academics and policymakers, and have them talk to each other. They publish articles that are very lucid, easy to read for policymakers, and less on technical jargon and they focus more on the content. I think some of those platforms are the right strategies to take if you want to engage.
That being said, behavioral economics is fairly new as a discipline. If that hasn't happened, if the conversation between a policymaker and an academic hasn't happened to the extent it should have for a subject as deep and rich as macroeconomics and expecting that to happen for behavioral economics is probably expecting a bit too much! But, hopefully, in the future more and more people will get trained, there is an increased emphasis on behavioral policymaking, even in organizations such as Niti Aayog, where we are all trying to come up with a Nudge Unit in India. I guess as time passes by and as more and more people become informed about behavioral economics, organizations such as the Nudge Unit in India, Niti Aayog will open up to ideas from academic economists, such as myself. So I'm hopeful that things will change in the future and the root of your question can be traced back to the fact that academics and policymakers have largely operated in similar silos.
Q2. We are aware that Behavioural change brings about a sustainable result, like lower fuel costs and reduced carbon emissions. How can such changes be implemented in India for a better sustainable future? If you could give us an example or two.
Mr. Ritwik Banerjee: So, there has been some examination of nudges in the context of environmental observation. So they have tested the role of conventional price-based mechanisms to encourage conservation and they also tested the role of non-price-based mechanisms. But, as you already know, the price-based mechanisms have their obvious limitations, because markets cannot solve and lead to an efficient outcome when there are externalities involved and in any environmental emission-related issue, there are large externalities involved so market-based solutions will not give us the socially optimal outcomes.
So, as a result, behavioral economics comes into the picture, and nudges can play an important role. For example, in the US and some of the Western countries where smart automobiles have very detailed dashboards where besides the speed and the number of kilometers traveled, they also show the amount of carbon that the car has emitted in this trip. So, that's an example of a nudge, which makes your role in carbon emission very salient. So, that's one example, but I guess it will take some time. So, these are things that people are experimenting with.
So, one of the things that we must remember is that most of these nudges which have been tested or the behavioral policies which have been tested, have been tested in a Western context. So, it would be a folly on our part to just import that idea and replicate it in India. Because many of these policies are context-dependent, they are culture-dependent. Giving that the content and culture in India is very different, we should get engaged in the process of very seriously testing whether some of these ideas work or not. So, we should be very wary of importing the nudges which have worked in for example Sweden, and just blindly implementing it here. We have to be careful in terms of testing whether these ideas work or not, if they do, we could adopt them in some measure. But as I said, there is a wide menu of options available and some of them are behavioral in nature and some of them are conventional in nature. But the important thing is that behavioral measures if we were to implement them, should be tested and only implemented if it works.
Some of the other conventional policies are less context-dependent. It so happens that behavioral policies are often context-dependent. The meaning of symbols are very different across cultures.
Q3. How successfully do you think the Swachh Bharat Mission and Beti Bachao Beti Padhao schemes were in employing the various aspects of behavioural economics like nudges and the prospect theory?
Mr. Ritwik Banerjee: I don't think prospect theory has much to do with the nudges. One thing is for sure, there was a chapter on behavioral policy making in the previous Economic Survey and it was very obvious from reading the chapter that the person or set of people who had written the chapter did not really understand what behavioural nudges are. So they put a whole range of policy interventions under behavioral nudges where they were not really nudges, they were pushes and shoves. All kinds of things get clubbed under behavioral nudges while they are not.
So far as the Swachh Bharat Mission is concerned, there are aspects which are behavioral in nature, there are aspects which are much more classical in nature. So for example, building the toilets themselves. I don't think that's behavioral. So you are making an in-kind transfer to a community, that's what is happening. There are limited resources. People do not have resources to build their own toilets in many cases, and the government makes a lump sum transfer and builds toilets in the villages, localities. So that's not included.
But I was in Patna a few months ago, before COVID-19 hit, and I was talking to people and they said the toilets were built but people did not know how to use them. So what the government did after that was that they painted the walls of all public institutions like panchayats, schools, the toilets themselves with figures that demonstrated or illustrated how the toilets should be used. So that is an example of a nudge. That's a behavioural intervention. There is very little monetary transfer involved. It's just a little information campaign which is painted on the public walls if you will. That's a good example of a nudge, so the government did end up using some of these insights. I don’t know whether they used the insights in an informed or uninformed manner but they did use some of these. But not everything about the Swachh Bharat Mission can be clubbed as behavioural in nature.
For example, Prime Minister Modi made a valiant attempt from the precincts of the Red Fort to urge people to be much more mindful about building toilets at home and so on. So some of those measures could also be clubbed under Behavioural Intervention.
Q4. Cognitive biases play an important role in behavioural economics. However, sometimes, firms take advantage of this in order to coax the consumers into buying their choice of products. What is your take on this? Do you think it is ethical?
Mr. Ritwik Banerjee: Yeah, so I don't think it's ethical. But you know, there is a discussion between or distinction between nudges and sludges. So the word sludge was introduced by Richard Thaler and Cass Sunstein. And there are all kinds of behavioral interventions which go on, right, this is not only from the public sector, but it's also from the private sector. So they are extremely interested in increasing their sales revenue and so on. What are the ad campaigns? What have they been doing? They have been, you know, quote-unquote, nudging people to buy the product for a very long time. So applying behavioral insights to marketing strategies is not something new. It's something new in the public sector, but it's not something new in the private sector at all.
So for example, the Fair & Lovely campaign panders to a very cultural desire for particularly South Asians to appear fair. A fair bride is more valuable than a dark-skinned bride. That's the cultural context that we come from, and Fair & Lovely has pandered to it. The correct word to use for these kinds of interventions is sludge. There is some social welfare maximizing solution, there are nudges, which help people move towards the social optimum. And there are sludges, which help people move away from the social optimum. So that's something that the private sector has done for a long time. So of course, it's not ethical. And that's the right word to use. So there should be a campaign for nudges and a campaign against sludges.
By the way, Fair & Lovely has recently changed the name of the product to Glow & Lovely. So some advisors have been informed that this strategy is now backfiring because people are seeing through your sludges so let's change that.
People have been using these principles for a very long time without formally knowing that this is part of behavioral economics or without being formally trained in psychology, they have been using it because they have been practicing the trade for a long time and there have received wisdom from their seniors or from wherever they have been trained. So for example, when I think when I was younger, there was a program called The Big Fight, which was then hosted by Rajdeep Sardesai, and one of the guests there was Alec Padamsee who was a very well renowned ad guru and theater expert. So he suggested that Fair & Lovely should rename themselves as Bright & Lovely.
Q5. How can behavioural economics be used to boost the current market sentiment, considering the falling aggregate demand?
Mr. Ritwik Banerjee: I don't think behavioural economics is the panacea to all the problems. Certain problems are more suitable for a behavioral intervention, certain problems are more suitable for behavioral intervention. Where the loss of demand in the economy is concerned, currently the demand in the economy is extremely low. The government should transfer cash into the hands of more people. The kind of economic situation the poor in the country have to face today is pretty bad and not only will a transfer of cash to these poor people through the mechanisms already set up by the government elevate the current economic situation, but will also help kickstart the economy. This will lead to an increase in aggregate demand, which will kickstart the whole economy. If you look at the market sentiments, they were never down. It was down for about just 3 weeks, and speculations were on and the market is back at the pre covid level - just observe the Sensex! The market sentiment was never affected. The real economy was in a very bad shape but the market had no effect except the one small dip.
Having said that, some findings show these cash transfers when framed in the form of a rebate somehow lead to lower expenditure as compared to when framed in the form of a bonus. Here prospect theory comes into the picture. One kind of frame induces the feeling that the money is already mine - inducing people to save rather than save more. As a government, when you are granting money in the hands of the poor, your objective being to kickstart the economy - you wouldn't want the people to save that money. You would want people to spend that money so that the multiplier kicks in. Now, if you think that the money is the only mine, they are more likely to save it. If the money is taken as a bonus, it is thought of as ‘extra money’ which can be spent on some consumer material. You can induce in people the sense that this is some extra money for you. The first order intervention has to be fiscal in nature but then some additional framing effects come into the picture.
Q6. How important is the study of Behavioural Economics at the undergraduate level? Do you think it should be added to the course curriculum all across the world?
Mr. Ritwik Banerjee: I don’t think adding behavioral economics would help. It would always be an elective. Suppose you don't want to pursue economics in the future, for you to have a sense of what behavioural economics is about, some of the biases that people have - it’s a good idea. But if you want to specialize in economics, I don’t think it's important to learn behavioral economics at the undergraduate level. The important thing for you is to focus on the tools and techniques. If you want to do a good Ph.D., you should have all the required tools and techniques: you should be good at math, you should invest a lot in building your computational tools. Computation is extremely important today, programming is extremely important today. It’s those tools that you really need to focus on in your undergraduate and master's. Later on, you can always pick up Behavioural Economics along the way. It’s something that can be done if your fundamentals are very strong. I don’t think it’s important at the undergraduate level. So if you’re interested in research, focus on math, statistics, computation - you’ll be able to pick up behavioral economics as you go along.
Interviewer- Nicole Srishti Basile and Visaaya Bamba
Image Source- IIM Bangalore