Digging into why we behave the way we do

Even though a tad lengthy, this book on behavioural economics sets the bar high for accessible and fun books on the ever-evolving subject.

In my experience as a trainer, I have found that economics is one subject that young bankers find scary. They state emphatically that concepts are difficult to understand. They don’t seem convinced when I tell them that as bankers, they should be able to analyse the “signals” coming from monetary policy or fiscal policy pronouncements and the implications they may have on banks.

One of the reasons for their fears may be the perception — for which we in the economics fraternity are partly responsible — they have about economics as a dismal science. This fear or dislike for economics extends beyond students to people at large. Such being the perception among people, V Raghunathan’s book with the title, 'Irrationally Rational' is timely. The author promises to simplify the subject by avoiding “highfalutin jargon”. What makes the book unputdownable is it does not have — as it also claims — formulas, graphs, or diagrams to distract or scare the reader.

Instead, it answers questions like: Why do we dream of joining a university that charges exorbitant fees? What are companies signalling when they declare dividends? Why are problems of housing cooperatives or resident welfare associations never solved?

More emotions than reason

Raghunathan is an alumnus of IIM, Kolkata and has taught in IIM, Ahmedabad, and other international schools, and has worked in the corporate sector for decades. The book, containing nine chapters, traces the evolution of economics from neoclassical to behavioural through the lens of many Nobel laureates who have contributed significantly to the evolution of behavioural economics. The book conveys the message that the choices or decisions that individuals make in their daily lives are irrational as they are driven by emotions and that they are not often rational as neoclassical economics assumed them to be.

The author makes the book a compelling read with anecdotes. Take for instance Gary Becker’s contribution to behavioural economics and his works on crime and punishment which are highlighted in Chapter 3. According to Becker, in many cases, the decision of criminals to resort to a career of crime is a rational one since the rewards adjusted for risk are far more than the cost of crime. The author quotes the wonderful “insurance” system that operates in Mumbai providing insurance to commuters for ticketless travel. Commuters travelling by suburban train can travel ticketless by paying a small premium. If they are caught, they produce the receipt to the “insurers” and get the refund equivalent to the fine. The contributions of Eugene Fama and Robert Shiller on asset (like stocks) prices should interest day traders and investors alike in stock markets. As the author states in the chapter, it is ironic that Fama and Shiller shared the Nobel Prize in 2013 for saying exactly opposite things.

Swalpa adjust maadi

The works of Daniel Kahneman and Amos Tversky (who could not get the Nobel prize as it is not awarded posthumously) are well explained in Chapter 5 under the title 'The Psychologists Who Changed Economics Forever' though the book seems to drag while covering heuristics and biases mentioned in Prospect theory. However, the anchoring heuristic (which uses mental shortcuts like a rule of thumb or educated guess) is well explained by the author under the heading 'Swalpa Adjust Maadi: The Adjustment and Anchoring Heuristics' and how this could be used by tenants and employees while negotiating rent and salary with the landlord or employer.

The chapter on Richard Thaler’s contributions to the field of behavioural economics covers the nudge theory. Nudges help individuals and businesses to alter their behaviour without prohibiting any of their options or imposing any fines. The author, while giving examples of nudges, mentions that the image of a fly (to aim) on urinal bowls is a widely known application of nudge. The background to this — which has not been covered in the book — is that this simple idea was first introduced at Schiphol airport in Amsterdam in 1999 and helped reduce the spillage around the toilet by 80 per cent, saving substantial cleaning costs and drastically reducing unpleasantness.

Even though the book is a tad lengthy, it is a must-read for policymakers, academicians and novices — to understand the importance of behavioural economics and how it has evolved in the last 50 years by integrating psychology with economics. I would have loved it if the author had dedicated a separate chapter to the works of Nassim Nicholas Taleb and covered Black Swan and Skin in The Game.

Ultimately, it would be irrational if you don’t read the book.