Tragedy of Commonsense- Why people persist with bad habits

My close friend Abhishek, who is in his early 40 s, leading a happy and healthy life is a sweet spoken gentleman, who smokes moderately and drinks occasionally. On a casual conversation, I once indicated him about adverse health impacts of smoking and chances of Cancer etc. I expected him to be defensive by arguing that he is addicted to it and despite knowing the bad consequences, he is unable to quit and similar lines of arguments.

However, surprisingly he was arguing for ‘positive virtues’ of smoking, such as increased alertness, boosting energy levels, and was completely dismissive about cancer and other ill consequences. He has a ready set of arguments to disprove that smoking does not result in cancer as he had a smoking uncle who lived up to 80 years, non- smoking aunt died of cancer etc. He was not ready to listen to any evidences or scientific studies and reports on smoking and its impact on health etc. I was amused to hear his irrational arguments and his defence against indefensible.

It was an eye opener for me and I tried to understand more about this psychological phenomenon. Later on, I was happened to hear about an interesting cognitive phenomenon called Cognitive Dissonance which was introduced by an American social scientist called Leon Fistinger in late 50 s. It then solved my riddle about why certain people uphold irrational believes and arguments despite having strong contrary evidence against such.

In common man’s language, it is like this. When people are people are committed to a belief or engaged in a habit (like smoking), any contrary evidence against such belief will create a ‘Dissonance’ in the mind of the believer. This dissonance produces a great amount of discomfort and leads him to put all his efforts to either completely eliminate it or at least reduce its intensity. The pathways he adopts for reducing this dissonance depends on upon a) his strength of belief, b) nature of dis-confirming evidence, and c) social support he gathers, to continue his present day belief.  

Accordingly, he chooses any of the 3 different pathways.

a)     Completely disowning the belief and thereby eliminating dissonance

b)     Attempting to rationalize the belief by searching for confirming evidence

c)      Living with the dissonance with all discomfort it carries.

Abhishek, like most others, in the above case opted for the second option where in which his stocks of arguments for rationalization were enough for him to reduce the dissonance to a tolerable limit. Even if his confirming arguments/evidences were weak and plainly stupid, for him it was appeared to be smoothing balm for mitigating the discomfort arising out of dissonance.

His propensity to cling to the existing believes, despite dis-confirmation is also rest on the availability and presence of a Social support system to with whom he can easily interact and exchange ideas. In other words, he will be searching desperately for similar people who have same amount of dissonance and they try to come together for mutually reinforcing arguments and rationalization. In many cases, particularly in religious beliefs etc, the pressure to have such social support tempts people for propagation and proselyting activities.

In other cases, when the dis-confirmation evidence is so strong to refute or ignore and his own belief was not that strong, coupled with the fact that the ‘believer’ does not have a believers community to take solace, he slowly but surely will disown the belief and come out of it to adopt new set of belief.

If the beliefs are very strong, then a few will prefer to live with the dissonance (with all its accompanying discomforts and pains) rather than disowning the faith. However, this is very less likely to happen and in most of the cases either of the above two will happen.

It implies, the course of action one will follow after dis-confirmation will depend on the complex interplay of a) His strength in existing believes b) Nature, strength and irrefutability of dis-confirming believes and c) Society in which he lives.

In other words, many times we ourselves don’t know exactly why we are doing what we do, or why we chose that pathway. But this vagueness and obscurity about our real motivation does not prevent us from making perfectly logical sounding arguments for our actions and decisions.

Lessons for Policy makers-

 Policy maker who wish to bring a socially desirable habits should realize that people are not going to be convinced by mere propaganda and passive social campaigns to give up their long held ‘believes’. There is also a fundamental mismatch between people who cause it and the people who are adversely affected by it. Hence, the asymmetry of cost and benefits will be played out against adapting socially desirable behavior.

We suggest 4 ways out –

a)     Top-down approach- Almost all the undesirable habits and practices have vanished from this earth through legal ban clubbed with its effective implementation. By legal ban, this practice will be vanished from everyday experience and may fall off from menu people s daily chorus. When enough time passed, no one alive would remember them to ‘justify’ it and hence will no longer would be raked up for debates. For example, none would debate on the desirability of Caste discrimination today unlike 60 years back when people openly argued that Caste system have a divine sanction and hence be kept alive.

b)     Social shaming- Habits which cannot be policed and punished effectively can be brought under control by social shaming. For example littering on street or open defecation. However, for it to happen , a critical mass of people have to support such initiative and have to take lead in ‘coercing’ others to follow it.

c)      Catch them at young -  Children is the best vehicle for bringing a desirable changes as new and fresh beliefs can be inculcated in them before they happen to practice any otherwise socially undesirable practices.

d)     Make it easy to practice the desirable behavior by creating supporting infrastructure, Eco-systems, incentivising such behavior both by financial and social rewards. Again, by lowering the entry barrier, more people are attracted towards it and hence a kind of social legitimacy and acceptance is achieved. Similarly, make it difficult to practice the undesirable habits by clear disincentives, high entry barrier and partial bans. (Example- smoking ban in public spaces etc).

People will change not when they are asked to, but when they feel that there is no other option left. They are heavily biased towards Status-quo and exhibit surprising degree of inertia. Hence, a policy maker has to design the strategy which is multi-pronged, keeping in mind the biases, incentive structures and cognitive dissonance that an individual had to encounter for adapting a new habit.

 

Nudging towards a better future- Stories and few suggestions.

Nudges are effective public policy instruments at the disposal of  policy makers to promote  socially desirable behaviors amongst citizens. The concept of Nudging was popularized by Nobel laureate Richard Thaler. According to him, policies based on nudges are ‘Libertarian paternalism’ where the state is nudging citizens towards a path which are beneficial to themselves, without being seen as authoritarian. He believes that, in a liberal democracy, people should have the freedom to do 'wrong' things, but State is morally responsible to nudge it's citizens to act responsibly.

As a public policy, we too have some examples in this category even though we had not adopted it widely to the extent possible. Here we discuss such few examples of those kinds, which are already put in place by the government in last couple of years.

a)      Electricity bills-

Have we noticed that our electricity bill contain data on our past 12 months consumption in  graphical formats? This is to make us understand the pattern of consumption and to see whether we make any conscious efforts towards reducing it.

Comparing our own past usages will likely to induce us to make an effort to reduce next month's usage. It will also provide us a benchmark from where we can relate our progress towards  reducing electricity consumption. We human beings cant spend our time on thinking and analyzing on everything. Often, we make our judgement using few thump rules and in this case, past usages in a graphical format gives us an excellent anchor. 

b)     Power of  default option - railway ticket booking experiment-

Have anybody noticed that IRCTC have changed default option for concessional rates for senior citizens. Earlier, senior citizens were getting concessional tickets automatically. However, now, such concessions can be availed only if the applicant changes the default option to that effect.

According to this report, nearly 90 lakh senior citizens have foregone their concessional prices and paid in full. I believe, many people would have gone for the default option without having to exercise the concessional ticket price option. Anyways, railways made substantial money just by having intelligently crafted default option. Because of the inherent status quo bias in us, we often go for default choices despite being our best choices lies elsewhere. 

Note- Recently, in the last few days, Railways have done away with this default option and gone to active choice of either of the options. 

c)      Ranking and rating-

Perhaps the mother of all nudges in the recent past is ranking the states under the Ease of doing business parameters. This brought a sense of competition amongst the state governments on reforms they had to undertake for easing the compliance, speeding up the approvals etc. Those found on the top were always praised and those on the bottom were shamed. .  No state wants to be at the bottom and hence it is seen as a race to the top.


Ranking and ratings are powerful policy instruments to nudge people to act in certain ways. Everybody wants to be favorably recognized and social shaming is always unwelcome.  

Now, let us discuss some suggested Nudges that can bring some good changes.

1)      Want to promote practice of yoga?  Dedicated spaces is the key

 Many find it difficult to practice Yoga at their home as they don’t have a dedicated space for it. As a way out, let us think of allowing extra FSI to builders, free of cost, for having a separate yoga room in apartments. This yoga room would be of a specified size which will discourage converting that in to an another bed room. Builders can make money out of it and the residents can have good yoga training in that room.  No money is spend by the government.

Why we need it ? –Now, having a Yoga room, there is an enabling environment in which he can translate his intention (of doing Yoga) to an actionable one. Besides, Sunk cost phenomenon would play here as people believe that they had already paid for the ‘Yoga room’ which can’t be used for any other purpose. So, by doing Yoga, he will be getting 'returns' and thereby doing justice to the money he already spend.

2)      Want to promote Organ donation-?  Make it far more easier

Many of us are willing to donate our eyes and organs once we die. But most of us don’t know where to go, do necessary consent and register. Even if we know, we often procrastinate. 

A simple way out. While issuing Driving licence or Passport, obtain consent to that effect and mention in it.  This will help our near relatives to know that we had already consented for organ donation and once we dies, the same information can be passed to the appropriate authorities.

Why we need it ? – As human being, we may not translate all our good intentions in to actions unless we are given a conducive and enabling environment to perform that act. We often misbehave, particularly when our choices and it's consequences are separated by a longer time-frame. A little nudge can be very fruitful in these type of cases.   

3)      Want to promote honesty?  ‘Declare it at the top’

It has been empirically proven that when an individual do self reporting, he is more likely to be honest when he has been made to sign the Honesty declaration at the top, rather than at the bottom.

Why we need it ? - This is because, when he declares and signs by putting his name on it, there is an element of self reflection in it and thereby he is linking his identity with certain moral values. So, he is more likely to be honest. Again, if such honesty declaration is at the end when he has already performed that act, his ‘morality upsurge’( which is resultant of his self declaration) , is less likely have an impact. This is because, he is less likely to revisit the act which he had already performed.    

4)      For Swach Bharat enthusiasts –

If you can keep the boundary walls, graffiti free and make it freshly painted, people are less likely to throw garbage near to it. If the place looks nice and well maintained, there would be a feeling that somebody has a control over it and hence people are less likely to violate the norms and rules prevailing there.  

Most social habits are contagious. We learn from others and we like to confirm to it. Many prey to collective conservatism, even if there is no particular benefit from it. If people feel that 'significant others' are not littering, then they will also adopt that behavior. We all have a powerful status quo bias within us, that tempts us to maintain a clean area clean and not to alter its status quo.

5)      Railway passes and SMS s-

Millions use Mumbai railway local passes and most of the passes are issued for 3 months. And 3 month is really a long period to keep an expiry date to remember. People often forget its renewal and travel with expired passes and once caught, are treated as ticket-less passenger and fined.

Railway can easily send an SMS  alerting about the expiry date of such passes a couple of days before. This will alert the people and is thus is a gentle warning that Railway is keen on renewal of his ticket on time.  This can be implemented by collecting mobile number at the time of issuance of passes and making some slight tweaks to its ticketing software.

Why we need it ?– Humans make predictable errors and if we can anticipate these errors, we can device policies that can reduce it. Again,as human beings, we have self control issues particularly when frequency of decisions are very less ( in this case , it is once in 3 months). A gentle nudge by making it easier to remember the expiry date can helpful in this case.

This is certainly not exhaustive but an indicative list of options available to the policy makers for bringing certain positive social behavior. Government of the day should leverage its understandings on human behavior patterns and have to integrate these aspects in its policy formulations. 

c)

        

a)     

Dynamic pricing by Indian Railways- Story of a failed experiment

Railway reserved berths are always a scarce commodity in India. Trains are always fully reserved and waiting list is long. Indians have accepted this as a fact of life and decided to move on and behave accordingly.

An economist would tell us that,in a Capitalist economy, when the goods are in short supply and demand is rising, the price will move northward thereby leading to drop in demand and hence equilibrium will be established.  In a Socialist economy, scarcity leads to goods being rationed, by consumers in long queue or in many cases goods will be allotted to people who are lucky (by lottery), or influential (by discretion) or robbing. (by corruption or nepotism ).

Recently, Railways started Dynamic Pricing (DP) mechanism on pilot basis in selected routes / trains. Our conventional wisdom says that it should be very successful and would have contributed much to the bottom line of Railways. However, it failed largely and many seats  under this DP route remained vacant. Neither passenger could travel nor railway got money. It ended up as lose –lose proposition.

Going for DP may have an economic rational, but I call these kind of proposals as Theory induced blindness.  Advocates of this pricing mechanism had forgotten certain behavioural aspects of rail passengers and how much they are willing to pay for a service in a particular context.

For decades together, we had an under supply of railway berths and we internalised that fair and just way of allocation is either through queue or through discretionary allocation. DP for railway ticket is not seen as just and fair. Let us try to understand this conundrum through various ideas and concepts of Behavioural science.

1) Utility calculus -

Nobel laureate Richard Thaler had brought the idea of two types of utility, a) Acquisition utility and b)  Transaction utility. Acquisition utility is the one which we are already familiar in Micro Economics.Transaction utility is the difference between price one is normally expected to pay ( ie normal ticket price)which is one’s reference price and the price one actually pays( ie, DP ). For a passenger who booked it under DP, this transaction utility is always negative, as he paid higher price than the normal price.  And so, the whole deal stinks for him.

People who travel in flights are very well aware and adapted to the market based pricing. They consider it as cool to the idea of paying a higher price during peak season /busy route and vice versa.  Since there is no reference price here, one simply can’t calculate the Transaction utility and hence one is happy with a positive Acquisition utility. So, according to his perception, the deal is always favourable.

2) Endowment effect and Loss aversion-

Railways always have a published ticket prices which is acting as a reference point and anything above that price is seen as ‘Loss’. Passengers feel entitled to a particular ‘Terms of the trade’ (ie ,selling ticket at normal price’) which they have accustomed to, and any deterioration from that terms of trade is considered as a ‘Loss’. This feeling of ownership of the conditions is what is seen to have unilaterally violated by Railways by starting to charge more.

3) Sitting next to me, he paid far less?

On further analysis, it seems that it is not just the Dynamic pricing or higher prices that irritates the passenger more, but different set of criterion and rules for different people. In a flight, everybody knows that all the passengers pay different prices, yet nobody feels cheated as all follow the same criterion (of dynamic pricing). Yet in case of railway, a majority people pay a prefixed, lower rate, and few others pay a far higher price for the berth inventory that has gone under DP.

Moreover, a typical flight travelling time is around 2 hours and passengers normally don’t talk about ticket prices hence nobody can know what others paid. People feel they‘lost money’ only when they compare it with others and when they came to know that others paid less for the same.  In a railway journey, passenger often talks openly about the money they paid and hence the man who paid more than the ‘normal’ price, is looked down as a ‘victim of the circumstance’.

Railway may have earned a small fortune due to this pricing policy, but it lost a large amount of goodwill amongst the consumer because of this. It was portrayed as rapacious baniya who is exploiting a ‘good famine’.

4) Why seats go vacant- Ultimatum game-

Consumers are always ready to take a financial hit ( by not travelling or booking flight ticket etc) if they feel that the deal is unfair and thereby punishing the proposer ( ie Indian Railways)  who sells ticket at higher price, by not booking and hence seats remaining vacant. Psychologists refer these kinds of engagement as Ultimatum game and its findings are very clear. People are least willing to accept unfair offers and for proposers, such offers always results in loss.  So is the seats going vacant.

The suggestive reforms in this direction are the following.

a)      It may completely do away with DP.

b)      If it wants to continue DP, it may earmark a whole compartment for dynamic pricing rather than a few seats in each compartment. They can call it as a separate ‘Premier compartment’.

c)       This compartment may be ‘discriminated’ in its favour by having more cleaner toilet, extra cushiness for its rexin or an additional meal/snacks etc to make feel passengers that they are a special customers to be pampered with,  as they paid more.

Learning lesson for Railway-

 DP should be introduced only in a competitive market economy where there are a large number of players competing against each other and people can choose between them and where there is no benchmark price. In a monopolistic market, DP will be seen as greedy and abuse of its monopolistic position. If not reversed immediately, this insensitivity to the norms of fairness could be particularly costly to IR s long term reputation.

Tax Trust and Transparency - Some behavioural considerations

Monopoly over legitimate use of violence and capacity to force its citizens to pay tax are the two attributes that make State fundamentally different from any other institutions which exists in a society. However, it’s capacity to collect tax without use of any violence (or threat thereof) with minimum coercion and least persuasion depends on a number of determinants which indicate nature of its governance and legitimacy it has.

Classical Economists attribute wealth of a Nation in terms of physical capital which it is endowed with. Social scientist James Coleman brought the idea of a new form of capital which he termed as Social Capital. It is attributed in terms of degree to which people come together and work towards a destiny with a common set of belief and a collective purpose. Francis Fukuyama had termed this phenomenon as Spontaneous sociability in which unrelated and unknown people can come together and create effective institutions.

Measured in terms of quantum of social capital a society is endowed with; we can classify them as in to High trust and Low trust society. A society with a huge social capital is referred as High trust society where a high degree of trust exists amongst citizens, government, business and other institutions. This propensity to trust is reflected in its legal systems, rules which govern behaviours of institutions, interactions amongst various authorities and its various interfaces with common citizens.

Contrary to it, a Low trust society endowed with a lesser amount of social capital. Its citizens, Business, Government etc maintain a suspicious relation with each other, if not a hostile one. Engagement amongst them are characterised by formal and rigid rules, involving a lot friction resulting in high transaction costs. All agencies and economic agents are suspicious to each other; decision making is painfully slow, resulting in huge economic as well as opportunity costs. It ends up in businesses remaining uncompetitive, inefficient public services, poor standard of living for its citizen, widespread discontent towards public institutions and rampant corruption.

People in those Low trust societies view their Government as robber barons, and taxation by government is considered as an expropriation of one’ own wealth. People perceive the political ruling class, and bureaucracy, as parasites, living on public money without contributing anything back to the society. Any expenditure by the government is viewed with suspicion and therefore such a government ends up with a huge bureaucracy, with lots of checks and balances which often ends acting at cross purposes. For example, having a huge audit, anti corruption and such departments to check the executive functions. 

In such a setting, tax evasion is rampant and tax bureaucracy is perceived to be widely corrupt. Non payment of tax has got a certain amount of legitimacy and is not viewed as a serious social offence. Citizens want state to coerce others to pay tax, yet he himself is of the firm belief that taxes can be evaded, as according to him, state in return, is not providing back enough in terms of public goods. Payment of tax is not seen as a moral obligation but as an expropriation of his wealth by the state. Tax payment is seen as a Zero sum game and not as a Positive sum one. Aggregation of this individual behaviour is reflected in the norms and value systems of such society.

Sense of fairness is a powerful parameter to understand how and why people pay tax and evade it. In a Low trust society like India, every tax payer is of the firm belief that he pays taxes disproportionate to what others pay. Salaried people complain that it is only they who regularly pay tax without default (through TDS of course), while business men believe that tax rates are too high to make them a decent profit in commensuration with their risks and efforts. While poor people complain that rich don't get taxed enough, urban middle class talks about their tax money being squandered away. Thus practically, every section of the society perceives that the tax regime is unfair to them.

Public goods game (a tool developed by Social scientists to test how much an individual are ready to contribute to a public cause whose benefits are shared equally with all irrespective of individual contribution) can be a good indicator or a proxy to a society which will tell how many of its members are ‘free riders’ and others as ‘beasts of burden’.

‘Me paying more tax’ is a fallacy that gets deeply drilled in our minds because of certain cognitive biases that we are carrying with all along. Behaviour scientists call it as ‘Self serving Bias’ where we individually are tempted to believe that our contributions for a cause are always higher than what actually is. Similarly, we are always flooded with the news of tax evasions and money confiscated; tax evaders arrested and prosecuted tax that remains unpaid etc. This ready-made news tempts us to fall in to ‘Availability bias’ where we are made available with a lot news which tempts us to believe that tax evasion is the norm and its payment is an exception. On the other side, common man never hears much about the amount of tax collected, who paid and how much etc. Again, in the name of privacy, our tax department is also unwilling to reveal any illuminating data on tax payments other than gross collection figures.

In a Low Trust Society, rational actors are always tend to be tax evaders or free riders, unless they are threatened with punishment. However, men are not that kind of rational, independent and isolated economic agent but are social animals who receives and radiates signals and cues from the society he interacts and part of. He always learns and adapts to the patterns of the ‘Significant others’ in the society and easily confirms to the norms and collective behaviour of the society in which he lives.

People all over the world are seen to be more ready to pay the tax if their neighbours and rest of the citizens are seen to pay it diligently. In other words, it is more about ‘Contagion effect’ which can act in either of the directions. Hence, it is important for tax authorities to make information regarding tax payments of this ‘significant others’ and the compliance level of people living in neighbourhoods and a particular geographic region. If privacy concern does not allow tax authorities to publish details about individual tax payers; nothing will be stopping them from giving more data about tax payment patterns at more granular levels.

For instance, details of gross tax or median tax paid, in a particular neighbourhood area or a particular PIN code - Colaba in Mumbai, for example - will be illuminating and will help others to understand tax compliance in that locality. If any asymmetry between the perceived income or consumption pattern and tax actually paid exists, it can be examined in detail. This will mount a moral pressure on residents of that area to be more honest in their tax matters. It will help others to move out of their ‘Me paying more tax’ fallacy and will illuminate about contributions of others too.

Nudging people to pay tax by increased compliances by way of making tax evasion difficult through means like PAN – Bank Accounts - Aadhaar linkage or some such means will have a huge positive spill-over by way of making honest tax payers feel morally satisfied. This will help them to perceive that everybody is now ‘forced’ to pay the tax. It then incentivises people to behave in such a way that is beneficial to the collective interest of the society. Adding to this, if he receives information about tax paid by others , whom he perceives as evading the tax, he then start to believe that it’s a ‘fair game' to pay the tax and feel vindicated. This ends up in more tax payments and thereby triggers a virtuous cycle where a resource rich government undertake activities that further enhance the wealth, and prosperity of its citizens.

Even though Tax policing and enforcements is a short to medium term tactics, by topping it up by disseminating desirable information, it can lead to a situation where tax payments will be a Social habit internalised by the citizens. Tax, hence not only have to be collected, but also seen to have collected..

 References-

1- Fukuyama, Francis. Trust: The social virtues and the creation of prosperity. No. D10 301 c. 1/c. 2. Free Press Paperbacks, 1995

2- Kahneman, Daniel. Thinking, fast and slow. Macmillan, 2011.