Government ignoring public behavioural pattern
Budget recommendations only adding to the problems
Budget recommendations only adding to the problems. PHOTO: INP
ISLAMABAD:
Many empirical studies in the past few decades have revealed that rational choice theory may be an unrealistic framework for the understanding of the economy in general, and for sustainable development in particular.
Policy economists have realised that rational choice assumptions regarding individual behaviour are not accurate and it might be more appropriate if we transform our rational choice models to include factors such as bounded rationality, limited self-interest, and finite will power. By identifying the “anomalous behaviour” of consumers and producers, we can model unintended consequences of the policy making process more accurately.
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Psychological insight filtered through a “triple bottom line sustainability” lens can help in the development of policies, which not only make economic sense but are also more sustainable. For instance, the Jevons paradox argues that efficiency gains due to technological progress, such as adoption of hybrid cars actually increases net gasoline consumption. So subsidising hybrid cars may actually contribute to an increase in the crude oil import bill – thanks to our irrationality.
However, the interface between behavioural studies and public policy remains fragmented and this interdisciplinary science is still in nascent stages.
Similarly, seeking energy efficiency may not translate to lesser energy consumption and smaller carbon footprint in the value chain, as it offers consumers and firms an incentive to pollute more. This explains that people may conserve less energy than predicted by Net Present Value (NPV) calculations when energy conservation systems are installed in the built environment. This is an example of rebound effect.
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Unfortunately, senior bureaucrats in Q block do not seem to understand this law of unintended consequences and the role of behavioural component in policy design. Proposed policies such as doubling the withholding tax (WHT) on sale and purchase of property would boost revenues only in the short run and revenues would actually decrease in the long-run. Such an approach assumes a simplistic view of the problem with a pure reductionist approach and ignores the cyclical nature of real estate market as well expected ‘rebound’ effects such as increased flight of capital to Dubai real estate market.
Similarly, State Bank’s recent announcement to cut interest rates despite inflationary pressures would help the government refinance its debt at cheaper rates - but at the cost of fuelling further inflation.
The proposal to slap 10% tax on branded milk again violates the principle of a level-playing field; and unbranded milk producers will start depending on government intervention rather than consumer choice and fair competition. Non-branded milk producers would exhibit ‘rent-seeking’ behaviour leading to production inefficiencies, inattention to consumer needs, a lack of innovation and a crippled long-term economic growth.
In designing pricing schemes, policymakers should account for people’s loss aversion as humans are asymmetric in the perception of gains and losses of the same size. They can also leverage social norms to establish a desirable social change as people conform to an overall society’s behaviour (the bandwagon effect) and believe that other people make good choices.
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Policymakers often assume that in a free market economy, consumers opt for the most competitive offer. However, many people suffer from status quo bias where consumers don’t actively exercise the power of choice due to procrastination and a behavioural lock-in. So consumers may not switch even if it saves them money, which can affect the efficiency of the market forces. Policymakers can leverage this behaviour by recommending a ‘default’ savings plans for employees. The very nature of WHT also exploits this behaviour.
In a nutshell, it is very important to understand a consumer’s mental model as a good public policy tends to leverage the prevalent behavioural biases for addressing the social, economic, regulatory and environmental problems with a holistic approach. As this does not seem to be the case here, such budget proposals would become part of the problem rather than the solution.
The writer is a Cambridge graduate and is working as a management consultant
Published in The Express Tribune, June 6th, 2016.
Many empirical studies in the past few decades have revealed that rational choice theory may be an unrealistic framework for the understanding of the economy in general, and for sustainable development in particular.
Policy economists have realised that rational choice assumptions regarding individual behaviour are not accurate and it might be more appropriate if we transform our rational choice models to include factors such as bounded rationality, limited self-interest, and finite will power. By identifying the “anomalous behaviour” of consumers and producers, we can model unintended consequences of the policy making process more accurately.
Economic Survey – what the numbers do not tell us
Psychological insight filtered through a “triple bottom line sustainability” lens can help in the development of policies, which not only make economic sense but are also more sustainable. For instance, the Jevons paradox argues that efficiency gains due to technological progress, such as adoption of hybrid cars actually increases net gasoline consumption. So subsidising hybrid cars may actually contribute to an increase in the crude oil import bill – thanks to our irrationality.
However, the interface between behavioural studies and public policy remains fragmented and this interdisciplinary science is still in nascent stages.
Similarly, seeking energy efficiency may not translate to lesser energy consumption and smaller carbon footprint in the value chain, as it offers consumers and firms an incentive to pollute more. This explains that people may conserve less energy than predicted by Net Present Value (NPV) calculations when energy conservation systems are installed in the built environment. This is an example of rebound effect.
Budget 2016-17: Going all-out to support agriculture sector, says Dar
Unfortunately, senior bureaucrats in Q block do not seem to understand this law of unintended consequences and the role of behavioural component in policy design. Proposed policies such as doubling the withholding tax (WHT) on sale and purchase of property would boost revenues only in the short run and revenues would actually decrease in the long-run. Such an approach assumes a simplistic view of the problem with a pure reductionist approach and ignores the cyclical nature of real estate market as well expected ‘rebound’ effects such as increased flight of capital to Dubai real estate market.
Similarly, State Bank’s recent announcement to cut interest rates despite inflationary pressures would help the government refinance its debt at cheaper rates - but at the cost of fuelling further inflation.
The proposal to slap 10% tax on branded milk again violates the principle of a level-playing field; and unbranded milk producers will start depending on government intervention rather than consumer choice and fair competition. Non-branded milk producers would exhibit ‘rent-seeking’ behaviour leading to production inefficiencies, inattention to consumer needs, a lack of innovation and a crippled long-term economic growth.
In designing pricing schemes, policymakers should account for people’s loss aversion as humans are asymmetric in the perception of gains and losses of the same size. They can also leverage social norms to establish a desirable social change as people conform to an overall society’s behaviour (the bandwagon effect) and believe that other people make good choices.
Pakistan, US agreement: Plan signed to promote women entrepreneurs
Policymakers often assume that in a free market economy, consumers opt for the most competitive offer. However, many people suffer from status quo bias where consumers don’t actively exercise the power of choice due to procrastination and a behavioural lock-in. So consumers may not switch even if it saves them money, which can affect the efficiency of the market forces. Policymakers can leverage this behaviour by recommending a ‘default’ savings plans for employees. The very nature of WHT also exploits this behaviour.
In a nutshell, it is very important to understand a consumer’s mental model as a good public policy tends to leverage the prevalent behavioural biases for addressing the social, economic, regulatory and environmental problems with a holistic approach. As this does not seem to be the case here, such budget proposals would become part of the problem rather than the solution.
The writer is a Cambridge graduate and is working as a management consultant
Published in The Express Tribune, June 6th, 2016.