Of course, saying that they  won’t penalize delivery boys for bad performance is not the same thing as saying that they won’t reward them for good performance. The two aren’t the same, because of the endowment effect. Then again, you shouldn’t reward them every time they do an on-time delivery, because it will effectively amount to the same thing. You need to reward them for aggregate performance.

Something to do with their pronunciations.

Also, most Indians aim to live their lives. We aren’t particularly interested in being a country-sized museum of anthropology for you guys to visit for extended periods when you get bored of your suburban life.

The typical arguments are made by the right too. If the economy is going good “see, the deregulation has brought about unprecedented wealth. How can you propose more regulation?”

When the economy goes bad, we get the answer “see, the crisis is brought about due to regulation in the housing mortgage market. How can you propose more regulation?”

Yes, the libertarian right makes this argument, but there is a consistency in it. We believe that most regulations do harm, and that a lightly regulated economy works best.

If the socialist left made the counter-argument, that too would be internally consistent. If you really wanted to regulate the economy all the way to the Soviet Union, you could justifiably claim that both the US and India are variants of the same system. But in my post, I wasn’t arguing with the socialist left – I don’t need to, as history has already answered them.

My argument is with those who say that “we need a free market with some regulations, but that doesn’t mean that we should be socialist”. If you hold that belief, I would expect you to believe that there is some point at which additional regulations do more harm than good, so you’d support some regulations and oppose others. But what I notice is that for supporters of regulation, the right amount of regulation is always “A little more than we have now”.

Also wields the knife

When things go wrong in the US, we get the answer: “See what happened to the US because they followed a free market system? How can you propose that we junk our regulations? We need mhisore.”

This bias ensures that we will always follow suit when the US moves left, never when it moves to the right.

Two nights before the first communion, Father Antonio Isabel closeted himself with him in the sacristy to hear his confession with the help of a dictionary of sins. It was such a long list that the aged priest, used to going to bed at six o’clock, fell asleep in his chair before it was over. The interrogation was a revelation for Jose Arcadio Segundo. It did not surprise him that the priest asked him if he had done bad things with women, and he honestly answered no, but he was upset with the question as to whether he had done them with animals. The first Friday in May he received the communion, tortured by curiosity. Later he asked Petronio, the sickly sexton who lived in the belfry and who, according to what they said, fed himself on bats, about it, and Petronio answered him: “There are some corrupt Christians who do their business with female donkeys.” Jose Arcadio Segundo still showed so much curiosity and asked so many questions that Petronio lost his patience.

“I go Tuesday nights.” he confessed. “If you promise not to tell anyone I’ll take you next Tuesday.”  (Gabriel Garcia Marquez, One Hundred Years of Solitude)

The purohit who did my upanayana when I was 8 was very wise. He confined himself to forbidding me from throwing stones at dogs.

The professor was amused that no one had reasoned backwards from there. Everyone expected the market to fall in September. So, what would happen in August? Wouldn’t they think, “Hey, I don’t want to get too greedy. I know that the index will rise another month, but what if it suddenly starts falling  and I am caught short? I had better sell right now and book my profits.”

Now, if many people think so, prices will fall, not in September, but in August. But if everyone knows that everyone else is thinking that way, why would they wait till August? Won’t they start selling in July? And so on, by induction, if people expect the market to tank in September, prices should fall right now.

This is what traditional economics suggests. Behavioural economics argues that the professor’s analysis is incomplete. Obviously, not everyone will decide to sell in August, but some people will. What will happen in the market is the classic battle between greed and fear. Some people, overcome by greed, will hold on in the hope of making even more gains, while some people, overcome with fear, will sell. At some point, fear will overcome greed and the market will crash.

So, behavioural economics is useful. It helps us understand why booms and busts occur. But is it useful in the sense that we can do something about it? One way of doing something about it is to profit from our knowledge of behavioural economics. If I can use this new science to predict exactly (or even approximately) when the boom will turn into a bust, I can keep buying just before that point and then sell. If I can do that, then I can make consistent supranormal profits, and the Efficient   Markets Hypothesis would have broken down. Of course, I will also need to keep my knowledge and actions secret from others, because if everyone starts doing what I did, then my knowledge will be useless.

So, when Ritwik says that behavioural economics will falsify the EMH, this is what he means (or should mean). But is it anywhere close to doing so? While it is good at explaining, in terms of actually predicting, it is no better than a trader’s gut feel. This is not surprising. Even after the  behavioural scientists have a working theoretical model of a human society (which I doubt they have yet)  they will need to come up with the data that they can feed into their models.  This data is inevitably voluminous and difficult to obtain.

So, instead of asking me whether scientific models have to be perfect to be used,  Ritwik needs to explain what stage of usefulness his preferred models are at.  Right now, we have some theories that have been validated by surveys of actual human behaviour, and through experiments performed in controlled laboratory settings. Occasionally, we have seen them validated in pilot studies, but even here, conditions are fairly controlled.  What we need to see is a working model of human and social behaviour that puts together most of the theories that we have come up with.

In other words, what we have right now is equivalent to a situation where Newtonian laws of Physics are being developed, and it is being claimed that developing complex machines is a trivial step that can be left as an exercise to the reader. Yeah right. Someone just has to put together Newtonian mechanics, corrections to them that need to be performed when you apply coefficients of friction and air resistance, the laws of electromagnetism that will come into play when electricity is involved, and then predict how the machine will behave in real life. None of these will require Einstein-like genius, but it does require a lot of work. Engineers these days can put together a machine entirely on computer and be able to predict very well how it will behave, but it has taken a couple of centuries of trial and error to get to that stage. It takes astonishing hubris to claim that we have reached that stage with a science that has developed in the past 3 decades and which deals with systems as complex as the human mind and human society.