Abstract
(Penguin Viking, 2022), 328 pp. ₹599.00, ISBN: 9780670095995
The field of what is today called ‘behavioural economics’ intrigues and baffles everyone who studies the actual behaviour of people (as distinct from how people ought to behave). In this excellent exploration, Raghunathan has given us both a bird-eye-view and a detailed look at this field.
Perhaps to make it feel more ‘human’, which is what behavioural economics is all about, the author has organized it around the Nobel Laureates who have won the Nobel Memorial prize for work in behavioural economics. This turns out to be a rather effective way of organizing the content because economists necessarily build on each other’s work, so the progression and evolution of thought is seen quite clearly. If he had organized it around topics or themes, it might have gone all over the place. Anyway, it feels good to know something about the very human people who created this body of knowledge. The book does this faithfully, giving us a little background on each and even telling us who spent time in India or Kenya and how that might have influenced their thinking.
I will not, of course, go into a chapter-by-chapter review, I leave that to each reader. My impression as a reviewer is simply this: As someone interested in this field but not, shall we say, committed to it (as Raghunathan is, starting from his doctoral dissertation days), I always wished someone would summarize all the work in this field in a meaningful way so I would not have to read a hundred books to figure out what it is all about. This book has achieved that purpose in an altogether satisfactory and satisfying way. At the same time, it has shown me a glimpse—a mere jhalak as it were—of some work that I can now go and look up.
Overall, Raghunathan has done justice and more, to each of the Nobel Laureates—many of whom couched their work in mind-boggling mathematical models—without using a single equation or referring to a stochastic process. That is always the sign of a master; if you have really understood something, you should be able to do this, and Raghunathan clearly has.
The book starts with the great Herbert Simon—as it should, for Simon is universally recognized today as the father of this field—although, as Raghunathan mentions, Laplace had said many similar things decades earlier. Simon’s work is described at some length, again, I believe this is appropriate for his work is the foundation for much that follows. Simon was the first to consider how human beings make decisions with limited information and multiple pressures; concepts like ‘bounded rationality’ become the basis for much that others have built on.
The book moves on to show how Nobel Laureate after Nobel Laureate contributed to our understanding of how people and organizations make economic decisions—from Gary Becker’s human capital and Kahneman and Tversky’s work on Heuristics and Biases.
One of the really interesting aspects of the work described in this book is how they based their propositions (I won’t even call them theories) on how people actually behave when faced with choices. This contrasts sharply with how conventional economists begin with a theory, generate some hypotheses and then proceed to test them. Because they start with actual human behaviour, most of us who are not economists, can immediately relate to them.
Although Raghunathan is primarily a finance professor, he does not, in this book, give undue weight to finance, whether in his stories or in his choice of Nobel Laureates, which is very refreshing. While finance and stock market stories certainly tell us a lot about human behaviour, most of us would rather hear stories from other fields, which is what this book gives us.
While I personally found some of the chapters a bit tedious because the experiments described were a bit too much like each other (for example, the work of Kahneman and Tversky), I found some to be of startling interest and relevance. The work of Ostrom, for instance, on the problem of the Commons, is becoming increasingly relevant as the planet heats up. The environment is undoubtedly the prime example of a commons, as Raghunathan clearly points out. If I could wish for more from this book, it would be a more elaborate exploration of this theme. To do him justice, Raghunathan even points out how the Bhagavad Gita and the concept of dharma may be relevant in this particular dilemma.
The book rightly credits Robert Shiller with helping us understand panics and crashes—something we will expect to keep seeing forever and ever. These are very significant contributions and worth understanding. The fact that investors in the financial markets often watch each other’s actions rather than anything ‘fundamental’ is something we have all observed in numerous situations.
Throughout the book, Raghunathan not only presents the concepts that the Nobel Laureates have developed but also discusses how they might be applicable in an Indian context, for instance, in the beautiful example in the third chapter on how we would favour a particular fruit vendor just because we would perceive him as being ‘fair’. We have come across some of his examples, especially Indian ones, in his earlier writings, but that is only because there is consistency and integrity to his thinking. I do not necessarily agree with some of his observations on Indians, but I find the examples and stories fascinating and easy to relate to.
Some puzzling aspects, where I was left a bit unsatisfied—what does Thaler really have to do with Modigliani and Miller was not really clear here, although they are all Nobel Laureates, of course. In some chapters, for instance, on the discussion of ‘greed versus fear’ in Chapter 8 and his own experiments, one would wish for more details on the results actually found, which would have been illuminating. Knowing him, I can say he must have conducted several interesting experiments.
The annexures also deserve a word of praise: If you want a quick, easy-to-understand summary of what mean variance is or what rational expectations really means, these annexures are better than anything I have seen yet.
The last chapter, where he touches on a number of contemporaries, many future Nobel Laureates, perhaps, is also extremely valuable. It gives me ideas of what to read next to keep up.
If I have any criticism of this book, I would say two: Some surprising omissions, for instance the story of Raiffa’s decision matrix, quoted in Iyengar’s The Art of Choosing (2010) and, generally, the contributions of Sheena Iyengar, do not get a mention, although both are highly relevant. The other criticism would be that some of the more far-reaching concepts, like Ostrom’s, which could make us think differently about the really big issues like global warming, are given less space than the relatively tedious (to me) discussion of experiments around the prisoner’s dilemma and its variations, which I always think of as ‘second order effects’.
All in all, although a great book, it certainly saved me the trouble of reading a hundred books and gives me enough detail to be satisfied; it leaves me just short to be intrigued, wanting to learn more. What more can one ask for, from any book?