MICRO-ECONOMICS AND BEHAVIOR

Thinking Like an Economist

Many Economics books like Mankiw start with a chapter on: “Thinking like an Economist.”But the book that does this best from a behavioral viewpoint is Robert Frank’s “MicroEconomics and Behavior”.

This book initiates its chapter on “Thinking Like an Economist” with a negation of the typical ‘material’ view of scarcity. Giving the example of Aristotle Onassis who suffered from ‘myasthenia gravis’, a debilitating and progressive neurological disease, the author states that despite being worth several billion dollars at his death Onassis ‘confronted the problem of scarcity much more than most of us will ever have to.’

‘For him, the scarcity that mattered was not money but time, energy and the physical skill needed to carry out ordinary activities.’

As a teacher I like to give the following example of scarcity: It is possible you have thousands of rupees in your pocket but because you are a very busy executive you do not have the time to see the latest movie ‘Ready’. Or, maybe you do have one evening (say, Saturday) free, but your wife or girlfriend wants to spend the evening in a Chinese Restaurant having dinner instead.

Costs and benefits of decisions.-When we are sitting in an armchair in our sitting room, we may want to lower the volume of the stereo, increase the speed of the fan, turn off the light, but we may be too lazy to do any of these activities, it is as if we compare the costs and benefits of alternate actions, getting up or remaining seated. (the author in the chapter explains how to translate this decision into a monetary framework.)

The Role of Economic Theory-It might sound not just strange but absurd that someone might actually calculate the costs and benefits of turning down a stereo. Making unrealistic assumptions is a charge often levied against economists. Two responses are made to this criticism. Economists don’t assume that people make explicit calculations of this sort at all-is the first response. Rather, we can make useful predictions if we assume that people act as if they made such calculations, is what many economists argue. Milton Friedman expresses this view forcefully by arguing that the shots expert pool players choose, and the specific ways they attempt to make them, can be predicted extremely well by someone who assumes that the players take careful account of all the relevant laws of Newtonian Physics. Not that they would have had training in Physics but, Friedman argues, they would never have become expert players in the first place unlessthey played as dictated by the laws of physics. Unrealistically, our theory of pool player behavior assumes, that pool players know the laws of physics. We are urged to judge this theory by Friedman  not by how accurate its central assumption is but by how well it predicts behavior. And it performs very well indeed, on this score.

 Friedman like many other economists, believes that useful insights into our behavior can be gained by assuming that we act if governed by the rules of rational decision making. By trial and error, he feels, we eventually absorb these rules, just as pool players absorb the laws of physics.

Conceding that actual behavior does often differ from the predictions of economic models, is a second response to the charge that economists make unrealistic assumptions. Thus, as economist Richard Thaler puts it, we often behave more like novice than expert pool players.

But even where economic models fail on descriptive grounds, they often provide very useful guidance for making better decisions, they may often give insights into how we may achieve our goals more efficiently, even if they don’t always predict how we do behave.

Common Pitfalls in Decision Making-

Ignoring Implicit Costs: some costs are not explicit, we should include the opportunity cost ie the value of the most highly valued alternative to the chosen alternative. If doing activity x means not being able to do activity y, then the value to you of doing y (had you done it) is an opportunity cost of doing x. Many people make mistakes while making decisions because they fail to see that while making a decision, the foregone alternative should be considered. Thus it would always be instructive to translate questions such as “Should I do x?” into ones such as “Should I do x or its most highly valued alternative y?

Should I go skiing today or work as a research assistant?

there is a skiing area near your campus in which the cost of skiing is $40, the benefit of skiing to you is $60, but there is a choice to that, you can work as a research assistant to your professor, and be paid $45 for that, you like the job enough such that you are willing to do it for free.

Here the cost of skiing is not just the explicit cost of $40 for skiing, but the opportunity cost of the lost earnings ($45). Therefore the total costs are $85, which exceed the benefits of $60. So, you should stay on the campus and work for your professor. Someone who ignored the opportunity cost of the foregone earnings would decide incorrectly to go skiing.

It is an important point that you are willing to do the job for free, meaning there are no psychic costs attached to the job. This is important because it means that by not doing the job you would not have escaped something unpleasant.

Not all jobs fall into this category. Suppose your job involves scraping plates at the dining hall for which you will get the same $45 per day. The job is so unpleasant that you would not be willing to do it for less than $30 per day. Let us now reconsider the decision of whether to go skiing assuming that your boss allows you to have one day free in your job.

Should I scrape plates or go skiing today?

There are two alternative ways of looking at this decision. One is that, one of the benefits of going skiing is not having to scrape plates. Since you would never scrape plates for less than $30 per day, one could say that going skiing is worth that much to you. So the indirect benefit of going skiing is $30.The direct benefit of going skiing is still the same $60.So the total benefit of going skiing is $90. Whereas the costs of going skiing is the same the opportunity cost of the lost earning which is $45 plus the explicit cost of skiing which is $40, so the total cost of going skiing is $85.So, in this alternative the costs of skiing are less than the benefits of skiing, $85 is less than $90, indeed it makes sense to go skiing.

There is an alternate way of looking at this problem. Looking at the unpleasantness of the job as an offset against the salary. In that case we would subtract the $30 unpleasantness cost from the $45 salary, so the opportunity cost of not doing the job would be only $15, and the cost of going skiing would be $40+ $15=$55.The benefits of skiing are $60.And, again the benefits are greater than the costs.

The valuation of the unpleasantness of scraping the plates can thus be handled either way, however it is important that you handle the valuation in one of the alternative ways do not count it twice.

Clearly there is a reciprocal relationship between costs and benefits. Not incurring a cost is the same as getting a benefit. Similarly not getting a benefit is the same as incurring a cost.

Consider the case of a graduate student who was returning home after getting his degree from US. Now he could get a car from US without paying duty according to the rules for a returning student. This story is of way back in the 60’s.The car the student planned to get was an Impala. He planned to sell it in India at the rate of its cost plus the amount of duty he would have had to pay otherwise. However his uncle asked him to bring back the Impala for him and told him he would pay him the cost of the car. Obviously the student could not charge his uncle the duty. Not getting this benefit was the cost paid by the student.

Should I work first or go to college first?

The cost of going to college is not only the cost of fees, books, hostel room and board but also the cost of time and money foregone by not working, this cost is the least when yoyu are straight out of school, so most people go to college right after school.

Is it fair to charge interest-Yes it is, interest is merely the lender’s opportunity cost of not having deposited money in a bank, but this begs the next question.

Why do banks pay interest in the first place?

Because interest is the reimbursement for the opportunity cost of money, yet there is hostility towards money lenders because they are the richer part of the transaction.

Pit  fall 2-Failure to ignore sunk costs-there are two examples given in the book, one is if we compare the cost of say going to Bombay from ahmedabad by bus and car, if we would take the cost of going by car as the petrol, maintenance, insurance and interest cost that would be a mistake because, they would be the same whether or not you drive to Bombay, they would not vary with the amount of km traveled, thus these costs are unrecoverable at the time at which the decision is made.Another eg is an all u can eat dinner of pizzas, the relevant choice is which restaurant to go based on the per head charge and other factors , once this decision is made, getting your moneys worth should just depend, on how hungry you are, and how much you like pizza not on how much you paid for the dinner, yet this is often the case.

Micro-Economics and Behavior II

Explaining tastes: the importance of altruism and other non-egoistic behavior:

The central assumption of microeconomic analysis is that people are rational. Two important definitions of rationality are the so-called present-aim and self-interest standards. (Derek Parfit, Reasons and Persons, Oxford:Clarendon,1984.).A person is rational under the present-aim standard if she is efficient in the pursuit of whatever aims she happens to hold at the moment of action. No attempt is made, under this standard, to assess whether her aims themselves make any sense.Under the self-interest standard, by contrast, it is assumed at the outset that people’s motives are congruent with their narrow material interests.

In textbook accounts of rational choice, economists often embrace the present-aim standard. The difficulty with the present-aim standard is what we might call the ‘crankcase oil’ problem. If we see a person drink the used crankcase oil from his car, and he then writhes in agony and dies, we can assert that he must have really liked crankcase oil.

With this difficulty in mind, most economists assume some version of the self-interest standard of rationality in their actual research. It helps explain, for example, why car pools form in the wake of increases in gasoline prices. Without question, self-interest is an important human motive.

Yet narrow self interest is surely not the only human motive. Travelers on interstate highways leave tips for waitresses they will never see again. Participants in bloody family feuds seek revenge even at ruinous cost to themselves. People walk away from profitable transactions whose terms they believe to be “unfair.” In these and countless other ways, people do not seem to be pursuing interests of the usual egoistical sort.

An application of the present-aim standard: altruistic preferences

Because we know from experience that not everyone has the narrowly selfish preferences assumed by the self-interest model, it is tempting to broaden the analysis by simply adding additional tastes-by assuming, for example, that people derive satisfaction from a variety of behaviors that conflict with narrowly defined self interest, such as donating money to charity, voting, disposing of litter properly, and so on.Let us explore how the notion that some people have altruistic preferences can be incorporated formally into our model of rational choice.

Consider, for example, the case of Tashu, who cares not only about her own income level but also about Mun’s. Such preferences can be represented in the form of an indifference map defined over their respective income. Tashu’s indifference curves are negatively sloped, which means that she is willing to tolerate a reduction in her income in return for a sufficiently large increase in Mun’s.Her indifference curves exhibit diminishing MRS, which means that the more income Tashu has, the more she is willing to give up in order to see Muns have more.

The question that Tashu confronts is whether she would be better off if she gave some of her income to Muns. Suppose her initial income level is $50,000/yr and that Mun’s is $10,000.What are Tashu’s options? She can retain all her income. Or she can give some of it to Muns, in which case she will have $1 less than $50,000 for every $1 she gives him.

If Tashu keeps all her income, her MRS exceeds the slope of her budget constraint,it is clear that she can do better. The fact that MRS greater than one at the original point tells us that she is willing to give up more than a dollar of her own income to see Muns have an extra dollar. But the slope of her budget constraint tells us that it costs her only a dollar to give Muns an extra dollar. She is therefore better off if she gives some of her income to Muns.

The Strategic Role in Preferences

The attractive feature of the present-aim standard of rationality is that it lets us broaden our analysis to embrace nonegoistic motives whose existence is well documented. Yet as noted, the lingering methodological difficulty is that unless we impose some constraints on ourselves, the present-aim standard allows us to explain virtually any bizarre behavior by simply positing a taste for it. Our dilemma is how to expand our view of human motives without at the same time becoming vulnerable to the crankcase oil objection.

Biologists have discovered a way out of this dilemma, one that rests on an analysis that is quintessentially microeconomic in character. In biology, an organism’s tastes are not arbitrarily given as they are in economic models. Rather, biologists assume that tastes are forged by the pressures of natural selection to help organisms solve important problems in their environments. For example in the biologist’s account, our taste for sweets is a characteristic we inherited from our ancestors, in whom it evolved for functional reasons.

There is evidence that this particular taste is no longer functional in our current environment. In earlier times, the sugar found in ripened fruits were sufficiently scarce that there was no practical danger of over consuming them. Now, with sweets so plentiful, our taste for them sometimes leads us to overindulge,with various adverse consequences.

The taste for sweets is a simple preference, in the sense that it would have been useful to an individual irrespective of whether others in the population shared that taste. Other tastes, however, are more complex, in the sense that the usefulness of having them depends on the fraction of other individuals in the population who share them. This second type we call a strategic preference, one that helps the individual solve important problems of social interaction.

A Parable of Hawks and Doves

Consider a population which differs in its taste for aggressive behavior. Thus it is divided into hawks, the aggressors and doves, the pacifists. If these two types engage in a fight for scarce resources which one will win out? Well, at first glance one would assume that the hawks who are more aggressive would win out, but this precludes a confrontation between two hawks. Since both individuals are predisposed to be aggressive a bitter confrontation might ensue. Depending on the consequences of such a fight, it may indeed be costly to be a hawk.

The potential disadvantages of being a hawk become even clearer, when we consider what happens when two doves confront each other over sharing of a resource, in this case the costs of a bloody battle are avoided and the two decide to share the resource.

In our hypothetical population pairs of individuals interact with one another at random and there are three possible pairings 1) two hawks, 2) a hawk and a dove, 3) two doves. To see how this population will evolve we need to know the payoffs for each of these three types of interaction.

Suppose the conflict involves food that contains 12 calories. When two doves interact, they share the food so that each receives a payoff of 6 calories. When a hawk and a dove interact, the dove defers to the hawk so that the hawk gets 12 calories the dove gets none. Finally, when two hawks interact, the winner gets twelve calories the loser gets none. The confrontation however, consumes ten calories for both the hawks, which means the winner gets 12-10=2 calories, and the loser gets -10 calories. Of course over the course of many interactions, any given hawk can be expected to win half the time, and lose half the time. Thinking of hawks as a whole then, the average payoff for the hawk-hawk encounters is expected to be (2-10)/2=-4 calories per individual.

Thus summarizing: when two hawks meet, a fight ensues that consumes 10 calories each, leaving an average net payoff of -4 calories per hawk. When doves and hawks meet, doves defer, so hawks get 12 calories, doves 0.When two doves meet, they share the food, so each gets 6 calories.

With the working of the hawks and doves model in mind, we will focus on how certain unselfish motives often help people solve an important class of problems that arise in economic and social interaction.

The Commitment Problem

One of the most frequently discussed examples in which the pursuit of self-interest is self defeating is the so called prisoners dilemma. Two prisoners are held in separate cells for a serious crime that they did, in fact commit. The prosecutor, however has only enough hard evidence to convict them of a minor offense, for which the penalty is, say, 1 year in jail. Each prisoner is told that if one confesses while the other remains silent, the confessor will go scot free while the other will spend 20 years in prison.If both confess, they will get an intermediate sentence, say, 5 years. The two prisoners are not allowed to communicate with one another.

The dominant strategy in the prisoners dilemma is to confess.No matter what Y does, X gets a lighter sentence by speaking out-if Y too confesses, X gets 5 years instead of 20; and if Y remains silent, X goes free instead of spending a year in jail.The payoffs are perfectly symmetric, so Y also does better to confess no matter what X does. The difficulty is that when each behaves in a self-interested way, both do worse than if each had shown restraint. Thus, when both confess, they get 5 years, instead of the 1 year they could have gotten by remaining silent.

Although the prisoners are not allowed to communicate with one another, it would be a mistake to assume that this is the real source of difficulty. Their problem is rather a lack of trust. A simple promise not to confess does not change the material payoffs of the game.(If each could promise not to confess, each would still do better if he broke his promise.)

The prisoners dilemma is an example of a broader class of problems called commitment problems. The common feature of these problems is that people can do better if they can commit themselves to behave in a way that will later be inconsistent with their own material interests. In the prisoners dilemma, for example, if the prisoners could commit themselves to remain silent, they would do better than if left free to pursue their narrow material interests.

Illustration:The Cheating Problem

The functional role of unselfish motives can be seen more clearly with the help of the example of a simple ecology in which egoists are pitted against nonegoists in a struggle to survive. The commitment problem they face arises in joint business ventures, each of which consist of a pair of individuals. In these ventures each person can behave in each of two ways. He can “cooperate” which means to deal honestly with his partner, or he can”defect:” which means to cheat his partner. The payoffs to each of the partners, depend on the combination of the behavior of both. Thus if they both defect, each gets a payoff of 2, each gets 4 by cooperating. The defector gets 6 if the other person cooperates and the cooperator in turn gets zero

These payoffs thus confront the partners with a monetary version of the prisoners dilemma.. They get a higher payoff by defecting no matter what the other does. If one believes the other will behave in a self interested way, he will predict that the other will defect. And, if only to protect himself he may feel compelled to defect as well. When both defect, each gets only a 2-unit payoff. The frustration as in all dilemmas of this sort, is that both could have done better. Had they cooperated, each would have gotten a 4 unit payoff.

events of last four decades

Technological Advances
TV in India-Mid Seventies
80's-Color TV, VCR
90's-2000's-Cyber Space,Mobile, DVD, Androids
Departmental Stores, Malls, TV Channels, Luxury Cars, Speciality Restaurants but also elite dabhas, cafes, bars....
Sports-World Cup 83, 2011, Olympic Medals in 21'st century, Sachin Tendulkar
Cinema-Amitabh-Action in 70's and 80's folowed by 90's, 21'st century:Khans-Romance, Akshay , Sunny, Hrithik-Action
Politics-Confusion, Madams of various hues and not to speak of bhenjis, now Baba Rahul?, 80-2010:Epoch of Confusion.
Tender Mercies-Independent, Strong, Non Interfering, Impartial Constitutional Bodies,Military, to some extent judiciary, Freedom of Speech, Social Spirit, Activist Media, Liberal(by and large) society
.....More of the same..next forty years? ....or better.....

movies

My earliest recollection of seeing movies were yaadon ki baaraat and don, i must have been about four then, after that i remenmber seeing Hum kisise kum nahin, kaala patthar, mr.natwarlal, suhaag, Sholay i saw much later. On a trip to Italy i saw Grease and loved it, i also saw my first animation super robot film and loved it too. I was very fond of Amitabh Bachchan and those were his days..the seventies. Other movies watched in the early eighties were Force Ten from Navarone(guns of Navarone watched much later), the hindi "Love Story", the first movie of Kumar Gaurav, (Sunjay Dutts Rocky not untill much later).Then Satte Pe Satta, Hero, Jaanbaaz, folowed by Maaine Pyar Kiyaa, QSQT, and then during colege days Dil, Jo Jeeta Wohi Sikander, Henna, Hum, folowed by Coolie No.1 , Raja Babu(Sarkailo Khatiya).Then as i reached the twenties, Hum Aapke hain kaun, DDLJ, Saajan Chale Sauraal, Hero No 1,Dil To Paagal Hai and then towards the thirties with kuch Kuch Hotaaa Hai, Biwi No.1, and then shifting to Ahmedabad in early to mid thirties(2000-20005) with Mohabatein, Kabhi Khushi Kabhi Gham, Munnabhai MBS, Main Hoon Na, Lage Raho Muna Bhai, and finally late thirties with Goilmaal Series and of course Dabbang,
Now i am ready for READY....(DON-II)

Books

As far as reading is concerned i started with amar chitra katha, Archie and Richie Rich, progressed to Enid Blyton-Five Findouters, Famous Five and Secret Seven, I was enthraled by Frederick Trotevile"Fatty", progressed further to Agatha Christie and PG Wodehouse, in Agatha particularly liked Curtain-Poirot's last case, and Wodehouse was fascinated by Psmith and enjoyed Uncle Fred and Muliner tho took sometime to get to Jeeves, some Ludlum's like the Bourne Series and racy Sheldon's (Other side of midnight) later i proceeded to Non-fiction with Ideaof India(stil to read Idea of Pakistan, wonder if ever will?), Shashi Tharoor's "From Midnight to Milenium", Edward Luce's "Inspite of the Gods" , Francine Frankael, Ramachandra Guha, Bipan Chandra's India After Independence and India's Strugle for Independence(tho not in full).Other books which i read substantially tho not in full were books on behavioral eco like nudge, fooled by randomness and animal spirits.Meanwhile since school days text books like NCERT Books on History and Maths(tho i did not do justice to Maths in School) and in BA-Chiang's math eco and Gujarati's basic econometrics and Masters Dornbusch and other reference reading on topics like Welfare Eco-Nath, Mishan, Bruce and Boadway, I particularly enjoyed a monograph of Manohar Rao for Indian Economic Journal on Money Deficits and Inflation(me and a student worked on it later,while teaching i basically worked on Mankiw's Economics basic text, tho progressed to Dornbusch and Case and Fair in last two years at AES now i am progressing to reading speeches from RBI websites and completing my reading of Chiang, Gujarati and Froyen's MacroEconomics among other readings, ofcourse articles on oped of Eco Times, Financial Express, Hindu, Indian Express, Times of India and magazines like India Today, Frontline, Outlook are read quite often........

Sports and me

Like a typical Indian guy, i have had my experience of playing and watching sports:
Playing Sports
My experience of playing started when i was two year old with my three pedal cycle which i used to ride fast in between the rooms, soon i started graduating to play with the neighbourhood boys, I remember how in Ahmedabd the society boys used to have their own lingo -HOWZATT! etc, we used to play cricket and i remember one match specially where i scored the winning runs, pure luck-the bowler missed the stumps at a distance of one foot with me and the runner at the same end!, In Drive In Area we built a team of friends playing serious gully cricket-calculating averages and all, in school in early years, i was a very good fast bowler with a tremendous yorker, but i lost my length and shifted to wicket keeping which i was good at till i picked up height, where i remember one match where my best friends were the bowlers and we conceded extras by the dozen, even the umpire did not know whether they were wides or byes, anyway my time of glory came when Ajay Jadeja organiseda cricket match between a team of "boys " in the neighbourhood(pandara park) and his team scored 76 with  him top scoring when our team got turn to bat most players got out early leaving me to score the required 70 runs i came within snifing distance and then Ajay "ordered" me to get out and through some kind of hypnotic efect i got stumped. Anyhow in schooln i did nothing of much note in sporta apart from once qualifying for a certificate in long jump. In colege i used to run 10 km but never participated in the main competition, gouing of for vacation during the Championship. In my masters i won my hostel 800 metre race, because of my practice of jogging everyday. Other sports i played were hockey, football, with some ability, Voleyball, badminton and table tenis with less ability and hand cricket and what is caled wall squash(hitting a tennis ball with your hands to the wall and scoring points) with a lot of fun, i learnt chess, carrom and cards and promptly forgot and drafts, monopoly and ludo i thankfuly did not forget
Watching Sports-The 1984 World Cup was my great moment and so has been 2011 world cup tho i started watching cricket with the 79 Kapil Kirmani series against Pakistan, I grew up with Vengsarkar Gavaskar and later Azhar Tendulkar and still later Ganguly Laxman Tendulkar Dravid, I alsos enjoyed Shahid, Zafar Iqbal, Pargat Singh, MP Singh and later Dhanraj Pilai, not to mention Mahesh and leander and Sania(Mirza).I particularly remember the Los Angeles Olympics missing out a medal in Hockey and PT Usha by a whisker this was before recent medal finishes in Shooting and Boxing!!!I remember MP Singh getting our team from 5-1 down in hockey to 5 all against germany, i also remember Ramesh Krishnan and Vijay Amritraj getting us to the finals of the Davis Cup

Walking around cities

Let me say first of all that whichever Metro City in the world I visit I like to remain stationed there for at least five days so as to soak in the atmosphere

Ahmedabad-Walk on Judges bungalow, turn into SG road, visit the ISCON mall-the Landmark Book Store there is a favourite, walk ahead to Crossword, catch a movie at Fun Republic, Cinemax or Wide Angle, have a Chocolate Sundae at Marriots Cofeeshop or a vegetarian meal at Shakahari at Marriot, walk ahead to the Hyderabadi Biryani place or turn into judges bunglow again to visit Cafe Upper Crust at Vastrapur and Himalya Mall near Drivein eat a MCSwirl at the Mc Donalds there or catch a movie at big cinemas or take your car to the Drive In Cinema.Mainland China, Mirch Masla, Hyderabadi Biryani, Country In and Suites are all good food options in the area.

Paris-The Touristy Area of Arc De Triumph is well visited but while in Paris visit the latin quarter on the left bank of the river seine, it is very historical, full of students, artists, architecture, and small cafes-Pl St Maichael and the left bank next to the river Sienne, Rue De Suger, on the other side as u walk to the Eiffel Tower, on the other side of the River is The Sorbonne University and further ahead the Louvre Museum, which is very historical opposite to that walking further on is the Eiffel Tower

Washington DC-made in same architectural style as Paris-Walk from Dupont Circle to Georgetown Univerity past Rock Creak Park, on the other side walk to the white House or Reiters Book Store where you'l get best economics books including study guides.

Manhattan-Walk from 42nd street New York Public Library, beautiful to Study and seee architecturaly, walk past Macy's Empire State Building to Central Park, New York University and the quaintness of West Vilage and East Village, number of book store and Restaurants there

Singapore-Ofcourse Orchard Street and Hill Street-Department Stores, Malls and Restaurants.

New Delhi PVR Priya, PVR Saket Malls near JNU, malls near Saket Ansal Plaza Mall near Asian Games Vilage, Metropolitan Mal near Gurgaon, India gate, Conaught Place, Greater kailash.

Canada-Waterloo-Walk from waterloo University, past Laurier University to Waterloo Public Library, number of Shops on the main Road from Kitchener to Waterloo Borders Book Store and on either side be prepared for a long walk if you are with me tho....

Food-the best places to eat in the world!!

The best meal i have had in India is at The Trattoria in Hotel President, particularly the kobe steak followed by the chocolate cake, the Thai Restaurant there is also pretty good provided you order well, but you can't go wrong with the thai chicken red curry with rice, in the konkan cafe, the sea food thali gives good value for money, talking about good goan food(insert a section on goan food in Bombay and Goa).The taj Holiday Village food is quite average in Goa but the Taj Exotica gives good Goan food, other Taj properties giving good food include the Taj Kumarakoram in Kerala and the Taj Machaan  in Delhi gives a mean club sandwitch folowed by a chocolate cake again to die for(ask for lots of ice cream). Other places in India were you get really good meals include Punjabi by Nature in Delhi-lovely humungous portions of Mutton Burra and Chicken Burra Kebab,the same is also good at chicken inn and pindis in pandara park where ichiban the chinese restaurant is pretty good where you won't go wrong also is with the mutton korma at karims in jama masjid folowed by the phirni, or try the Saagar at diferent places in Delhi for south Indian food or Bengal Sweet Mart in Bengali market or South Extension for Chole Bhatiure , Chaat and Kulfi,(I used to go to Bengal sweet mart at south ex with my grandmother). For Chinese food the chinese restaurant at the Taj mansingh is pretty good, cheap chinese food can be had at Yo China  at the Metrropolitan Mall at Gurgaon, that mall is anyway good for a visit, as far as a good bar is concerned nothing can beat the Geofrey's at Ansal Plaza Mall, Pastry lovers try Wengers at Cp, for good cold milk try Keventers at CP Inner Circle, Flavours near Moolchand Flyovers gives good pizza, Nirulas used to be pretty good particularly the one at yashwant place. If you want good old diners nothing like NY Manhattan all american diners but visit cafetaria at west 18th street for deliciously huge burgers while in NY or Cafe Orlin in West village or the cafes at the East village including the lovely bakeries in a quaint atmosphere, or go to Dupont Circle in Washington for lovely deliciacies, including ethiopian food.In Paris, try the Left Bank near the river for quaint restaurants.
As far as Ahmedabad is concerned good food can be had surprisingly at the Mosaic Restaurant at Country INn where Chef Jena is the best chef in Ahmedabad, try the tandoori chicken or the Chicken Steak Valencia or the Chinese Lobster there. Or try the Chicken Steaks at Upper Crust cafe followed by the chocolate Trufle or Chocolate Brownie or Black Forest with Icce Cream and the Lemon Cooler. Sports Club near Sardar Patel Circle gives good food catered by  Rushad of Mirch Masala/Tomatos fame(Two other good restaurants in Abad).If u r talking of clubs then IIC in Delhi( for those lucky enough to get in) is prety good.

ADAPTING GAME THEORY TO THE CLASSROOM-TEACHING NOTES ON THINKING STRATEGICALLY

“Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you”(Dixit, Avinash and Nalebuff Barry, Norton 1991).Strategic Thinking has been studied in various books, notably in Michael Porter’s Competitive Strategy (Porter, Michael, Free Press, 1991). However our focus is on Dixit and Nalebuff’s classic “Thinking Strategically-The Competitive Edge in Business, Politics and Everyday Life”

A). Ten Tales of Strategy

1. The Hot Hand: People including commentators and bettors believe that players experience the “hot hand, while observing basketball players scoring baskets, they believe that there exists a positive autocorrelation between successful baskets when there is infact no empirical evidence of that..Sports announcers see long streaks of consecutive successes and proclaim that the athelete has a “hot hand.” Yet according to certain psychology professors, this is a misperception of reality.(Gilovich, Thomas, Vallone, Robert and Tversky, Amos, 1985).

They propose a more rigorous test. In basketball, they look at all the instances of a player’s baskets, and observe the percentage of times that player’s next shot is also a basket.A similar calculation is made for the shots immediately following misses.If a baket is more likely to follow a basket than to follow a miss, then there really is something to the theory of the hot hand.

They conducted this test on a basketball team. The results contradicted the ‘hot hand’ view. When a player made his last shot, he was less likely to make his next; when he missed his previous attempt, he was more likely to make his next. Does this mean we should be talking of the ‘stroboscopic hand,” like the strobe light that alternates between on and off?

Game theory suggests a different interpretation. While the statistical evidence denies the presence of streak shooting, it does not refute the possibility that a ‘hot’ player might warm up the game in some other way. The difference between streak shooting and a hot hand arises because of the interaction between offensive and defensive strategies. Suppose a player does have a truly hot hand. Surely the other side would start to crowd him. This could easily lower his shooting percentage.

That is not all. When the defense focuses on this player, one of his teammates is left unguarded and is more likely to shoot successfully. Thus we might test for hot hands by looking for streaks in team success.

A player may even assist himself when one hot hand warms up the other. The Boston Celtics star, Larry Bird, prefers shooting with his right hand.

What happens when Bird spends his off season working to improve his left-handed shooting? The defense responds by spending more time covering his left-handed shots. The result is that this frees his right hand more often.

Going one step further, we show that when the left hand is stronger it may even be usedless often. If your backhand is much weaker than your forehand, your opponents will learn to play to your backhand. Eventually, as a result of all this backhand practice, your backhand will improve. As your two strokes become more equal, opponents will play more evenly between forehands and backhands. You get to use your better forehand more often; this could be the real advantage of improving your backhand.

2. When it pays to move second-In two competitor sailboat racing an interesting reversal of a “follow the leader” strategy is seen. The leading sailboat usually copies the strategy of the trailing boat. If you have the lead, the surest way to stay ahead is to play monkey see, monkey do. So we come to our second tale-

                                             “To lead or not to lead.”

After the first four races in the 1983 America’s Cup finals, Dennis Conner’s Liberty led 3-1 in a best-of-seven series. On the morning of the fifth race, there was anticipation of having prolonged the United States’ winning streak to 132 years. It was not to be.

At the start, Liberty got off  to a 37-second lead when Australia II  jumped the gun and had to recross the starting line. The Australian skipper, John Bertrand, tried to catch up by sailing way over to the left of the course in the hopes of catching a wind shift. Dennis Conner chose to keep Liberty on the right-hand side of the course. Bertrand’s gamble paid off. Conner was criticized for his strategic failure to follow Australia II’s path. Two races later, Australia II won the series.

The leader imitates the follower even when the follower is clearly pursuing a poor strategy. Why? Because in sailboat racing: only winning matters.

3.Do what you want we will not bribe you-Consider two companies both in a position where they have to bribe a Government department, now one company will think the other company is going to bribe so I will benefit by bribing, he can also think even if the other company does not bribe I will benefit by bribing.The other company will also think in a similar manner so both will end up bribing the government department. However both companies would have benefitted by making an agreement not to bribe. This is an example of Prisoners Dilemna

4. Be selectively inflexible-there is a power in intransigence , but how can one achieve the necessary degree of intransigence? There are various means by which commitment can be achieved and sustained.

5. Hostages dilemma-a prisoners dilemma with more than two people-Why is a planeload of people powerless before a single hijacker with a gun? The question is who is going to bell the cat?

6. Look at the whole picture-Decisions made on a case by case basis can lead to undesireable results overall.In fact a sequence of majority votes can lead to an outcome that everyone regards as worse than the status-quo.

7. Be wary of a commitment-once you get into a situation it is difficult to get out of it. Strategists who foresee such consequences will use their bargaining power while it exists, namely, before they get into the commitment.

8. Mix your plays-If you do the same thing all the time, the opposition will be able to counter you more effectively by concentrating its resources on the best response to your one strategy. It is unpredictability that is important when mixing.

9. Use information to guide your own action.-The strategic insight is that other people’s actions tell us something about what they know, and we should use such information to guide our own action. Of course, we should use this in conjunction with our own information concerning the matter and use all strategic devices to elicit more from others.

10.Pride and irrationality cannot be ignored-It is foolhardy to deal with people who are not rational in terms of bargaining, negotiations and strategy. Even if you deal with such people do not pre-commit yourself.

B)A few Morals:

The Hot hand-we cannot assume that when we change our behavior everything else will remain unchanged.

When it pays to move second-In technology races no less than in sailboat races, those who trail tend to employ more innovative strategies; the leaders tend to imitate the followers.

Be selectively inflexible-“The stuck wheel gets the grease”

Belling the cat-the difficulty of obtaining outcomes that require coordination and individual sacrifice.

Look at the whole picture-the danger of solving problems piece by piece.

Mix your plays-tennis and tax audits point out the strategic advantage of being unpredictable.

C.) Moral of Case Study 1-In games it is not always an advantage to seize the initiative and move first. This reveals your hand, and the other players can use this to their advantage and your cost. Second movers maybe in the stronger strategic position.

References;

Dixit, Avinash, Nalebuf Barry, “Thinking Strategically-The Competitive Edge in Business, Politics and Everyday Life” Norton 1991.

Gilovich, Thomas, Vallone, Robert and Tversky, Amos,”The Hot Hand in Basketball:On the misperception of Random Sequences,” Cognitive Psychology 17,1985:295-314.

Porter, Michael, Competitive Strategy,Free Press, 1991

Micro Finance and Behavioral Eco

A.Importance of Micro Finance

A good definition of microfinance as provided by Robinson is, ‘Microfinance refers to small-scale financial services for both credits and deposits —that are provided to people who farm or fish or herd; operate small or microenterprises where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries, in both rural and urban areas’.

The goal of microfinance is a world in which as many poor and near-poor households as

possible have permanent access to an appropriate range of high-quality financial services, including not just credit but also savings, insurance, and fund transfers.(CGAP, 2004)

Seen from a broader perspective, the development of a healthy national financial systemhas long been viewed as a catalyst for the broader goal of national economic development(see for example Alexander Gerschenkron, Paul Rosenstein-Rodan, Joseph Schumpeter,Anne Krueger ).
Gerschenkron (1962)postulated that the more backward an economy was at the outset of development the more certain conditions were likely to occur during growth: consumption would be squeezed in favor of investment (i.e., savings) in countries starting from farther behind, and there was likely to be a greater reliance on banks, state entities, and other means of directing investment, among other conditions. He never exactly defined how 'backwardness' was to be measured, though he alluded to a northwest-to-southeast axis within Europe, with the United Kingdom at the most advanced extreme and the Balkancountries at the least developed extreme. 

Rosenstein Rodan(1943) is the author of the 1943 article "Problems of Industrialisation of Eastern and South-Eastern Europe" - origin of the “Big Push Model” theory - in which he argued for planned large-scale investment programmes in industrialisation in countries with a large surplus workforce in agriculture, in order to take advantage of network effects, viz economies of scale and scope, to escape the low level equilibrium "trap". He thus developed a theme laid out by Allyn Young in his 1928 article "Increasing Returns and Economic Progress", in which the latter himself expanded a theme formulated by Adam Smith in 1776.

Schumpeter  (1934) thought that the institution enabling the entrepreneur to purchase the resources needed to realize his or her vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit. One could divide economists among (1) those who emphasized "real" analysis and regarded money as merely a "veil" and (2) those who thought monetary institutions are important and money could be a separate driving force. Schumpeter was among the latter.

According to Anne Krueger liberalization of trade and payments is crucial for both industrialization and economic development.(Krueger, 1997)

B.Microfinance and Behavioral Economics

A growing body of research into decision-making reveals that people, rich and poor,consistently save less than they would like to. The problem is not simply impatience and a lack of “future orientation.” Instead, new explanations point to limits to complex decision making and weak internal self-control mechanisms on the part of individuals. The theory translates into innovative practice and products. Field studies, for

example, show the power of mechanisms like structured savings accounts that require regular deposits toward a fixed goal. Having the right mechanisms can make the difference between saving a little and saving a lot.( Armendáriz and Morduch 2010 p.17)

Mulainathan and Krishnan(2008) conclude in their article on Psychology and Economics:

“The psychological evidence presented suggests that planning for the future and sticking to that plan is difficult. The behavioral economic framework of these facts supports the idea that debt discipline is a good mechanism for microfinance clients. Given the liquidity constraints that many of the poor face, many are unable to save enough on a regular basis to meet their needs. For this reason, having relatively affordable access to credit can allow many clients and their families access to a range of items that will enhance their quality of life, from new consumer goods to the ability to pay for children’s school and college fees. The commitment to make weekly repayments to the MFI is something that many clients see as fixed, which helps them psychologically realize that saving for such payments cannot be delayed. In any case, given that mistakes are easier to make for the poor and carry much more weight, repayment discipline, implemented either through product design or group trainings, helps mitigate these self-control problems when it comes to debt.

At the same time, a behavioral perspective can be useful when thinking about common

accusations leveled at the microfinance sector, including the fact that clients borrow at high interest rates and may not be fully aware of the conditions to which they agree when borrowing from MFIs. With the example of the “leaky bucket,” where clients often find themselves unable to save up a large enough sum of money to purchase consumer durables for their homes, given the array of temptations and events responsible for the savings leakage, it is easy to see how microfinance clients are borrowing at relatively high interest rates because of behavioral reasons,rather than simply the lack of credit. In fact, this common behavior could be more of an illustration of the failure of savings markets, given that the cost of savings, at the expense of immediate need, may be so high that clients continually turn to both MFIs and moneylenders to meet their need for credit.

Lastly, in terms of consumer finance and policies to regulate the microfinance sector, it is

important to realize that development economists tend to emphasize the presence of institutions:

for instance, banking may need to be privatized to guarantee a more streamlined credit system that also ensures better savings facilities and smoother consumption. Behavioral economists take these ideas and examine them through a psychological lens, which often shifts the focus to how important the effects of human behavior are when thinking about how the poor deal with all aspects of their lives, from managing their finances to providing for their families. We see through the behavioral lens that institutional design in microfinance is not just about providing access to financial services but about solving these issues that microfinance clients—the poor— face on daily basis. Within the scope of this piece and the few examples presented here, it is the hope of the authors that principles of psychology as well as economics will provide greater intuition when formulating development policies that affect the poor in their everyday lives.”

Having given an introduction to the theme we plan to study we next look at the basic issues which we need to consider with regard to behavioral aspects of microfinance.

Mode/Mechanism of Microfinance

Are their certain behavioral anamolies specific to the poor? Does that affect the products relevant for them?Does that affect the mode of financing them?

A.)Are their certain behavioral anamolies specific to the poor?

Bryan, Karlan and Nelson (2010) define a commitment device as an arrangement entered into by an agent which restricts his or her future choice set by making certain choices more expensive, perhaps infinitely expensive, while also satisfying two conditions: (a) the agent would,on the margin, pay something in the present to make those choices more expensive,even if he or she received no other benefit for the payment; and (b) the arrangement does not have a strategic purpose with respect to others.

Much of the empirical work on Behavioral Anomalies in Credit Markets centres on the poor.This reflects a simple reality: behavioral anamolies may be costly to individuals, but the poor have less slack, ie; disposable income with which to absorb errors(Bryan, Karlan and Nelson, 2010;Mulainathan and Shafir, 2009)

Banerjee and Mullainathan (2009) formalize this idea in the context of commitment, putting forward a temptation model that helps explain the existence of poverty trapsAt higher levels of income, however, only a small portion of marginal saving will be spent on temptation goods. Therefore, those with low income donot save and those with high income do save, leading to polarization of income. If this model is correct and temptation does in fact represent a smaller cost to the rich, then commitment devices may provide a means of pulling the poor out of poverty.

B.Do the behavioral features of the poor affect the products relevant for them?

Ashraf et.al(2003) examine savings products in developing countries designed to promote commitment behavior. The desire for clients who require liquidity and also want help committing to a savings plan, but these two desires are often at conflict with each other.

Summarising from this paper:

Savings products with a commitment property can be more suitable to meet long-term goals and anticipated events, such as purchasing a house or paying school fees. Whereas simple flexible savings products aims to offer low-income and poor communities safe and convenient access to their funds to meet non-discretionary spending needs.( Ashraf et.al(2003)

C.Do the behavioral features of the poor affect the mode of financing them?

“Group liability” and “Group lending” both are very distinct from one another." “Group liability” refers to the terms of the actual contract where individuals are both borrowers and simultaneously guarantors of other’s loans. “Group lending” merely means there is some group aspect to the process or program, like the sharing of a common meeting time and place to make payments.

Giné and Karlan (2010)

Group liability in microfinance purposes to improve repayment rates through peer screening, monitoring, and enforcement. Sometimes it may create excessive pressure which may discourage reliable clients from borrowing.( Armendáriz and Morduch, 2000)

Group liability is often described as a key innovation responsible for the expansion of access to credit for the poor in developing countries. Under group liability structure clients have an incentive to screen other clients so that only trustworthy individuals are allowed into the program.(Adverse Selection avoided) In addition to that clients have incentives to make sure that funds are invested properly and effort exerted.(Moral Hazard mitigated). Finally the enforcement could be enhanced because clients face peer pressure, along with legal pressure to repay their loans. Thus shifting the responsibility of certain tasks from the lender to the clients, group liability claims to overcome information asymmetries typically found in credit markets, especially for households without collateral. Giné and Karlan (2010)

The basic question about the relative merits of group versus individual liability has still remained unanswered for many reasons. Merely comparing performance of one product with another within or across lenders does not establish a causal relationship between the contract terms and outcomes such as repayment, selection, or welfare. There are countless unobserved characteristics that drive individual selection into one contract or the other, as well as institutional choices on what to offer, and how to offer. Lenders typically chose the credit contract based on the context in which they operate. Giné and Karlan (2010)

Quoting Armendariz de Aghion and Morduch (2005),

“The best evidence would come from well-designed, deliberate experiments in which

loan contracts are varied but everything else is kept the same.”

This is precisely the goal of the paper by Giné and Karlan.(2010)

Quoting from their conclusion:

“The choice of group or individual liability is perhaps one of the most basic questions lenders make in the design of loan products in credit markets for the poor… The results are striking, however, in three respects. First, we find that individual liability compared to group liability leads to no change in repayment but did lead to larger lending groups,

hence further outreach and use of credit, for pre-existing groups. Second, in new areas, we found bank officers less willing to open groups despite no increase in default. Thus the supply constrained the growth of the lending program, whether for good cause or unwarranted fear by the employee is outside the scope of our data to assess. Third, we do find statistically significant evidence of some of the mechanisms discussed in the group liability literature, such as screening and monitoring, but we simply do not find that it adds up in an economically meaningful way to higher default…… In sum, the recent trend of microfinance institutions expanding their individual lending products (or in some cases, shifting from group liability to individual liability but maintaining group meetings) may help deepen outreach and provide more flexible microfinance products for the poor.” Giné and Karlan (2010)

REFERENCES

 1. Robinson, Marguerite S, ‘Microfinance: the Paradigm Shift From credit Delivery to Sustainable Financial Intermediation’, in Mwangi S Kimenyi, Robert C Wieland and J D Von Pischke (eds), 1998, Strategic Issues in Microfinance, Ashgate Publishing: Aldershot.

2.Gerschenkron, Alexander (1962), Economic backwardness in historical perspective, a book of essays, Cambridge, Massachusetts: Belknap Press of Harvard University Press.

3.Paul Rosenstein Rodan“Problems of Industrialization of Eastern and South- Eastern Europe”, Economic Journal v 53, No. 210/211, (1943), p 202-11.

4.Joseph Schumpeter"The Nature and Necessity of a Price System", 1934, Economic Reconstruction.

5.Anne O. Krueger Trade Policy and Economic Development: How We Learn The American Economic Review, Vol. 87, No. 1 (Mar., 1997), pp. 1–22

6.The economics of microfinance / Beatriz Armendáriz and Jonathan Morduch.—2^nd  ed. 2010 Massachusetts Institute of Technology

7.Psychology and Economics: What it Means for Microfinance,Sendhil Mullainathan & Sudha Krishnan,April 2008, The Financial Access Initiative and Innovations for Poverty Action.

8.Armendariz de Aghion, B. and J. Morduch (2005). The Economics of Microfinance, MIT Press.

9. Group versus Individual Liability: (May, 2010),Long Term Evidence from Philippine Microcredit Lending Groups, Xavier Giné and Dean S. Karlan

10. A Review of Commitment Savings Products in Developing Countries, Economics and Research Department Series Number 45.Nava Ashraf, Nathalie Gons, Dean Karlan and Wesley Yin; Asian Development Bank, July 2003.