I try to teach people to make fewer mistakes,” said the newly-minted economics Nobel laureate, Richard Thaler, in an interview earlier this week. “We need to take full account of the fact that people are busy, they’re absent-minded, they’re lazy.”
Congratulations to Professor Thaler; I think his brilliantly accessible work is part of a growing and important contribution of behavioural perspectives that enrich traditionally strictly “rationalist” economics. I just wish the laureate had avoided making some big mistakes of his own, where he failed to apply his theories to himself. After the November 8 demonetisation in India, he had tweeted, “This is a policy I have long supported. First step toward cashless and good start on reducing corruption.”
Wiping out 86 per cent of a country’s currency is rarely a “good start” on anything. In a country where, according to recent analyses of income-tax probes, the cash component of undeclared wealth is estimated to be only about six per cent, leaving an economy virtually cashless is certainly not a good place to end up. If Thaler had studied the data on the Indian economy he might have realised that the policy instrument he had supported was aimed at the wrong target: The currency of corruption is mostly in non-cash assets.
I also find it ironic that Thaler, an expert in behavioural economics, did not account for the proposition that people have a strong incentive to not lose money. In other words, they will seek out ways to deposit their invalidated cash in the banks. Thaler should have anticipated that Indian society — not unlike societies around the world — has access to money-laundering networks and creative schemes for getting around rules. And people will use them — it’s the only consistent thing for a behavioural economist to anticipate. No wonder, the RBI recently reported that of the estimated Rs 15.28 trillion ($239 billion) in currency taken out of circulation by demonetisation, almost 99 per cent had been returned.
Read the full Op-Ed