In an appeal to civic duty, the Government of India is asking citizens to forgo a gas subsidy they receive so that gas cylinders can be transferred to the less fortunate. To encourage Indians to "Give It Up," the government called on business leaders to set an example and made the procedure extremely easy.
India recently launched an ambitious cash transfer program to help small businesses and households buy fuel. Under the plan, consumers of liquefied petroleum gas (LPG), commonly referred to as propane or butane, receive a cash subsidy in their bank accounts to buy gas cylinders at market price.
Once joining the scheme, the subsidy, which is equal to the difference between the current subsidized rate and the market price, is transferred to the consumer’s bank account when he/she orders a cylinder. Another transfer is then provided at the time of delivery of the cylinder.
Last November, the Direct Benefit Transfer Scheme for LPG was rolled out across 54 districts, with the rest of the country participating by January 1 of this year.
The scheme was launched by India’s previous UPA government in June 2013, but it was abruptly stopped earlier this year following court orders. It has since been modified to exclude the requirement of providing a unique identification number (Aadhaar) to avail the cash subsidy.
The idea behind the direct benefit transfer is that it can ensure that the subsidy meant for the genuine domestic customer reaches them directly and is not diverted. The Government of India hoped to save millions each year by curbing diversions and leakages in the system but also to ensure efficient delivery of subsidies to the target beneficiaries— the consumers.
Psychological research explores a phenomenon known as the "entourage effect"in which allowing individuals, referred to as VIPs, to share otherwise-exclusive privileges with a circle of friends, elevates the status of the VIP.
Economists and marketers alike have known for a long time now that the perceived status of a product has a tremendous impact on sales and who the customer base is. The basic economic reasoning is that the scarcer a product or service is, the more valuable it is perceived to be. The scarcity or exclusivity of the product or service signals its status.
Research on this topic, however, highlights the ultimate form of status: the entourage.
Brent McFerran of the University of Michigan, Stephen M. Ross School of Business and Jennifer Argo of the University of Alberta, Department of Marketing, Business Economics, & Law published a paper in September 2012 called the “The Entourage Effect” in which they demonstrated that when an individual earns or wins a reward, they enjoy it more if they can share it with people they like. This individual, referred to as the VIP because a priviledge has been granted to them, gains status from the act of sharing. The authors write, “the presence of others (i.e., an entourage) alters a VIP's personal feelings of status.” In particular, they show that “VIPs feel higher levels of status when they are able to experience preferential treatment with an entourage, even if this results in the rewards associated with the treatment becoming less scarce.” Even though VIPs are sharing their reward, reducing its exclusivity, they nonetheless feel higher levels of status.
There is a new and exciting field emerging that combines the insight of analytics and psychology; it’s known as crowd science. Already, it’s a fairly pervasive industry, involving not just data scientists but also behavioral economists, marketers, and entrepreneurs.
Crowd science analyzes data (through mining, algorithms, statistical modeling, and others) and then applies psychological or behavioral theories to make sense of the analyses. It is sometimes referred to as the “guinea pig” economy because it utilizes consumer tests— often without the consumer realizing it— to obtain its data and, therefore, insight.
One of the most popular forms of crowd science is A/B testing whereby website visitors are shown different interfaces or versions of the same site. The way in which each visitor navigates through the site is then tracked to determine which version is more appealing or effective. One reason A/B testing is so helpful is that it divides users into a control group and a treatment group, allowing the engineers of the experiment to determine not just what the issues are but how to solve them. It also allows decision-makers to test for biases in project design and implementation.
I am not sure if I was more surprised, glad, or excited to see the recent 2015 World Development Report published by the World Bank Group. Knowing well this institution, I admit I did not expect to see the day when it would acknowledge that human behavior is not necessarily guided by rational considerations and that behavior change is not a linear process and needs to reflect the complexity of factors affecting such process. The possibility that rational thought is not at the basis of every human action is something quite revolutionary, at least within the mainstream boundaries of economic discourse.
The WDR entitled “Mind, Society and Behavior” seems to suggest that economists might actually have something to learn from behavioural scientists! However, such concepts have been floating around for a quite some time. A handful of social scientists, development scholars, and practitioners have been exploring, advocating, and applying to a different degree principles, which are now illustrated in the WDR and applying approaches that promote human agency and facilitate social change.
“Public figures are ordinarily rewarded for what they say, not for what they don’t. Grace is an underrated virtue; gracelessness is an insufficiently acknowledged vice.”
- Cass R. Sunstein, an American legal scholar and author. He taught at the University of Chicago Law School for 27 years and is currently the Robert Walmsley University Professor and Felix Frankfurter Professor of Law at Harvard Law School. Sunstein also served as the Administrator of the White House Office of Information and Regulatory Affairs in the Obama administration. He is the author of numerous books on legal philosophy and co-authored, with Richard Thaler, Nudge: Improving Decisions about Health, Wealth, and Happiness (2008).
How bad would the customer service at your bank have to be for you to switch to another? How long would you have to sit in a waiting area, reading bad magazines, before you would look for a new doctor? How about switching health insurance plans?
At the foundation of economics is the premise that people make rational choices, based on the information they have. This may be true, but as a decision becomes more complex, so does our desire to avoid it. According to the literature on economic behavior, this phenomenon is known as consumer inertia.
As Stigler and Becker (1977) state: “the making of decisions is costly, and not simply because it is an activity which some people find unpleasant. In order to make a decision one requires information, and the information must be analyzed. The costs of searching for information and of applying the information to a new situation may be such that habit is often a more efficient way to deal with moderate or temporary changes in the environment than would be a full, apparently utility–maximizing decision” (pg. 82).