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Con Artists and Economists

Hi, I am Atma Jyoti, the newest addition to the wonderful team of Rostra. This article is in trying to connect the dots between Sherlock, con artists and economists.

Before we jump in, a few words on Sherlock and Patrick Jane.

We all know Sherlock. But Patrick Jane, for those who don’t know, is a con artist who observes people and makes “psychic readings” about them. The show is called “The Mentalist”, I highly recommend it. Ranging from body language to subconscious mind control, it’s all very exciting. I am personally amazed by body language. Our bodies “leak” our emotions. A very popular non-verbal gesture is the arms cross. It usually means that the person doing it is defensive; he’s creating a barrier. Only 7% of a conversation is words and the rest is body language. Let that sink in. Now uncross your arms, please.

Wouldn’t it be amazing if economics had these aspects to it as well? Instead of just solving equations and deriving solutions, maybe we should toy around with the aspect of some non-verbal, non-analytical and non-number-crunching-mind-numbing economics. Oh wait, I just realized, all these things is what economics is about. It’s about us. How we think,and how we are raised. It can range from how often you listened to bedtime stories, to the number of savings accounts you have in different banks. Interested in motivational speakers? That’s economics. Society’s stigmas affecting your decision? That’s economics. Confused between spicy wings and crispy strips at KFC? That’s me.

I am going to argue that what we are studying isn’t economics, it’s just maths. Might as well study physics, pretty much the same thing. Now uncross your mental arms, I have very good reasons for all that I said. Firstly, I ask you to consider this. Beginning with Adam Smith’s phenomenal book, economics was viewed as a theoretical subject. There was a lot of speculation and debate; one might find it philosophical to have so many arguments. Politics was a major part of this new discipline, “political economy” was the original term that was used. Yet, a lot of economics assumed many things about us humans, the very subjects of the subject. “They are rational”, “They maximize profits”, “They have a defined set of preferences”, so on and so forth. But, how much of neo-classical economics focuses on humans? There is little not to mention of psychology in our discourses. Maybe we should think about how people think.

Secondly, where do we get all these numbers and functions from? “The utility function is U = x + y”. Have you ever wondered why one unit of x and one unit of y provides that much utility? What factors influence the person to buy one x and one y, and how can we be so numerically sure of an abstract concept such as utility? This begs for another look at human psychology, and the way it impacts our decisions.

Now, there’s a certain difference between going all Sigmund Freud and understanding the impact of psychology in economics, which can be termed as behavioral economics.  Self-esteem issues and distressed romance are not our forte, fortunately, though I could do with some counselling about that. We’re looking at why do people think the way they do, and the decisions thereof. Whereas behavioral economics relates to more of economic decisions, we’re also considering socio-economic implications of psychology. The World Bank Report, Mind, Society and Behavior (2015) says there are three ways in which people think: automatically, deliberatively and socially. Let us look at this through something we do every day: eating. Thinking automatically is when you are hungry, you will eat. Deliberative thinking is choosing between buying food or cooking it yourself. Finally, you might be a vegan, so you won’t buy any meat products for lunch, that’s social thinking in action.

Each of these steps results in a economic residue. Eating has an opportunity cost in terms of time, and not buying meat means less revenue for meat suppliers. These principles have been applied in welfare economics as well. Investments in healthcare shot up to 70% from 15% after households in Kenya were provided with a box and a padlock labelled “Healthcare”. They automatically created a mental account that they should store some money in that tangible location. Households in South Africa watched a popular soap opera which had financial messages embedded in the episodes, leading them to deliberate about their decisions. The impact of society’s values led to an increase in better decision making. Lastly, elderly individuals were shown motivational messages, and their productivity went up resulting in improvements at the self-help group they were working. Again, the roots of economic results are deep-seated in a variety of factors.

In economics, these factors, and much more, such as co-operation, altruism and cognitive taxes aren’t taken into account. And being uneducated in these may lead us to biased views centering around numerical efficiency. This in itself, the very fact that incomplete knowledge leads to biased views, is also mentioned in the report.

There is a principle in social psychology, called the exposure effect. You like things better when you’re familiar with them. Con artists are very adept at this. The three card monte, which is a standard trick, is a practical application of this principle. First, you are shown the card that you’ll follow, out of the three cards, and after a bit of shuffling, you have to show where it is. They will let you intentionally win for the first two times, doubling the bet each time. This raises your confidence, and you develop familiarity with the game. On your third and final bet, et voila, you lose, thus burning a hole in your pocket.

Economists used the same principle at a microfinance bank in India, a country which is strapped for cash currently. Rural societies rely heavily on micro-finance, even on a day-to-day basis. Simply assigning members to meet weekly instead of monthly resulted in lesser debts and greater risk pooling. Ironically a few years back, people were asked to deposit money in banks, instead of keeping them in their house. All this new cash injected in the economy caused a round of inflation!

These psychological manipulations are what make us human. This is why con artists can con us, and this is also why the world’s largest democracy experienced unexpected inflation. We live in a world where a few lines of code can launch nukes and wipe humanity from this planet. Of course, data is a must for us to make sense of the world. As was the result of a famous experiment, over 70 statisticians were given a data set and were tasked to make a statistical model fitting this. Not surprisingly, there were almost 70 models!

I believe this is just the tip of the iceberg, in terms of interdisciplinary impacts on economics. The great thing is, economics can also have an impact on other subjects like physics! Budget constraints are a part of any lab, (anything, really). That kid comes an affluent family with enough money to fund her studies, and she might make the next breakthrough in criminology! The world is a wide web, and everything is interconnected. It is up to us to choose how we perceive reality.

I want to leave you with this: “Humans are the essential variables in economics”.

  1. Atma Jyoti Mahapatra, circa 642 BC ( I should trademark this ASAP )


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