The last-mile challenge in banking for the poor

It has always been thought that lack of access to formal bank accounts prevented poor people from saving more and once accounts were opened they would be able to more optimally manage their finances. But now that we have made some progress, albeit tiny (only 5.5% of 650,000 Indian villages have bank branches and half the adults in the country do not have access to bank accounts), with access through the campaign for total financial inclusion (TFI), have the desired outcomes been achieved for those people?

Surprisingly, it does appear that having a bank account does not automatically translate into its use, much less efficient management of personal finances. Livemint points to a study by Skoch Development Foundation which found that only 11% of 25.1 million no-frills accounts opened between April 2007 and May 2009 are operational mostly because of the high costs.

India Development Blog points to an IFMR study of the impact of TFI campaign in Gulbarga District of Karnataka (claimed to have achieved 100% financial inclusion), which found that 36% of sample households remained without access to formal and semi-formal savings mechanisms and more importantly, access to bank accounts did not translate into bank account usage. It was found that the accounts were used mostly to manage NREGS payments or SHG transactions. Critical to the lesser than expected account usage is the high transaction costs, especially by way of travel costs.

I am inclined to believe that even if access to formal banking systems, by way of opening a bank account, is increased, actual usage is likely to remain low unless bridge the last mile gap and take banking to the door-step of the people, especially in rural areas. The recent decision by the Reserve Bank of India to approve the deployment of mobile bank business correspondents, equipped with electronic terminals, to transact at the sub-branch level is certain to increase the quality of access. This will ensure that, unlike now, rural account holders are more likely to actively transact using their accounts.   

In this context, mobile phones have the potential to revolutionize banking and increase utilization dramatically. Mobile phones-based technologies offer the attraction of directly placing the bank account in the hands of the customer, thereby lowering transaction costs and increasing the likelihood of account usage. It may therefore be tempting to get carried away by this possibility, coupled with a campaign to increase financial literacy, and assume that it will ensure account usage.

However, dovetailing NREGS and other government cash transfers through TFI accounts, extensive use of business correspondents and mobile phone-bassed technologies, and financial literacy, while necessary are not sufficient conditions to ensure optimal account usage.In fact, unless complemented with other initiatives, mere increase in access to banking accounts, could be counter-productive. It could just as easily enable access to debt and other less than desirable financial products, whose extensive adoption could be detrimental to the interests of the poor people.

Behavioural science teaches us that even with access to their accounts and adequate financial literacy, human beings are cognitively constrained. This in turn means that despite firm commitment to save or spend on certain things, people tend to renege and fall short on achievement. People discount the value of later rewards by a factor that increases with the length of the delay. They are therefore tempted to spend on immediate needs as opposed to save for important long-term requirements. Further, drawing from theories of "mental accounting", it has also been found that people tend to save optimally when they they know what they are saving for.  

It is therefore necessary that the bank accounts are structured to address these cognitive biases. This assumes importance since we need to bear in mind that the ultimate objective is not to merely enable access to bank account, but to enable poor people with systems to more effectively manage their scarce finances. What can be done to ensure that poor people save more, optimize on their interest returns, manage their long-term needs like health care, children's education and pensions, make more effective purchase decisions, and so on? In simple terms, how do we ensure that people not only manage their finances effectively, but also overcome their cognitive urges which are often determental to their interests?

I have written about several examples of how innovative financial products can overcome such cognitive biases and increase the likelihood of optimal outcomes for poor people with management of their finances. In fact, bank savings accounts and financial products, with subtle commitment features, have the potential to dramatically increase not only usage but also effective usage of bank accounts. I have bloggged earlier about Save More Tomorrow, default pension savings, lottery savings products, products to increase fertilizer consumption, multi-tier accounts (also here), and budgeting family expenditures. See also this and this.

In this context, there is a big window of opportunity. Bill and Melinda Gates Foundation have just pledged $500 million to helping poor people learn to save money. They propose to fund research and project interventions in this area to emulate the examples like the hugely successful mobile banking for the poor — via cellphone in Kenya and Bangladesh and smart card in Mexico. Spurred on by the low domestic savings rate, this area has been the focus of considerable interest in the US too. It is appropriate that some part of this be leveraged into experimenting with financial products and structured accounts that help overcome cognitive biases.

It needs to be borne in mind that TFI and optimal utilization of bank accounts by the poor needs to go beyond mere door-step acceess to bank accounts.

Electoral bribery - a tale of two games?

Anecdotal evidence from electoral politics in many Indian states appears to indicate that all the contesting candidates pay reasonably similar amounts of cash bribes to all the voters.

On the face of it, this appears surprising since only one candidate can finally win the electoral race and the electoral race is high stakes and ultra-competitive. In the circumstances, conventional wisdom would have it that atleast some candidates renege on their bribe payments. Further, there should have been a bidding war among contestants to outbid each other in the payment of bribes. So what is the underlying story? Why do "all candidates" bribe "all voters"? Why are the bribes "reasonably similar"?

I am inclined to believe that there are two games being played here. On the one hand, candidates have to weigh the consequence of not making payments given the uncertainty associated with the response of the other side. On the other hand, candidates face the possibility of a potential bidding war in bribe payments.

Consider the first game, which is a defection game. Candidates rationalize bribing voters on the ground that voters have been socialized into expecting bribes and are likely to react negatively (turn against them) if their expectations are not met by any of the candidates. The undeniable reality of an availability bias associated with electoral bribing means that there is a strong likelihood for voters to form expectations about receiving some amount as a bribe. In fact, this expectation is likely to be more pronounced with the incumbent legislator.

The trend is widely pervasive in most parts of India, so much so that any candidate who defects, by not paying or paying less, is perceived to face certain defeat. The table below models a two-candidate electoral game where the decision point is about whether to bribe or not.



This brings us to the second game, the co-operation game. Interestingly, political parties too appear to have internalized the dynamics of the electoral game. Given the inevitability of bribe payments, all of them realize the massive costs associated with a bidding war where one party tries to outbid the other. Since these games are all repeat games, with the same parties fighting over multiple elections, there are sufficient incentives for all sides to embrace an equilibrium and co-operate. The result is an implicit understanding about the magnitude of their bribe payouts. The table below captures this game.



However, there is a small Bayesian twist to this tale which highlights the slippery slope down which both candidates and voters have slipped. Since all parties bribe voters, and voters have to make an electoral choice, they end up making their actual choices based on other considerations. But this choice is conditional on the receipt of bribes. In other words, while voters may make their choice based on several factors, this choice is mostly restricted to those who have paid the bribes. If this line of analysis is true, then all candidates end up defecting and bribing, resulting in a Nash equilibrium. Ironically, atleast in the short-run, the real winner in this is the voter!

So, conditional on receipt of the bribes, what are the factors that drive voting choices? A few intuitive answers include those who paid the larger amount, those perceived as leading the electoral race, those who have struck a chord with some local or emotional issue, and sometimes even those who are perceived as extremely corrupt. Given this, do we have a window of opportunity here to align the individual incentives of voters with general public interest and drive the agenda of contesting candidates accordingly?

Cognitive biases and winner takes all society

Lane Kenworthy has an interesting post where he questions conventional wisdom on the winner-takes-all economy, where a few people at the top of each industry have seen massive increases in their incomes, whereas the take-home paychecks of the rest have remained stagnant.

Supporters of this trend argue that the differential is a well-deserved premium since it is a reward for hardwork and inventiveness. This line of analysis attributes a disproportionately high weight to the good performance of the company (it is another matter that even those with below average performance claim this premium!) to the quality of leadership. Supporters of the skewed financial market compensation in general, and executive compensation, in particular, have argued that the high financial rewards are a reflection of their performance and the innovation that goes along with it.

Since Apple and Steve Jobs are the modern benchmarks for innovation, Prof Kenworthy writes in the context of the discussion on what drove the late Jobs,

"Would Jobs and his teams of engineers, designers, and others at Apple have worked as hard as they did to create these new products and bring them to market in the absence of massive winner-take-all financial incentives... Jobs himself seems to have been driven mainly by a passion for the products, for winning the competitive battle, and perhaps for status among peers. The satisfaction of achieving excellence and of beating one’s opponents appears to have been far more important than monetary compensation. Excellence and victory were their own reward, rather than a means to the end of financial riches... The rise of winner-take-all compensation occurred simultaneously with surges in innovation and productivity in certain fields, but that doesn’t mean it was the cause of those surges."

I agree with Prof Kenworthy and am inclined to the argument that innovation at the highest levels is driven more by passion and desire for peer recognition than by financial rewards. Here are three more observations.

1. The fixation on financial rewards may be an example of availability bias at work. In the mainstream discourse, financial rewards have a deeply entrenched association with achievements and innovations. So there is a natural tendency to subliminally associate any innovation with financial rewards.

2. Further, there is also the strong correlation-causation bias in the winner-take-all interpretation. A successful innovation would naturally result in a flow of financial rewards. So, given the entrenched availability biases about financial rewards causing innovation, the immediate impulse is to attribute the innovation itself to the financial reward.

3. A wage premium is necessary to build up high quality teams that can collaborate in the development of innovative products. However, while intuitively true, this may require more deeper analysis. It would be instructive to examine the great modern day innovations, and assess the relative roles of large team-work and individual genius, in the genesis of the innovation. I suspect that the latter would bear a disproportionate share of the credit for such innnovations. It may be too much of a stretch to argue that Larry Page or Mark Zuckerburg or Niklas Zennström were motivated predominantly by the attractions of a winner-takes-all system and not their inherent personal motivation.

Improving decision making quality through pre-mortems

Been reading Daniel Kahneman's excellent latest book, Thinking, Fast and Slow. Among several fascinating ideas and concepts, he points to Gary Klein's idea of pre-mortem.

One of the biggest challenges for any decision-making team is to overcome the danger of group-think and the strong possibility of a failure to examine all dimensions of the issue. A combination of cognitive biases, personal prejudices, and group dynamics conspire to obscure certain critical aspects of the project. This results in incomplete project implementation plans, whose fault-lines get revealed when faced with unanticipated obstacles.

How do we overcome such blind-spots? How can project teams locate weaknesses in their implementation plans? Gary Klein advocates the use of pre-mortems, wherein the possible failure channels in any project plan can be identified through prospective hindsight. It is based on a 1989 research work by Deborah J. Mitchell, Jay Russo, and Nancy Pennington, who found that prospective hindsight — imagining that an event has already occurred — increases the ability to correctly identify reasons for future outcomes by 30%. He writes,

"A premortem is the hypothetical opposite of a postmortem... A premortem in a business setting comes at the beginning of a project rather than the end, so that the project can be improved rather than autopsied. Unlike a typical critiquing session, in which project team members are asked what might go wrong, the premortem operates on the assumption that the "patient" has died, and so asks what did go wrong. The team members' task is to generate plausible reasons for the project’s failure.

A typical premortem begins after the team has been briefed on the plan. The leader starts the exercise by informing everyone that the project has failed spectacularly. Over the next few minutes those in the room independently write down every reason they can think of for the failure — especially the kinds of things they ordinarily wouldn’t mention as potential problems, for fear of being impolitic...

Next the leader asks each team member, starting with the project manager, to read one reason from his or her list; everyone states a different reason until all have been recorded. After the session is over, the project manager reviews the list, looking for ways to strengthen the plan."

The effectiveness of pre-mortem lies in its clever use of framing effect. The team members are primed by telling them that the "project has failed". Their prospective hindsight analysis is based on this failure assumption. This frees them up from their cognitive shackles that restrained the team members from giving full vent to all their apprehensions while doing the project conceptualization brain storming.

Given the aforementioned dynamics of pre-mortems, its effectiveness is critically dependent on the most appropriate technique of framing. In simple terms, how do convey the "project failure" message in a manner that cognitively detaches and transports team members from their present ex-ante analysis role to one that enables prospective hindsight?

Pre-mortem, if effectively executed, is an obviously powerful tool to strengthen project implementation plans in both private and public sectors. In fact, I am inclined to believe that it is likely to be even more effective in public bureaucracies where ex-ante analysis is always held back by strong currents of political correctness and bureaucratic hierarchy norms. Pre-mortems on effectively primed (about the program failure) team members has the potential to yield remarkable results.

Here is the chronology of a pre-mortem

Step 1: Preparation. Team members take out sheets of paper and get relaxed in their chairs. They should already be familiar with the plan, or else have the plan described to them so they can understand what is supposed to be happening.

Step 2: Imagine a fiasco. When I conduct the Pre-Mortem, I say I am looking into a crystal ball and, oh no, I am seeing that the project has failed. It isn’t a simple failure either. It is a total, embarrassing, devastating failure. The people on the team are no longer talking to each other. Our company is not talking to the sponsors. Things have gone as wrong as they could. However, we could only afford an inexpensive model of the crystal ball so we cannot make out the reason for the failure. Then I ask, "What could have caused this?"

Step 3: Generate reasons for failure. The people on the team spend the next three minuted writing down all the reasons why they believe the failure occurred. Here is where intuitions of the team members come into play. Each person has a different set of experiences, a different set of scars, and a different mental model to bring to this task. You want to see what the collective knowledge in the room can produce.

Step 4: Consolidate the lists. When each member of the group is done writing, the facilitator goes around the room, asking each person to state one item from his or her list. Each item is recorded in a whiteboard. This process continues until every member of the group has revealed every item on their list. By the end of this step, you should have a comprehensive list of the group’s concerns with the plan as hand.

Step 5: Revisit the plan. The team can address the two or three items of greatest concern, and then schedule another meeting to discuss ideas for avoiding or minimising other problems.

Step 6: Periodically review the list. Some project leaders take out the list every the list every three to four months to keep the spectre of failure fresh, and re-sensitise the team to the problems that may be emerging.

The psychology of poverty

Conventional wisdom on poverty has been that poor remain poor because of low incomes and their certain lifestyle and behavioural traits - lack of cleanliness, limited self-control, wasteful expenditures, idling away time etc. While incomes are not within their control, it has been argued that the poor could be encouraged to change certain behavioural traits that could increase the likelihood of their overcoming or atleast mitigating poverty.

This post is a summary of considerable research that appears to point to a significant role of behavioural psychology in determining the behaviour of the poor.

1. I had blogged earlier about the bee-sting theory of Charles Karelis.

When we're poor our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where the bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems. Poverty and wealth, by this logic, don't just fall along a continuum the way hot and cold or short and tall do. They are instead fundamentally different experiences, each working on the human psyche in its own way.

Karelis argues that poverty introduces a diminishing marginal utility to putting in effort, "One doesn't have enough money to pay rent or car insurance or credit card bills or day care or sometimes even food. Even if one works hard enough to pay off half of those costs, some fairly imposing ones still remain, which creates a large disincentive to bestir oneself to work at all."

2. Conventional wisdom would have it that people exercise their free willpower to resolve conflicts among competing choices and demands on their scarce resources (be it money, time, space, attention, affections etc) and make decisions in a rational manner and in their best interests. In other words, these decisions are thought to be under the control of the respective individuals.

A recent New Republic article points to the pioneering work of researchers from Case Western Reserve University, Roy Baumeister, Ellen Bratslavsky, Mark Muraven, and Dianne Tice, who found that an individual’s capacity for exerting willpower was finite. Their experiments found that self-control was depletable - exerting willpower in one area makes us less able to exert it in other areas subsequently in the immediate future.

They had food-deprived subjects sit at a table with two types of food on it: cookies and chocolates; and radishes. Some of the subjects were instructed to eat radishes and resist the sweets, and afterwards all were put to work on unsolvable geometric puzzles. Resisting the sweets, independent of mood, made participants give up more than twice as quickly on the geometric puzzles. Resisting temptation, the researchers found, seemed to have "produced a 'psychic cost'".

In another experiment, participants were asked to remember a number – the number was randomly selected to either be a short two digit number or a seven digit number – and then to walk down a hallway to another room for an interview. As a seeming afterthought, they were told there is a snack cart in the hallway and to help themselves to one of the snacks. The snack choice was either fruit salad or chocolate cake. The subjects asked to remember the two-digit number selected the fruit salad in equal proportions to the chocolate cake. The subjects tasked with remembering the longer seven digit number overwhelmingly chose the chocolate cake. The authors attribute this to depletable self-centrol - when attention is focused elsewhere, such as on retaining a long number, there is less of this resource available to guide the decision over snack choice.

In another experiment in rural Rajasthan by Dean Spears, people were, in random order, offered to purchase a well-known brand of soap at a highly discounted price and they were also asked to squeeze a mildly resistant handgrip for as long as possible (handgrips are common way to measure cognitive control, with the duration determined by mental will power). He found that if the hand grip came before the offer of discounted soap, both poor and rich respondents squeezed the grip for an average of two minutes. But if the decision to purchase soap was taken before the hand grip exercise, the rich respondents still held the handgrip for an average of two minutes, while the poor gripped for a full 40 seconds less. He found that by making economic decision making more difficult for the poor, poverty depletes cognitive control.

These results have been corroborated in more than 100 experiments, where researchers have found that exerting self-control on an initial task impaired self-control on subsequent tasks - consumers became more susceptible to tempting products; chronic dieters overate; people were more likely to lie for monetary gain; and so on. In addition to self-control decisions, these researchers have expanded the theory to cover tradeoff decisions - like choosing between more money and more leisure time. They have found that tradeoff decisions require the same conflict resolution as self-control decisions and appears to similarly deplete our ability to muster willpower for future decisions.

In all these cases, willpower can be understood as the capacity to resolve conflicts among choices as rationally as possible, and to make the best decision in light of one’s personal goals. And, in all of them, willpower seems to be a depletable resource. The Development Impact blog writes,

"The conditions of poverty exact a heavy toll on cognitive resources through the everyday challenges of scarcity. The repeated trade-offs confronting the poor in daily decision making – i.e. "should I purchase a bit more food or a bit more fertilizer?" – occupy cognitive resources that would instead lay fallow for the wealthy when confronted with the same decision. The rich can afford both a bit more food and a bit more fertilizer, no decision is necessary...

My impulsive desire may prefer the consumption good in front of me, but my cognitive control can resist that impulse and select the alternative investment good if it hasn’t already been depleted through recent repeated usage. If my control resource has been depleted through earlier use, then the conditions of poverty can induce behavior that in turn prolongs poverty... because cognitive control is a depletable resource, the higher frequency of difficult economic decisions confronting the poor takes a toll on subsequent decisions."

Dean Spears did field experiments in India and analysed the American Time Use Survey and found that poverty is responsible for lower performance and control.

3. The theory of declining temptations says that the fraction of the marginal dollar that is spent on temptation goods decreases with overall consumption. Sendhil Mullainathan and Abhijith Banerjee argue that "declining temptations can help to explain a large range of phenomena, from poverty traps to credit and investment behavior". They argue that this "has a number of striking implications for the investment, savings, borrowing and risk-taking behavior of the poor".

They advocate using these insights to design commitments savings products (that both force savings and limit withdrawals) for poor people. Nava Ashraf, Dean S. Karlan, and Wesley Yin designed commitment savings products for a Philippine bank and found that those who opened the account increased savings by 192% and 337% over 6 and 12 months respectively relative to the control group.

4. Lack of control

Psychologist Martin Seligman has propounded the concept of "learned helplessness", as a "condition of a human person or an animal in which it has learned to behave helplessly, even when the opportunity is restored for it to help itself by avoiding an unpleasant or harmful circumstance to which it has been subjected". It follows that clinical depression and related mental illnesses may result from a perceived absence of control over the outcome of a situation.

Accordingly, when we don't feel we have some level of control over our lives we get depressed. And when we feel we have no control for a long time we stop trying to improve a terrible situation because we don't think it's possible anymore. Eric Barker writes about the story of taming elephants - after being leashed by a chain and realizing that they cannot break-free, elephants stop trying to get free even if the chain is replaced with a rope. Such feeling of lack of control, arising from factors like unfair workplaces, bad bosses, and unemployment, have been found to lead to poor health. It is therefore natural for a poor person, who faces a series of continuous struggles on even the most mundane and basic of things, to feel that things are mostly out of his control and accordingly feel depressed and unproductuive.

5. Decision fatigue

I have blogged earlier about a study by Shai Danzigera, Jonathan Levavb and Liora Avnaim-Pessoa of the changes in the nature of decision-making by eight experienced parole judges in Israel during a court session. They found that the prisoners appearing for parole were "anywhere between two and six times as likely to be released if they are one of the first three prisoners considered versus the last three prisoners considered".

The larger message sought to be highlighted by this experiment is that human beings are vulnerable to decision fatigue - the ability to discriminate and make objective decisions get depleted as the session or day (or even life?) progresses. Jon Tierney sums it up nicely,

"No matter how rational and high-minded you try to be, you can’t make decision after decision without paying a biological price. It’s different from ordinary physical fatigue — you’re not consciously aware of being tired — but you’re low on mental energy. The more choices you make throughout the day, the harder each one becomes for your brain, and eventually it looks for shortcuts, usually in either of two very different ways. One shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences... The other shortcut is the ultimate energy saver: do nothing. Instead of agonizing over decisions, avoid any choice. Ducking a decision often creates bigger problems in the long run, but for the moment, it eases the mental strain. You start to resist any change, any potentially risky move — like releasing a prisoner who might commit a crime. So the fatigued judge on a parole board takes the easy way out, and the prisoner keeps doing time."

This analysis is similar to the arguement above that people have a finite store of mental energy, which enables them to exert self-control. Therefore, once they indulge in activities that require utilization of this self-control (like decision making), their reservoir of mental energy is depleted, and they are likely to show less mental commitment in subsequent activities. This phenomenon manifests itself in people making irrational and often impulsive choices and decisions when their mental energy level gets depleted.

Extending this analysis to poor people could help throw light on some of the elements that characterize people living in poverty. Experiencing scarcity in everything (time, money, space, jobs, physical strength etc), more than any others, poor people have to constantly make decisions involving trade-offs. This depletes their pool of mental energy faster, leaving them to either act impulsively or not act at all. The popular caricatures of poor people with different manifestations of these attributes can atleast partially be attributed to decision fatigue and depleting mental energy.

Tierney offers a neat summary of all these new behavioural psychology theories of poverty,

"This sort of decision fatigue is a major — and hitherto ignored — factor in trapping people in poverty. Because their financial situation forces them to make so many trade-offs, they have less willpower to devote to school, work and other activities that might get them into the middle class. It’s hard to know exactly how important this factor is, but there’s no doubt that willpower is a special problem for poor people. Study after study has shown that low self-control correlates with low income as well as with a host of other problems, including poor achievement in school, divorce, crime, alcoholism and poor health."

Assessing Roger Federer's clay court legacy

Roger Federer's loss in the just concluded French Open finals will naturally ignite the ususal round of questions about his competence on clay. Critics will argue that this is further proof of the fact that he does not belong to the top rank of clay court players of all time.

Now let us examine this claim against the weight of facts. Since 2004, Federer has lost at Paris before the finals to just three players, all of whom were exceptional clay-court specialists. In 2004, he lost to three-time champion and arguably the best clay court player of his time, Gustavo Kuerten, in 2005 to the great Nadal, and in 2010 to two-time finalist (and at the time, red-hot on clay) Robin Soderling. Underlining his consistency on clay, in the past eight years Federer has entered the finals five times, won once, and lost four times (all to Nadal). His record, atleast in terms of finals and consistency on Parisian clay, is bested only by Borg and Nadal.

None of this would speak of a man whose competence on the red clay is questionable. In fact, his consistency alone should place him alongside all the great clay-courters of the open-era, like Guillermo Vilas, Borg, Wilander, Lendl, Courier, Kuerten, and Nadal. Further, his performance on his less favored surface should also be seen against the relatively poor performance of the other great non-clay champions like McEnroe, Becker, Edberg, and Samparas. So why the controversy?

It can be partially explained by a cognitive bias to which human beings are vulnerable - representativeness bias. It refers to the phenomenon where people evaluate a hypothesis (or its probability) by considering how much of it resembles readily available and salient data as opposed to using a Bayesian calculation.

People evaluate great champions by their wins, not their losses. In Federer's case, there are several factors that amplify the bias. Not only has he lost four finals, he lost all of them to his great opponent Nadal, who has won six. Nadal is the unquestioned clay court champion of his time, probably of all time. Federer falls terribly short in comparison to Nadal, atleast on clay. Further, people also compare his performance at French to the other Slams, where he has won 15 times. He has won on grass and hard-courts, despite Nadal. Though it only means that Federer is more comfortable and more competitive on these surfaces, people construe it as proof of his weakness on clay.

In conclusion, Federer may be a lesser player on clay, but less stronger and consistent than only two others!

Mental fatigue and decision-making

One of the less understood and least discussed areas of public policy is the influence of psychological and behavioural motivations in determining the actions and decisions of human beings. Conventional wisdom on this has relied on the assumption that human beings are rational and respond to incentives (rewards and punishments) and regulations (rules). But this approach overlooks the critical influence of cognitive biases on human behaviour.

An excellent post in Economix draws attention to the critical role of extraneous, human behaviour-related factors in deciding outcomes in public administration. It points to a recent paper by Shai Danzigera, Jonathan Levavb and Liora Avnaim-Pessoa who analysed the changes in the nature of decision-making by eight experienced parole judges in Israel during a court session.

They examined more than 1,000 rulings made by them in 2009 found that the probability of favorable decisions declined dramatically as the session progressed. They write,

"Are judicial rulings based solely on laws and facts? Legal formalism holds that judges apply legal reasons to the facts of a case in a rational, mechanical, and deliberative manner. In contrast, legal realists argue that the rational application of legal reasons does not sufficiently explain the decisions of judges and that psychological, political, and social factors influence judicial rulings. We test the common caricature of realism that justice is “what the judge ate for breakfast” in sequential parole decisions made by experienced judges. We record the judges’ two daily food breaks, which result in segmenting the deliberations of the day into three distinct “decision sessions.” We find that the percentage of favorable rulings drops gradually from ≈65% to nearly zero within each decision session and returns abruptly to ≈65% after a break. Our findings suggest that judicial rulings can be swayed by extraneous variables that should have no bearing on legal decisions."

A Guardian report quotes one of the authors, Jonathan Levav,

"You are anywhere between two and six times as likely to be released if you're one of the first three prisoners considered versus the last three prisoners considered."

This finding resonates with studies elsewhere and in other areas. Behavioural economists like Dan Ariely have found that making successive decisions depletes a limited mental facility. As people get tired, they look for shortcuts, and one of the easiest shortcuts is to uphold the status quo – in this case, denying parole. As the Economix report writes about its implications elsewhere,

"This suggests that college admissions committees are more likely to accept the first applicants they consider after a lunch break. Or that quality-control officers may be more likely to ignore possible flaws in products as a long day drags toward its close."

As the Economix post argues, while food and rest are imperfect solutions to overcome mental fatigue related problems, checklists may be more effective in addressing them. In fact, Prof Levab points to the extensive use of checklists by professionals like pilots as an acknowledgement of the reality of mental fatigue.

Update 1 (7/6/2011)

The idea of depletable self-control - that an individual’s capacity for exerting willpower was finite (or exerting willpower in one area makes us less able to exert it in other areas) has been gaining currency in recent years. In 1998, researchers at Case Western Reserve University published some of the young movement’s first returns. Roy Baumeister, Ellen Bratslavsky, Mark Muraven, and Dianne Tice set up a simple experiment. They had food-deprived subjects sit at a table with two types of food on it: cookies and chocolates; and radishes. Some of the subjects were instructed to eat radishes and resist the sweets, and afterwards all were put to work on unsolvable geometric puzzles. Resisting the sweets, independent of mood, made participants give up more than twice as quickly on the geometric puzzles. Resisting temptation, the researchers found, seemed to have "produced a 'psychic cost'".

Over the intervening 13 years, these results have been corroborated in more than 100 experiments. Researchers have found that exerting self-control on an initial task impaired self-control on subsequent tasks - consumers became more susceptible to tempting products; chronic dieters overate; people were more likely to lie for monetary gain; and so on.

In addition to self-control decisions, researchers have found the same problem with tradeoff decisions - where w resolve conflicts among choices as rationally as possible. Any decision that requires tradeoffs - like choosing between more money and more leisure time - require the same conflict resolution as self-control decisions and seems to deplete our ability to muster willpower for future decisions.

Princeton economist Dan Spears has found that such self-control and trade-off decisions are more pervasive for poor people, with the result that they make a large number of sub-optimal subsequent decisions. For example, if you have enough money, deciding whether to buy the soap only requires considering whether you want it, not what you might have to give up to get it. However, many of the tradeoff decisions that the poor have to make every day are onerous and depressing - whether to pay rent or buy food; to buy medicine or winter clothes; to pay for school materials or loan money to a relative - are weighty, and just thinking about them seems to exact a mental cost.

Mullainathan and Banerjee too found that given their scarce incomes, the same self-control or trade-off decision problem is more consequential for the poor than the rich. These findings bring in a new dimension to poverty - "poverty doesn’t simply reduce freedom by constraining an individual’s choices, but that it may actually alter the nature of freedom by reducing an individual’s willpower".

Empowering consumers using behavioural insights

The Behavioural Insights Team located in the British Cabinet Office has released its latest strategy document (pdf here). It argues for the use of insights from behavioural psychology to empower consumers and help them make more informed and effective choices. It is hoped that this will in turn encourage competitive businesses, improve overall economic efficiency and thereby long term economic growth. As the report says, "A better deal for consumers and the economy means a better deal all round."

Its earlier report which advocated the use of insights from behavioural economics to address health care issues is discussed here. Its two-fold objectives are defined as

"1. To put consumers in charge so that they are better able to get the best deals for themselves individually and collectively as well as looking at ways to empower the most vulnerable who may not otherwise benefit from these exciting developments.
2. To contribute to our broader growth agenda, supporting a strong private sector recovery and helping to raise underlying long-term growth rates."

The strategies and initiatives proposed include,

"1. A radical new programme of work – 'mydata' – which will enable consumers to access, control and use data currently held about them by businesses;
2. A range of new ways of ensuring that consumers are given richer, more relevant information about the goods and services they buy (including clearer information on Credit Card Statements);
3. A drive to encourage collective purchasing and collaborative consumption, which enable people to come together to buy or use goods;
4. The development of a self-regulatory quality mark for web and comparison sites, and the publication by Government of complaints and performance data held about businesses"

The Better Choices : Better Deals program seeks to put power into the hands of consumers so that they can choose optimally between suppliers and in the process incentivize businesses to be more efficient and innovative. In order to achieve this, it seeks to leverage three recent trends,

"1. The increasing role of new technologies, in particular internet and mobile phone applications, that have opened up new channels for consumers to find, compare, and purchase goods and services.
2. The use of data, drawn from customers’ own transaction histories, that have allowed businesses to understand their customers better, allowing them to make more tailored recommendations.
3. The development of new ways for different consumers to collaborate across the economy – for example whether by sharing cars or bicycles, or giving feedback about a GP practice, a local tradesman or a multinational corporation."

The centerpiece of the campaign is the "mydata" program undertaken by the government in partnership with consumer groups and leading businesses to give consumers more control and access to their personal transactions data in a way that is portable and safe. This will enable them to "take advantage of the growing number of applications which can use this data to find them a better deal, or tell them interesting things about their spending habits".

The Better Choices : Better Deals campaign also proposes to go beyond the conventional regulations driven approach to protect and benefit consumers. This would include working in partnership with businesses and voluntary associations to build norms of social responsibility and consumer satisfaction. The program will appeal to businesses to reduce their carbon footprint, improve skills and create jobs, support the local community, and improve the quality and well-being of their consumers.