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Indianomix: Making Sense of Modern India

Vivek Dehejia and Rupa Subramanya

Random House India

Pages: 219 Rs. 399

An ambitious look at some of India’s biggest problems

Vivek Dehejia and Rupa Subramanya’s new book is an essential read for those interested in the convergence of economics and psychology, writes Madhav Raghavan

MADHAV RAGHAVAN  15th Dec 2012

Vivek Dehejia

n 2005, an economist and a journalist came together to write a popular economics book. Their idea? To apply economic ideas to things that nobody considered to be related to economics at all. After all, how else could you describe a book that talked of teachers and sumo wrestlers in the same breath, or made a connection between legalising abortion and reducing crime?

Freakonomics, as the book was called, has since inspired a revolution. The past seven years have seen a number of similar exercises -- the sequel, SuperFreakonomics, Tim Harford's Undercover Economist, and Dan Ariely's Predictably Irrational, to name just a few of probably dozens of books that have pushed the boundaries of what is considered economics.

And now the revolution has come to India.

Indianomix fits well with this group. For starters, it too is the product of collaboration between an economist and a journalist. Vivek Dehejia is a professor at a university in Canada, while Rupa Subramanya writes a weekly column for WSJ India. And the product is a little gem of a book, not just because of what it says, but what, as Freakonomics accomplished, it might do for popular economics in India.

We do have to catch up. The rage over the past decade has been the symbiosis between economics and psychology. The study of how people behave, and what makes them do the things they do, is a rich field, and the two disciplines have moved together to create a powerful set of analytical and empirical tools. Until now, these have not been applied in the Indian context.

The analysis comes from examining the foibles of human nature. People have long been known to do strange things, things made even stranger if you believe that everybody at heart is only out for themselves. People are selfless at times, pass up wonderful opportunities for no reason, and often don't do the 'rational' thing. The insight from psychology is the study of biases, cognitive failures, and unconventional preferences. Many of these have now been well documented, and the reader is advised to pick up any of the books mentioned above for a great first look.

But the hammer of theory needs an anvil. And that is the idea of corroboration by experiment. From the trend-setting works of Daniel Kahneman and Amos Tversky, to the path-breaking experiments of Vernon Smith, to now, economists have focused on generating data to test hypotheses, and theories must now pass these tests to gain acceptance.

It should be made mandatory reading for all the pundits on TV who have strong opinions on subjects with absolutely no factual basis.

Zen masters will tell you that the deepest insights are the most obvious, but perhaps only after they have been thought into being. True to form, the deep insight of the new economics is obvious - people respond to incentives. Shape the incentives properly, or so the theory goes, and you might even get people to do things they didn't think they wanted to.

his may sound paternalistic – getting people to do things that you think are good for them. Indeed, 'paternalistic libertarianism' is the somewhat tongue-twisting name given to this line of thinking by Richard Thaler and Cass Sunstein in their influential book, Nudge. But from opt-out clauses in pension schemes, to voluntary charitable contributions, it works. People will mostly do the right thing, but sometimes they need a little encouragement.

Indianomix stands on the shoulders of these giants. Its unique contribution is to Indianise their insights and observations. And here it succeeds, except for the occasional feeling that it tries to do a bit too much.Image 2nd

There are sections that deal with human psychology. Take for example the bit that discusses the war with China in 1962. In the months leading up to the actual fighting, the Indian government seemed blissfully unaware of the threat. In fact, officials seemed to go out of their way to claim that all was well (Hindi-Chini-bhai-bhai, and all that). And then, of course, the war happened, and only the Indian government was surprised. The authors suggest that Pandit Nehru and others may have been victims of a cognitive bias. As Nehru himself said later, "We were living in an artificial atmosphere of our own creation."

The authors are at their best when they talk politics. They analyse the famous 2004 general elections in India, where a rampant BJP-led NDA government was stopped in its tracks by a resurgent Congress Party, leading to all these UPA years. Conventional wisdom has it that this was because the rural poor were fed up with all the India Shining nonsense, since their stars were not shining at all, and so voted for change.

But the point is that this is all post-election rationalisation. Nobody, simply nobody, saw this coming beforehand. Pre-election polls pointed firmly towards a BJP victory. So what happened? Was it really the rural vote that swung away in droves?

As it turns out, you could make a more convincing case for sheer dumb luck than for any concerted rural action. The difference in the vote shares for the Congress and the BJP from 1999 to 2004 was very small, but that difference magnified into an alarming swing in the seat counts. No great strategy there, just mathematics. And luck.

Anyone looking to dabble in highly entertaining economics and psychology should definitely have a go at this book. And it should be made mandatory reading for all the pundits on TV who have strong opinions on subjects with absolutely no factual basis. Maybe then they will think before they speak. But then again, they wouldn't be TV pundits if they did, would they?

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