Economics

Uncovering the Logic of Life using Behavioural Economics ‘Economics is like a jigsaw and the more we study it, the more likely we are to unleash the economics of Economics’ Economics is one of the most fascinating social sciences that study the behaviour of the Economic Man (Homo Economicus) as a rational, perfectly informed and self¬interested actor in a scarcity¬driven environment. It draws its roots from the study of ‘moral philosophy’ back in the 18th century by Adam Smith and since then the world of Economics has transcended dynamically, unraveling many micro and macro economic secrets that persistently crop up in revitalized forms. Yet, the big question is whether Economics can help to solve all the problems of humanity? And as usual, the simplest answer would be ‘It depends’! Economists are freaky fellows who see the world in a different, yet, mesmerizing manner and seek to link everyday experiences with economic ideas thought provokingly. There is a growing consensus that Economics can help to uncover the logic of life through the use of our economic toolkit and this field of Economics has been coined as ‘Behavioural Economics’. For example, when the server drops off the check at the end of a meal, people often scramble to figure out the norms for payment. Do we each pay for what we ordered? Do we split the bill evenly even if John had that extra glass of wine and the crème brûlée? Luckily, findings from behavioural economics can help answer this burning question. It turns out that one person should pay the entire bill, and that the person paying should alternate over time. Here is the reason: When we pay any amount of money we feel some psychological pain (we call this the pain of paying). This is the unpleasantness that is associated with giving up our hard earned cash. But it also turns out that this pain does not increase linearly with the cost of the meal. This means that when we double the payment, the pain doesn’t double¬it only increases by a bit. In fact, the biggest increase in the pain of paying comes when we switch from paying nothing to paying something. This of course means that we are happiest when we pay nothing, that we are slightly less happy when we have to pay something, and that we become even more unhappy as the size of the bill increases. Of course, this system is not free from defects like any economic reasoning and it has many underlying assumptions. For instance, it is being assumed that the person whose turn it is to pay does not run out of town and those meals taken up at each round cost the same. However, the first best solution remains that we should avoid sharing the bill and that we should resort to alternate payments, i.e. one person paying at a time, economically speaking. Likewise, Behavioural Economics can help to uncover many logics of life that we encounter on a daily basis implicitly. I personally believe that the study of Economics can help us not only to make better decisions and to improve our lives as a human being but also to unleash useful insights into the causes of complicated economic phenomenon like the recent upsurge in global commodity and energy prices which can eventually aid policymakers to devise the appropriate remedies. However, nothing comes with perfection and economic policy tools should not be misinterpreted as being magical brooms that can solve all our problems. There would be side effects with economic pain killers but in the long run, we have to develop the real cures to eliminate the economic vampires and achieve at least the second best of everything, if not the first best! So dear Economics students, love the subject, play with it, it will give you pains at the beginning, but if you really master it, then you will cherish a passionate career path as an Economist. Goodluck! Economics Department_RTSS