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Saturday 12 May 2012

Incentive Caused Bias and the Indian Politicians

Charlie Munger refers to incentive caused bias as one of the most potent of all biases that mankind is afflicted with. And we see it everywhere around us, all the time. I was thinking of this when I saw one leading mutual fund manager mention on his facebook account on the ills of the RBI not cutting rates quick enough to boost growth. He was peeved that RBI was more concerned about taming inflation than looking at industrial growth. Here, I thought, is a classical case of incentive caused bias. A fund manager, would obviously love industry to grow, so the stock market performs better and he gets a better bonus.

The non-stock-investing common people (I read somewhere that in India about 5% people invest in equities, so that leaves the the majority in this category) want higher bank deposit rates. People with home loans want their home loan rates to go down. People with cars want petrol prices to go down and those with diesel cars want diesel prices to remain where they are.

The politicians are also trapped within their own set of incentive caused biases, primary among them is winning the next election. Financial and economic propriety is irrelevant when it comes up against such a strong bias. So, who gives a damn about the fiscal deficit or the trade deficit! Most people in India wouldn't even know what these terms mean or what impact they have on their lives.

Every subsidy that the government doles out has a set of people who have very strong incentives in continuing with them, so it becomes very difficult to break the setup. As the French have shown us recently, no one likes austerity for the long-term greater good. The hell with good economics as long as we can live well now. That has been the downfall of all (atleast nearly all) great civilizations before ours. It will be interesting to see, if it is the same for us!

The only solution to this is to align long term interests of the nation to those of the elected politicians. For example, factors like reduction in absolute poverty levels (the threshold is immaterial - whether its Rs 28 per day or Rs 40 per day it does not really matter, as long as it is fixed and their is a steady decline in number  of people below it), increase in education levels at all levels (not only primary, but also secondary, college, professional and technical), healthcare availability, access to clean potable water, access to roads, availability of 24x7 electricity and other such critical parameters. If the politicians cannot deliver, then all the MPs will be debarred from contesting elections for the next 10 years. Then we shall see real progress as the ministers and all the opposition MPs will have incentives in ensuring that the country makes actual progress!

P.S. I know this will never happen and we will continue to perform pathetically in the future, just as we did in the past! But, no harm in dreaming, is there!

1 comment:

  1. Your idea on politician is great innovative idea .
    There should be set measurable goal for every MP. This measurable goal should be quantitative so can be classified strictly achieve or not achieved (can be given some variance)

    Recently I came across to two companies . I watch PAT graph of both . First had inconsistent PAT while second has 45 degree PAT graph . I wonder what is difference between both when both operate in same industry and both were competitor of each other. First has set goal for each and every employee but not quantitatively measurable but other company has set goal for each and every employee which is measurable . There might be other difference but this was major difference.