Have you always wondered why economics is so important?
It is because economics deals with how 'rational' human beings think and take decisions.Following is an excerpt from Steven D.Levitt's Freakonomics:A Rogue Economist Explores the Hidden side of Everything;(This book is a must read, for further information about the book and the authors check out www.freakonomics.com.)
Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty -- it may involve coercion or exorbitant penalties or the violation of civil liberties -- but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.
We all learn to respond to incentives, negative and positive, from the outset of life. If you toddle over to the hot stove and touch it, you burn a finger. But if you bring home straight A's from school, you get a new bike. If you are spotted picking your nose in class, you get ridiculed. But if you make the basketball team, you move up the social ladder. If you break curfew, you get grounded. But if you ace your SATs, you get to go to a good college. If you flunk out of law school, you have to go to work at your father's insurance company. But if you perform so well that a rival company comes calling, you become a vice president and no longer have to work for your father. If you become so excited about your new vice president job that you drive home at eighty mph, you get pulled over by the police and fined $100. But if you hit your sales projections and collect a year-end bonus, you not only aren't worried about the $100 ticket but can also afford to buy that Viking range you've always wanted -- and on which your toddler can now burn her own finger.
An incentive is simply a means of urging people to do more of a good thing and less of a bad thing. But most incentives don't come about organically. Someone -- an economist or a politician or a parent -- has to invent them. Your three-year-old eats all her vegetables for a week? She wins a trip to the toy store. A big steelmaker belches too much smoke into the air? The company is fined for each cubic foot of pollutants over the legal limit. Too many Americans aren't paying their share of income tax? It was the economist Milton Friedman who helped come up with a solution to this one: automatic tax withholding from employees' paychecks.
There are three basic flavors of incentive: economic, social, and moral. Very often a single incentive scheme will include all three varieties. Think about the anti-smoking campaign of recent years. The addition of a $3-per-pack "sin tax" is a strong economic incentive against buying cigarettes. The banning of cigarettes in restaurants and bars is a powerful social incentive. And when the U.S. government asserts that terrorists raise money by selling black-market cigarettes, that acts as a rather jarring moral incentive.
Only after coming to a B-school have I realised the power of thinking in terms of incentives.I have started believing that the world has not yet invented a problem which cannot be fixed by designing a proper incentive scheme.An important thing to keep in mind is that an incentive can be something as tangible as money or something as intangible as affection, recognition.Once we allow for intangible incentives, I think a lot of mysterious 'behaviour' in relationships even friendships and personal relationships becomes less mysterious.
Do you think, thinking in terms of incentives/disincentives can help in the following situations?
1)How would you ensure that there is no freeriding in your project group without letting the quality of project get affected?Assume that you have no control in the formation of groups.You also cannot report the name of the freerider to the professor.
2)The IIMC library requires student volunteers so that it can remain open till 1:00am in the morning.The student gets paid a very meagre sum for volunteering for 4 hrs in a week that it is not an incentive.The library requires 20 volunteers per month out of 500 students.You cannot fine the volunteers if they dont perform the duty after giving their names.You cannot increase the number of staff in the library.
3)Asssuming equal ability, how would you decide whom to vote for a place in the Placement committee,if you have to decide among the following, a guy who already has a 'slot 0' offer but medium CG,a guy who has 'slot 0' offer and a very high CGPA, a guy who has a very high CGPA but no 'slot 0' offer, a guy with an average CGPA and no 'slot 0' offer?
4)How can students be motivated to show 'interest' in terms where the CGPA does not count for placement?Assume you cannot make all the terms count for placement.
5)What about 'unconditional' or 'unrequited' love?
6)Going in for 'love marriage' versus going in for 'arranged marriage'?
Can you think of other situations where apparently altruistic or 'mysterious' behaviour can be explained in terms of incentives?
Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty -- it may involve coercion or exorbitant penalties or the violation of civil liberties -- but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.
We all learn to respond to incentives, negative and positive, from the outset of life. If you toddle over to the hot stove and touch it, you burn a finger. But if you bring home straight A's from school, you get a new bike. If you are spotted picking your nose in class, you get ridiculed. But if you make the basketball team, you move up the social ladder. If you break curfew, you get grounded. But if you ace your SATs, you get to go to a good college. If you flunk out of law school, you have to go to work at your father's insurance company. But if you perform so well that a rival company comes calling, you become a vice president and no longer have to work for your father. If you become so excited about your new vice president job that you drive home at eighty mph, you get pulled over by the police and fined $100. But if you hit your sales projections and collect a year-end bonus, you not only aren't worried about the $100 ticket but can also afford to buy that Viking range you've always wanted -- and on which your toddler can now burn her own finger.
An incentive is simply a means of urging people to do more of a good thing and less of a bad thing. But most incentives don't come about organically. Someone -- an economist or a politician or a parent -- has to invent them. Your three-year-old eats all her vegetables for a week? She wins a trip to the toy store. A big steelmaker belches too much smoke into the air? The company is fined for each cubic foot of pollutants over the legal limit. Too many Americans aren't paying their share of income tax? It was the economist Milton Friedman who helped come up with a solution to this one: automatic tax withholding from employees' paychecks.
There are three basic flavors of incentive: economic, social, and moral. Very often a single incentive scheme will include all three varieties. Think about the anti-smoking campaign of recent years. The addition of a $3-per-pack "sin tax" is a strong economic incentive against buying cigarettes. The banning of cigarettes in restaurants and bars is a powerful social incentive. And when the U.S. government asserts that terrorists raise money by selling black-market cigarettes, that acts as a rather jarring moral incentive.
Only after coming to a B-school have I realised the power of thinking in terms of incentives.I have started believing that the world has not yet invented a problem which cannot be fixed by designing a proper incentive scheme.An important thing to keep in mind is that an incentive can be something as tangible as money or something as intangible as affection, recognition.Once we allow for intangible incentives, I think a lot of mysterious 'behaviour' in relationships even friendships and personal relationships becomes less mysterious.
Do you think, thinking in terms of incentives/disincentives can help in the following situations?
1)How would you ensure that there is no freeriding in your project group without letting the quality of project get affected?Assume that you have no control in the formation of groups.You also cannot report the name of the freerider to the professor.
2)The IIMC library requires student volunteers so that it can remain open till 1:00am in the morning.The student gets paid a very meagre sum for volunteering for 4 hrs in a week that it is not an incentive.The library requires 20 volunteers per month out of 500 students.You cannot fine the volunteers if they dont perform the duty after giving their names.You cannot increase the number of staff in the library.
3)Asssuming equal ability, how would you decide whom to vote for a place in the Placement committee,if you have to decide among the following, a guy who already has a 'slot 0' offer but medium CG,a guy who has 'slot 0' offer and a very high CGPA, a guy who has a very high CGPA but no 'slot 0' offer, a guy with an average CGPA and no 'slot 0' offer?
4)How can students be motivated to show 'interest' in terms where the CGPA does not count for placement?Assume you cannot make all the terms count for placement.
5)What about 'unconditional' or 'unrequited' love?
6)Going in for 'love marriage' versus going in for 'arranged marriage'?
Can you think of other situations where apparently altruistic or 'mysterious' behaviour can be explained in terms of incentives?
posted by Vamshi Jandhyala at 5:37 AM
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