During my marriage hunt, my father learned an
important lesson. He passed that lesson to me. He said, 'People say something,
do something'.
Couple of weeks ago I read the book, ‘Think like a Freak’, by Steven D.
Levitt and Stephen J. Dubner. I was surprised that there is a similar principle
in economics, which mirrored what my father said. ‘People often say one thing and do another, or more precisely, we will
say what we think other people want to hear and then in private do what we want’.
In economics these are known as declared preferences and revealed preferences.
There is often a hefty gap between the two.
Declared and revealed preferences become
important when designing incentives. It involves a lot of effort to figure out
the right incentives because, ‘People say
something, do something else.’ The authors give several examples when an
incentive backfired. One example was the cobra effect.
A British Lord in colonial India thought that
there are too many cobras in Delhi. He offered cash for cobra skin. Indians
bred and slaughtered cobras to cash the bounty. People will do everything they
can to game the system, so rather being cross at their acts, appreciate their
ingenuity and design a more clever incentive.
The other principle that is valid in today’s
world is about failing fast, failing cheap and failing smart, on the path to
success. We view quitting as being cowardly, but it is important to know when to
quit.
The authors discuss about the sunk-cost fallacy or
the Concorde fallacy, named after the supersonic airplane. The British and French
Governments suspected that the Concorde was not economically viable but had
spent too many billions to stop. It is tempting to believe that once you have
invested heavily in something it is counterproductive to quit. So the next
time, you are in a theatre, watching a boring movie, don’t waste anymore time
watching it. You cannot get your money back, but at least you can save time.
I enjoyed reading this book. The Freakonomics and Superfreakonomics authors came up with another great book. I recommend it for reading.
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