The Hindu Business Line : The psychology of economics

What is the similarity between a person coming out of an airport, getting into a cab and ending up being charged more by the taxi-driver and a person who dines at an up-market restaurant and pays more than the amount on the menu card? Both are puppets in the psycho game.

The cab driver knows that if you are coming out ofthe airport, you're not likely to haggle with him asyou are either claiming the cab bill from your company or really don't care about the amount. So he wins the game in any case.The same holds good with the diner who shies away from asking the waiter if the dish that is said to cost Rs 150 on the card would end up at Rs 225, garnished with the various taxes and service charges. In fact, often, you are offered a huge choice of toppings for the dessert and by the time you realise that the toppings cost more than the basic dessert it's a bit too late.

Advantage salesman

The principle at work is that we as human beings are hesitant to raise the issue of money when we are in certain environments. All salesmen use this principle to their advantage.. They will extol the virtues of a high-end TV set or a washing machine and would all but thrust them on you when you would have been better off with a basic model. This is also replicated in the ever-popular `sales', offering "up to 80 per centoff" — schemes where the item you want invariably does not have the discounted rate. You end up buying the item at a higher price. These are examples of how psychology dominates the economics of life. Another example is that of a variety of regulators who use this human weakness to their advantage. Ideally, most of them are there to ensure that rules are not broken. But most wait for you to break the rule and then negotiate the price of `forgiveness'. The human-psychology factor also works in the medium-end restaurants where the focus is on full capacity utilisation, where no one has to wait for long to get a table. The order is taken in a trice as the waiter comes back to you in a minute assuming that you know what you want. You actually do not get time to go through the elaborate menu card and may have probably decided what to order.

The food comes in a jiffy and even as you are finishing, the waiter courteously poses the question of the dessert and, if there is no nod of acquiescence, offers to bring the bill. The idea here is that you should not sit for longer than is required and he has to ensure that the capacity utilisation rate is optimal.

Human actions are often guided by strong psychological impulses. Economic theory assumes rational human behaviour which, more often than not, is an exception. Most economic activity is undertaken using rudimentary principles of game theory where psychology dominates reason. The clue is to work on these theories to better one's business. And surprisingly, these games can be learnt only through careful observation, and are outside the realm of textbooks.

(The author is Chief Economist, NCDEX Ltd.)