Programmed to reject demonetisation

While a lot is being discussed about the economic impact of demonetisation, no one seems to have examined the processes of individual and collective interpretation related to this initiative.

It has long been known that we as human beings do not respond to incidents purely based on what the objective parameters of the situation are, but rather on the way we perceive it to be. Our perception, in turn, is coloured by a series of psychological and social biases.

Let’s look at the role of cognitive biases in the way we are making sense of and responding to demonetisation.

This can help us realise that we can actually cope better (and panic less) if we recognise how we ourselves (through our conclusions, judgements, and emotions) are contributing to the situation and collectively determining how it will evolve further in the coming days.

Conformity effect When I see pictures of long queues of people standing in front of banks and ATMs, it is almost impossible to resist the temptation to go and withdraw cash. There is a feeling that if everyone is withdrawing cash, I too must go and do it, even though I know I can manage with cards and online wallets.

This is a classic case of the Conformity Effect where the belief that the group must be right can actually override an individual’s own perception and reasoning ability.

A practical way to decrease the influence of the conformity effect is to actively seek out examples of people who are not conforming with the ‘herd’. In studies that measure the influence of conformity on individual sense-making, even a single dissenting voice has been found to bring about a significant drop in the tendency to conform.

Decades of research tells us that our private theory in our heads is going to significantly influence the way we interpret the incidents that are unfolding around us. What did you conclude about the demonetisation initiative as soon as you heard about it? Did you form an opinion that it was going to help us change as a country, or did you decide upfront that it was going to create trouble?

When you hear stories of the way people have been managing in local communities through cashless barter and relationship based credit do you interpret that news as evidence to show how the demonetisation is creating problems or do you interpret that as evidence that shows how resilient and innovative our communities can be?

Confirmation bias

This difference in the many possible conclusions we can draw from the same data is because of our own inherent Confirmation Bias , defined as the inherent human tendency to interpret new evidence as a confirmation of one’s existing theories and beliefs. A practical way to decrease confirmation bias is to consciously ‘live in the question’, rather than conclusions and judgements.

Status quo bias A third bias that is influencing us in this context is the Status Quo Bias , which as the name suggests is the tendency of human beings to favour the current state of affairs.

A large amount of experimental and field evidence has been found in support of the status quo bias from contexts ranging from number driven decision like retirement plans, to subjective decisions like ethical choices.

Our brains are wired to lead us against appreciating and supporting any initiative that warrants a shift away from the ‘status quo’. To try and offset the effect of this bias we could consciously choose to give the demonetisation a greater benefit of doubt (at least in our own minds).

Loss Aversion , yet another bias relevant to the demonetisation, refers to the tendency for people to strongly prefer avoiding losses as compared to acquiring gains. Priming of loss triggers the emotion of fear and fear has the effect of distorting perception and therefore introducing more error into thinking and decision making.

As Daniel Kahneman, who won the Nobel Prize for bridging economics and psychology, puts it — “What actually happens with fear is that probability doesn’t matter very much.

That is, once I have raised the possibility that something terrible can happen to your child, even though the possibility is remote, you may find it very difficult to think of anything else.”

In severe cases, the emotion of fear or panic can also lead to a phenomenon called Amygdala Hijack . An Amygdala Hijack is defined as a strong, immediate and overwhelming emotional reaction that is out of proportion to the stimulus.

This happens because something has triggered a deep emotional threat and therefore the amygdala, which is the part of the brain that handles emotions shuts down the neo-cortex, or ‘thinking brain’ which operates on logic.

Group concerns We cannot and should not underestimate the role that the above psychological biases are playing with regard to our individual attitudes and sense-making of the demonetisation initiative.

Further, the effect of these biases are compounded when they occur at a group level, and can escalate exponentially at a societal level, a phenomenon known as Polarisation .

To quote Kahneman again, “When everybody in a group is susceptible to similar biases, groups are inferior to individuals, because groups tend to be more extreme than individuals.”

I invite people of India to experiment with examining their own mental frames through which they are making sense of this initiative and the news stories that we are hearing.

I know a friend who withdrew cash in ₹100 denominations but passed it all on to his cook so that it could go back into circulation. My housemaid’s landlord told her she could pay her rent next month.

Let us carry on this optimism and spirit of ‘jugaad’ in whatever ways we can. Let us not allow this event to break us down, rather let us use this as an opportunity to connect, help and emerge stronger and more resilient than before.

The writer is a faculty of organisational behaviour at IIM-Bangalore

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