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It was towards the end of the first season of the Indian Premier League in 2008 that I heard of the game theorist with a Shah Rukh Khan (SRK) photograph on his desk. The Kolkata Knight Riders had sought his expert help to help them bid for cricketers in the auction. The grateful team owner had gifted the professor an autographed photograph.

It seemed a great story to tell, so I sought an appointment with the game theorist in New Delhi. He modestly told me the auction strategy he had designed was a mere afternoon’s work, and so there was not much of a story there for me. He had not attended the auction either, so he could not be sure how much his model had actually helped the team owners decide on how to bid during the auction. But yes, SRK had indeed gifted him that photograph.

That a cricket team was prepared to seek advice from a game theorist was early indication that dry intellectual pursuits such as game theory, neuroscience, behavioural economics and auction theory—which study how human beings compete, collaborate and interact with one another—were beginning to be used to solve problems on the ground in India. Here, we highlight four examples of people who are using their specialist knowledge to tackle important problems: a “behaviour architect" who has succeeded in reducing deaths at railway crossings; a neuroscientist who is applying the findings of her subject to microfinance; biologists and economists collaborating to give local communities a stake in tiger protection; and the work of a game theorist at the heart of government.

How network theory can explain why people are poor

TARA THIAGARAJAN, CHENNAI

Vadipatti is a small taluk in the Madurai district of Tamil Nadu. “On average a rural adult in Vadipatti travels beyond 5km from his or her home less than once a month. In an earlier study elsewhere in Madurai district we found that of 200 entrepreneurs, less than 2% travelled beyond 20km to sell products—ever. Contrast this with our behaviour. We often travel hundreds of kilometres in a month and go beyond 5km more than once every day," says Tara Thiagarajan, chairperson of Madura Micro Finance. “Many people reported that they interact with only 25 people through most of the year. And with such low mobility, new information coming in is rare."

From the field: Through insights from her research, Thiagarajan and her team want to assess the risk of micro-enterprises. Nathan G/Mint

She illustrates this insight using the example of the carbon atom: “You can’t really describe the properties of a single carbon atom because the properties only manifest on interaction with other atoms. Carbon can become hard like a diamond when the atoms form tight bonds or be soft like graphite when the bonds are more fluid." The same element can become either a brilliant diamond or a piece of black graphite depending on how carbon atoms bond together.

Economic outcomes can be understood in similar terms: What really matters is how individual units link together in networks and how information flows dynamically along these links. The marooned lives of the poor in Madurai are a recipe for poverty, which the regular government schemes may not be able to tackle. What could help poor communities more would be interventions, products and infrastructure that strengthen the flow of information in these areas.

“In impoverished communities, flow of knowledge and information is poor. The network structure and dynamics look different from those of more progressive swathes of society where networks are extremely dense with faster and more efficient dynamics," says Thiagarajan, who is also a visiting scientist at the National Centre for Biological Sciences in Bangalore.

Economists have written about how so-called agglomeration effects reduce the cost of economic transactions, give easier access of skills and offer a rich information environment. That is one reason why dense cities are economic powerhouses. Recently, economist Ricardo Hausmann and physicist César Hidalgo, both at Harvard University, US, used network science to show the richest countries are the ones with the most dense economic networks, because that allows for specialization. As Manas Chakravarty wrote in his Capital Account column in Mint in October, the complexity map of the world also has predictive value. Economic complexity in India and China is well above what is usual for countries at their level, which the two Harvard researchers say is an indication of their potential to grow rapidly in the future.

So how does a microfinance firm use these insights into the importance of networks? “In microfinance, our goal is not so much to create networks as it is to use information ourselves to enable productive flow of capital," says Thiagarajan. Yet, she adds, “We are working to take the insights we gain from the Vadipatti research and turn it into tools that can assess the risk of micro-enterprises based on the network and knowledge characteristics of the entrepreneur."

The big question is whether public policy will adapt to this new framework, so that the graphite of poverty can be transformed into the diamond of prosperity.

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How game theory can help the government design efficient public policy

KAUSHIK BASU, DELHI

Kaushik Basu is an accomplished technical economist and an elegant writer with a rich sense of irony. But his career graph has led to an ironical development that even Basu must have been unprepared for. The game theorist found himself at the heart of government.

In 1997, Basu, then a professor at Cornell University, wrote a paper on the art of policy advice. His basic point was simple. Economists innocently believe that governments will act on their advice. The reality is more complicated. Politicians and civil servants have their own preferences. Basu designed a theoretical game called Cheater’s Roulette to help the economic adviser understand the preferences of agents in government—and then give advice that would work.

People’s economist: Basu says it is important to treat the ordinary citizen as a self-seeking, rational agent. Raj K Raj/Hindustan Times

Basu has entered government at a time when Indians are being treated to a law for every occasion and a grand plan for every problem. A disciple of Amartya Sen, Basu has never doubted the need to provide basic entitlements to citizens. But the game theorist in him has been quietly pointing out that ambitious policies often run into trouble on the ground.

“Our policies are not wrong in concept but there are problems of implementation. We do not pay enough attention to the incentives faced by agents who are to carry out the grand plans," says Basu. Just think of the ration-shop owner who would rather sell grain at a profit in the open market, the government schoolteacher who encourages his students to come for private tuitions, the bribe giver who does not complain because of laws that punish him as severely as the bribe taker.

“In crafting good economic policy it is important to treat the various players on the market—the policeman, the ration-shop owner and the ordinary citizen—as reasonably self-seeking, rational agents. If these agents get the opportunity to earn some extra money with little effort, they will seize the opportunity. Hence, to cut down on corruption and pilferage, we have to design policies in such a way that there is no incentive for ordinary citizens and the enforcers of the law to cheat. Accordingly, good mechanism design is the heart of the problem. Many a noble plan to reach out to the poor and increase the welfare of our citizens has fallen on hard times because of the policymakers’ propensity to assume that the policies are delivered by flawlessly moral agents or perfectly programmed robots," Basu wrote in a fascinating chapter in the 2010 Economic Survey released by the finance ministry before the Budget.

The game theorist in Basu wants the government to think more deeply about the actions of the individuals who implement policy or benefit from it. Has he seen any change in attitudes in New Delhi? “There is now a subliminal awareness in government that we have to get the micro-foundations right," says Basu.

His own appointment was one clear indication, since the chief economic adviser has traditionally been a macroeconomist dealing in broad issues such as economic growth, inflation, exchange rates or industrial policy. Basu brings a fresh approach to economic policy in India, even though game theorists and behavioural economists have been used in other countries.

For example, the Obama administration in the US has appointed Harvard University behavioural economist Sendhil Mullainathan, who has done fascinating research work on why people make bad economic decisions, to its consumer financial protection bureau. The British government has hired a Behavioural Insights Team—popularly called the nudge unit—to help design policies that will persuade people to make the right choices about their money, their health, their security.

In India, development economist Abhijit Banerjee, whose work is based on careful research in poor communities, is in the running to head the new Independent Evaluation Office being set up to assess the impact of public programmes and suggest ways to improve their effectiveness, a sign that more attention is now being paid to ground-level realities that affect the choices people make. “The paradigm of thinking about policy is gradually changing," says Basu.

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How behavioural science can reduce deaths on railway tracks

BIJU DOMINIC, MUMBAI

Around 6,000 people get mowed down every year while making suicidal dashes across the railway tracks that snake through Mumbai, the biggest reason for unnatural deaths in the city. All the standard responses from the authorities—from warning notices to pedestrian bridges to walls flanking the tracks— have failed to prevent the deaths.

Biju Dominic, 47, was lecturing at the Railway Staff College in Vadodara, Gujarat, when a senior official asked him whether what he had been telling his audience could actually be used to tackle the fatal problem. Dominic is chief executive of Mumbai-based Final Mile Consulting, a firm that uses insights from behavioural economics, cognitive neurology and anthropology to nudge people to change their entrenched habits.

The Final Mile team hung around the most lethal crossings for several weeks, melting into the crowd, says Dominic, “like method actors living the character". They quickly noticed that the people crossing the tracks were overconfident, one of the biases that behavioural scientists say are hard-wired into our brains, the same bias that ensures that equity analysts overestimate corporate earnings or cigarette smokers refuse to believe they can be struck down by cancer. “We went back to the railway authorities and said that trespassing cannot be stopped. But deaths can be reduced," says Dominic. People would continue to cross the tracks on work, to get home to one of the slums near the tracks, and to relieve themselves in a city without adequate toilets.

His team suggested ways to make people more careful when crossing the suburban railway tracks, to curb the optimism bias. The most effective pilot project was set up at Wadala, a station on Central Railway which had seen one of the highest increases in deaths in 2010.

Fast forward: Dominic, seen here at the Wadala station tracks, changed the behaviour architecture on Mumbai’s railway tracks to prevent deaths. Abhijit Bhatlekar/Mint

Third, the team at Final Mile identified a sweet spot 120m away from a crossing point. People are overconfident when the train is more than 120m (or around 7 seconds) away, but they panic when it is closer than that. So they advised the railways to put up boards asking train drivers to blow the horn when the train is 120m from the crossing. Fourth, their reading of some musicologists told the Final Mile team that the silence between two notes is very effective, which means that the train horns should be changed to staccato bursts rather than the current system of one long note.

Fifth, since our brains are not well-equipped to judge relative speeds unless a reference point is provided, the behaviour architects got the railways to paint yellow lines on the sleepers that hold the tracks. These yellow lines allow trespassers to judge the speed of the train. These unusual but simple solutions seem to have done the trick. Dominic says that in the one year since their suggestions were put into effect at Wadala, the number of deaths has fallen from 40 in the six months prior to the changes, to nine deaths in the first six months, and then down to just one death in the six months after that. He says the railways want to take the model elsewhere as well.

What Dominic and his team have done is interesting: They did not stop people from crossing, or suggest expensive pedestrian bridges that would never be used, or impose fines. They tweaked the environment so that people would be more careful while crossing. They changed the behaviour architecture.

The Final Mile team has begun work on two other projects. One, they want to figure out how to get residents of a slum in New Delhi to use the toilet blocks built by the government, rather than defecate in the open. Two, they are trying to work with a Mumbai public hospital to ensure that people continue to take medicines even after symptoms recede, so that the course is completed and drug-resistant variants of tuberculosis are not unleashed in India.

“To change behaviour, you need to understand what happens in the human brain," says Dominic.

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How auctions can ensure that local communities have a stake in tiger conservation

V SRINIVAS, CHENNAI

Man or tiger? Indian policymakers have struggled to figure out how wild animals and poor communities can coexist in a country desperately hungry for land. The territory has been marked by conflict, as humans have invaded forests reserved for tigers while the cats have attacked encroachers. There are now just 1,706 tigers left in India, down from an estimated 100,000 a hundred years ago.

A group of environmentalists and economists is now trying to give local communities a stake in wildlife conservation in the Western Ghats. A unique collaboration between the Puducherry-based Foundation for Ecological Research, Advocacy and Learning (FERAL), The University of Melbourne, Australia, and the Indian Statistical Institute (ISI) is using auctions to solve the problem. Their laboratory is the Shencottah Gap in Tamil Nadu, where people living near the two tiger sanctuaries in the area will be paid to protect tiger habitats. The work is being co-sponsored by the National Tiger Conservation Authority with a $1.2 million (around 6 crore now) grant.

Tiger’s friend: Srinivas at Periyar, Kerala. Courtesy V Srinivas

“What makes the auction design difficult is that we are not dealing with a uniform good. Plots near the forest or near areas of animal movement have more value," explains E. Somanathan, a game theorist with the ISI who has worked on the auction rules. Care also had to be taken to ensure that the auction is transparent, local communities end up with surpluses, and there is trust between the buyers and sellers. “We designed the auction so that participants do not have an incentive to underbid. Also, one of the reasons we used descending bid auctions is that it is harder for participants to collude," adds Somanathan.

An auction undertaken at a village in Tamil Nadu by Srinivas and his team.

Participating in auctions is a tricky process, and the project team is taking care to train local farmers in auction strategy. “The farmers are used to auctions for their products, but these are reverse auctions," says Srinivas. Besides training the farmers in mock auctions, another type of education had to be imparted. Participants would bid depending on the opportunity cost of leaving their land fallow, or the money they were giving up. Many do not have adequate knowledge of costing to arrive at the figure. Most farmers know what their turnover is but are less sure of their profits. The FERAL team has also conducted costing classes for farmers so that they can make the correct economic calculations during auctions.

The use of auctions to overcome the conflict between tiger sanctuaries and human habitations could be the way forward, as local communities become willing partners in conservation. The Shencottah Gap project could provide clues that can then be transferred to other parts of the country.

nirajan.r@livemint.com

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