Behavioural Economics and Demonetization

Behavioural economics is a subfield of economics that focuses on the psychological social and emotional factorsthat influence decision making which is different from traditional economics.

As defined by Dick Thaler and Cass Sunstein book named “Nudge”,there exist two kind of personalities in the market one the human and other the Econs. The Econs are the ones that are true follower of traditional economics and thus tend to take perfect rational decisions. Where as humans are emotional and impulsive while taking decisions.

Assuming market is full of Econs isa myth and in reality, the market majorly comprises of humans. Studying behavioural economics enables us to understand individuals, their behaviour, their reactions and their action patterns.

The most talked about event last year was Mr. Modi government’s massive demonetization program of discontinuing 500 and 1000 notes. An Econs viewpoint would be excepting the policy without hesitation and without complaints. However, an Econs viewpoint would be quite different.

We all are aware that the implementation of this policy resulted in lot of inconvenience and chaos especially within the people whose daily transaction was in cash. The human behaviour advocates that we all hate losses more than we love gains. However, despite this, the Indian citizens preferred standing in long queues and supported the nation’s decision of demonetization. There can be possibly two main reasons for this behaviour, which is contrary to the expected one.

Firstly, a strong belief that today’s inconvenience would enable us to have a fairer society in future. This belief of fairer society was inculcated in people psychology with help of the second reason that was the persuasive dialogues and speech of the prime minister which motivated the people believe that today’s little inconvenience and tolerance would definitely lead to a corruption free and fair future. 

Ms. Manisha Gupta

Assistant Professor

Dept. of Management Studies