The Hindu Business Line : Neuro economics

YOU might have read about the strike at the Honda Motor Cycle factory in Gurgaon. Production was disrupted for sometime causing losses to the company and, perhaps, to the workers as well. This goes against the basic principle of economics. If the management and the workers were rational, as they are made out to be in the standard economic textbooks, the strike should not have happened.

After all, both sides lose if production is affected — the company generates lower revenue and the workers could lose their salary for the days they are on strike. So, why then did the strike occur? Neuroeconomics can explain the reason for such behaviour. This is a branch of economics that applies neuroscience and psychology to understanding economic decisions. So, neuroeconomists study the brain to understand how we take decisions.

Neuroscience argues that we suffer from time inconsistency. If you have to decide on something that is likely to happen in the future, you may be able to take a rational decision. But that is not the case with decisions on current consumption. We suffer from this behaviour everyday. A decision to go on a crash diet six months hence may be easy. But how easy will that decision be if you had to go on a crash diet now? Economists use hyperbolic discounting functions to analyse such behaviour. The reason we act differently is because of the way our brain functions. The part of the brain that helps in taking decisions for current consumption demands immediate satisfaction. On the other hand, the part that enables in taking future decisions favours measured and balanced thinking. Perhaps, the workers at the Honda factory were driven by immediate satisfaction when they went on strike.

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