Profile Dr. S. Vijay Kumar, Professor (Associate), HOD of Economics, KGC...

Behavioral Economics

Behavioral Economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. Behavioral economics is often related with normative economics. It draws on psychology and economics to explore why people sometimes make irrational decisions, and why and how their behavior does not follow the predictions of economic models. KEY TAKEAWAYS Behavioral economics is the study of psychology that analyzes the decisions people make and why irrational choses are chosen. Behavior economics is influenced by bounded rationality, an architecture of choices, cognitive biases, and herd mentality. Behavior economics is crafted around many principles including framing, heuristics, loss aversion, and the sunk-cost fallacy. Companies use information from behavioral economics to price their goods, craft their commercials, and package their products. Starbucks' limited season drinks, Amazon's Lightning Deals, or "buy one, get one" promotions are all tied to behavioral economics. Understanding Behavioral Economics In an ideal world, people would always make optimal decisions that provide them with the greatest benefit and satisfaction. In economics, rational choice theory states that when humans are presented with various options under the conditions of scarcity, they would choose the option that maximizes their individual satisfaction. This theory assumes that people, given their preferences and constraints, are capable of making rational decisions by effectively weighing the costs and benefits of each option available to them. The final decision made will be the best choice for the individual. The rational person has self-control and is unmoved by emotions and external factors and, hence, knows what is best for himself. Alas behavioral economics explains that humans are not rational and are incapable of making good decisions. Because humans are emotional and easily distracted beings, they make decisions that are not in their self-interest. For example, according to the rational choice theory, if Charles wants to lose weight and is equipped with information about the number of calories available in each edible product, he will opt only for the food products with minimal calories. Behavioral economics states that even if Charles wants to lose weight and sets his mind on eating healthy food going forward, his end behavior will be subject to cognitive bias, emotions, and social influences. If a commercial on TV advertises a brand of ice cream at an attractive price and quotes that all human beings need 2,000 calories a day to function effectively after all, the mouth-watering ice cream image, price, and seemingly valid statistics may lead Charles to fall into the sweet temptation and fall off of the weight loss bandwagon, showing his lack of self-control. Thus, Behavioral economics combines elements of economics and psychology to understand how and why people behave the way they do in the real world. It differs from neoclassical economics, which assumes that most people have well-defined preferences and make well-informed, self-interested decisions based on those preferences. Shaped by the field-defining work of University of Chicago scholar and Nobel laureate Richard Thaler, behavioral economics examines the differences between what people “should” do and what they actually do and the consequences of those actions. Behavioral economics is grounded in empirical observations of human behavior, which have demonstrated that people do not always make what neoclassical economists consider the “rational” or “optimal” decision, even if they have the information and the tools available to do so. For example, why do gamblers often risk more after both winning and losing, even though the odds remain the same, regardless of “streaks”? By asking questions like these and identifying answers through experiments, the field of behavioral economics considers people as human beings who are subject to emotion and impulsivity, and who are influenced by their environments and circumstances. This characterization draws a contrast to traditional economic models that have treated people as purely rational actors—who have perfect self-control and never lose sight of their long-term goals—or as people who occasionally make random errors that cancel out in the long run. Several principles have emerged from behavioral economics research that have helped economists better understand human economic behavior. From these principles, governments and businesses have developed policy frameworks to encourage people to make particular choices. What are the origins of behavioral economics research: Behavioral economics has expanded since the 1980s, but it has a long history: According to Thaler, some important ideas in the field can be traced back to 18th-century Scottish economist Adam Smith. Smith is often remembered for the concept of an “invisible hand” that guides an overall economy to prosperity if each individual makes their own self-interested decisions—a key concept in classical and neoclassical economics. But he also recognized that people are often overconfident in their own abilities, more afraid of losing than they are eager to win and more likely to pursue short-term than long-term benefits. These ideas (overconfidence, loss aversion and self-control) are foundational concepts in behavioral economics today. More recently, behavioral economics has early roots in the work of Israeli psychologists Amos Tversky and Daniel Kahneman on uncertainty and risk. In the 1970s and ’80s, Tversky and Kahneman identified several consistent biases in the way people make judgments, finding that people often rely on easily recalled information, rather than actual data, when evaluating the likelihood of a particular outcome, a concept known as the “availability heuristic.” For example, people may think shark or bear attacks are a common cause of death if they’ve read about one such attack, but the incidents are actually very rare. With “prospect theory,” Tversky and Kahneman also demonstrated that framing and loss aversion influence the choices people make. For example, if presented with an opportunity to win Rs. 250 guaranteed or gamble on a 25% chance of winning Rs. 1,000 and a 75% chance of winning nothing, most people will choose the sure win. But if presented with the chance to lose Rs. 750 guaranteed or a 75% chance to lose Rs. 1,000 and a 25% chance to lose nothing, most people will risk losing Rs.1,000, hoping for the slim chance that they will lose nothing at all. This classic example demonstrates that people are more willing to take a greater statistical risk if it means avoiding a Rs. 1,000 loss versus obtaining a Rs. 1,000 win, which contradicts expected utility theory. Prospect theory and other work by Tversky and Kahneman continues to inform many areas of behavioral economics research today. In the 1980s, Richard Thaler began to build on the work of Tversky and Kahneman, with whom he collaborated extensively. Now the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the Booth School of Business, he is today considered a founder of the field of behavioral economics. Thaler’s research in identifying the factors that guide individuals’ economic decision-making earned him the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2017. His ideas stem in part from a series of observations he made in graduate school that led him to believe that people’s behavior deviated from traditional economic models in predictable ways. For example, Thaler observed that he and a friend were willing to forgo a drive to a sporting event due to a snowstorm because they had been given free tickets. But had they purchased the tickets themselves, they would have been more inclined to go, even though the tickets would have been valued at the same price regardless, and the danger of driving in the snowstorm unchanged. This is an example of the “sunk cost fallacy”—the idea that people are less willing to give up on projects they have personally invested in, even if it means more risk. Thaler is also known for popularizing the concept of the “nudge,” a conceptual device for leading people to make better decisions. A “nudge” takes advantage of human psychology and a number of other concepts in behavioral economics, including mental accounting—the idea that people treat money differently based on context. For example, people are more willing to drive across town to save Rs. 10 on a Rs. 20 purchase than Rs. 10 on a Rs. 1,000 purchase, even though the effort expended and the amount of money saved would be the same. Thaler and other UChicago economists—including Leonardo Bursztyn, Josh Dean, Nicholas Epley, Austan Goolsbee, Alex Imas, John List, Susan Mayer, Sendhil Mullainathan, Devin Pope, Rebecca Dizon Ross and Heather Sarsons—continue to conduct empirical research, including field experiments, that explore behavioral economics from multiple angles. What is a “nudge” in behavioral economics? In behavioral economics, a “nudge” is a way to manipulate people’s choices to lead them to make specific decisions: For example, putting fruit at eye level or near the cash register at a high school cafeteria is an example of a “nudge” to get students to choose healthier options. An essential aspect of nudges is that they are not coercive: Banning junk food is not a nudge, nor is punishing people for choosing unhealthy options. Thaler’s ideas about nudges were popularized in Nudge: Improving Decisions about Health, Wealth, and Happiness, his 2008 book with former UChicago legal scholar Cass Sunstein, now of Harvard University. Businesses and governments, including the U.S. government under President Barack Obama, have adapted Thaler and Sunstein’s ideas about nudges into policy. The formal term Thaler and Sunstein use to describe a situation designed around nudges is “libertarian paternalism”—libertarian because it preserves choice, but paternalistic because it encourages certain behavior. In Thaler’s words: “If you want people to do something, make it easy.” Guide to behavioral economics terms The availability heuristic refers to the idea that people often rely on easily recalled information, rather than actual data, when evaluating the likelihood of a particular outcome. For example, people may think shark or bear attacks are a common cause of death if they’ve read about one such attack, but the incidents are actually very rare. Bounded rationality refers to the fact that people have limited cognitive ability, information and time, and do not always make the “correct” choice from an economist’s point of view, even if information is available that would point them toward a particular course of action. This might be because they cannot synthesize new information quickly; because they ignore it and instead choose to “go with their gut”; or because they don’t have the time to fully research all options. The term was coined in 1955 by Nobel laureate and UChicago alum Herbert A. Simon, AB’36, PhD’43. Bounded self-interest is the idea that people are often willing to choose a less-optimal outcome for themselves if it means they can support others. Giving to charity is an example of bounded self-interest, as is volunteering. While these are common activities, they are not captured by traditional economic models, which predict that people act mostly to further their own goals and those of their immediate family and friends, rather than strangers. Bounded willpower captures the idea that even given an understanding of the optimal choice, people will often still preferentially choose whatever brings the most short-term benefit over incremental progress toward a long-term goal. For example, even if we know that exercising may help us obtain our fitness goals, we may put it off indefinitely, saying we will “start tomorrow.” Loss aversion is the idea that people are more averse to losses than they are eager to make gains. For example, losing a Rs.100 bill might be more painful than finding a Rs.100 bill would be positive. Prospect theory refers to a series of empirical observations made by Kahneman and Tversky (1979) in which they asked people about how they would respond to certain hypothetical situations involving wins and losses, allowing them to characterize human economic behavior. Loss aversion is key to prospect theory. The sunk-cost fallacy is the idea that people will continue to invest in a losing project simply because they are already heavily invested, even if it means risking more losses. Mental accounting is the idea that people think about money differently depending on the circumstances. For example, if the price of gas goes down, they may begin to buy premium gas, leading them to ultimately spend the same amount, rather than taking advantage of the savings offered by the lower price.

G20 NEW DELHI SUMMIT 2023 – ANALYSIS

-*Dr. S. Vijay Kumar The G20 is a Group of 20 countries comprising 19 of the world’s largest economies, as well as the European Union (EU) and 01 Country as a permanent guest . The Nineteen countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom (UK), United States and, One County - Spain is invited as a permanent guest. The G20, formed in 1999, meets regularly to coordinate global policy on trade, health, climate, and other issues. The G20 is not a permanent Institution with a headquarters, offices, or staff. Instead, its leadership rotates on an annual basis among its members, its decisions are made by consensus, and implementation of its agenda depends on the political will of the individual countries. The Group of G20 was conceived as a bloc that would bring together the most important industrialized and developing economies to discuss international economic and financial stability. Its annual summit, a gathering of G20 leaders that debuted in 2008, has evolved into a major forum for discussing economics as well as other pressing global issues. Bilateral meetings on the summit’s sidelines have occasionally led to major international agreements. Together, the nations of the G20 account for around 80 percent of global economic output, nearly 75 percent of global exports, and about 60 percent of the world’s population. Previous summits have addressed the COVID-19 pandemic, 2008 financial crisis, the Iranian nuclear program, and the Syrian civil war. The Russian invasion of Ukraine deepened divisions within the group, leading experts to predicted that it will struggle to find consensus at its 2023 summit in New Delhi, India. India convened 18th G20 Leaders' Summit for the first time at New Delhi on 9th and 10th September, 2023 chaired by the Indian Prime Minister. Narendra Modi committed to democracy and multilateralism, India's presidency is significant milestone as it seeks to find practical global solutions for the benefit of all and embody the idea of "Vasudhaiva Kutumbakam," or "the world is one family." *Retired HOD & Associate Professor of Economics, KGC (NAAC “A” Grade College), Ex- Member of Board of Studies in Economics, Kakatiya University, Warangal, Telangana State (India). Brief History of G20 Countries: The G20 was formed in 1999, in the wake of the Asian financial crisis, to unite finance ministers and central bankers from twenty of the world’s largest established and emerging economies. A decade later, at the height of the global economic crisis, the G20 was elevated to include heads of state and government. In 2008 and 2009, G20 nations agreed to spending measures worth $4 trillion to revive their economies, rejected trade barriers, and implemented far-reaching reforms of the financial system. G20 is struggling to achieve success on its goals of coordinating monetary and fiscal policies, achieving higher growth, and rooting out corruption and tax evasion. G20’s membership is still more representative of the current international balance of power than blocs of countries formed earlier, such as the G7. Several democracies like India, Brazil and Indonesia, belong to the G20, as do other influential autocratic countries, such as China, Russia, and Saudi Arabia. The G20 initially focused largely on broad macroeconomic policy, but it has expanded its ambit. The 2016 summit in Hangzhou, China, broke new ground when U.S. President Barack Obama and Chinese President Xi Jinping formally announced their countries’ accession to the Paris Agreement on climate. Economic and financial coordination remains the centerpiece of each summit’s agenda, but issues such as the future of work, climate change, and global health are recurring focuses as well. Broader agendas became more common in the decade following the 2008 global financial crisis, when the G20 was able to turn its attention beyond acute economic crisis management. But at recent summits, countries have struggled to reach a unified consensus—the hallmark of previous repetitions of the conference—as the interests of high- and low-income economies continue to diverge. The COVID-19 pandemic posed a major test for the group for largely failing to move beyond “uncoordinated national policies.” However, G20 countries did agree to suspend debt payments owed to them by some of the world’s poorest countries, providing billions of dollars in relief. Although climate change has been a focus of recent summits, meetings have yielded few concrete commitments on the issue. At the 2021 Rome summit, countries agreed to curb emissions of methane and end public financing for most new coal power plants overseas, but they said nothing about limiting coal use domestically. (China, the world’s largest emitter, permitted more domestic coal power plants in 2022 than any year since 2015). At the 2022 gathering, Indonesia agreed to close coal power plants in exchange for $20 billion in financing from high-income countries, including the United States. But as of 2023, it is still building coal-fired plants. As the 2023 host, India has framed the agenda around issues facing lower-income countries in the so-called Global South. These include rising debt levels, persistently high inflation, depreciating local currencies, food insecurity, and increasing severe weather events associated with climate change. However, none of the ministerial meetings that precede the G20 leaders’ summit has produced a joint communiqué, which prior to the war was a staple of such meetings. With Russian President Vladimir Putin absent at the 2022 summit in Indonesia, leaders issued a joint declaration deploring the “aggression by the Russian Federation against Ukraine.” Putin has again skipped the August 2023 G20 at New Delhi. Chinese President Xi Jinping also skipped the Summit, their places were taken up by Russian foreign minister Sergey Lavrov and Chinese premier Li Qiang, respectively. How G20 Works: • The G20 Presidency steers the G20 agenda for one year and hosts the Summit. The G20 consists of two parallel tracks: the Finance Track and the Sherpa Track. (Sherpas are personal representatives of the leader of member countries. They work behind the scenes and formulate the agenda for the G20 Summit). • Finance Ministers and Central Bank Governors lead the Finance Track while Sherpas lead the Sherpa Track after Finance Track. • The G20 process from the Sherpa side is coordinated by the Sherpas of member countries, who are personal emissaries of the Leaders. Finance Track is led by Finance Ministers and Central Bank Governors of the member countries. Within the two tracks, there are thematically oriented working groups in which representatives from the relevant ministries of the members as well as from invited/guest countries and various international organizations participate. The Finance Track is mainly led by the Ministry of Finance. These working groups meet regularly throughout the term of each Presidency. The Sherpas oversee negotiations over the course of the year, discussing agenda items for the Summit and coordinating the substantive work of the G20. • In addition, there are Engagement Groups which bring together civil societies, parliamentarians, think tanks, women, youth, labour, businesses and researchers of the G20 countries. • The Group does not have a permanent secretariat. The Presidency is supported by the Troika – previous, current and incoming Presidency. During India’s Presidency, the troika will comprise Indonesia, India and Brazil, respectively. India's G20 Priorities: Green Development, Climate Finance & LiFE: • India's focus on climate change, with a particular emphasis on climate finance and technology, as well as ensuring just energy transitions for developing countries. • Introduction of the LiFE movement, which promotes environmentally-conscious practices and is based on India's sustainable traditions. Accelerated, Inclusive & Resilient Growth: • Focus on areas that have the potential to bring structural transformation, including supporting small and medium-sized enterprises in global trade, promoting labour rights and welfare, addressing the global skills gap, and building inclusive agricultural value chains and food systems. Accelerating Progress on SDGs: • Recommitment to achieving the targets set out in the 2030 Agenda for Sustainable Development, with a particular focus on addressing the impact of the COVID-19 pandemic. Technological Transformation & Digital Public Infrastructure: • Promotion of a human-centric approach to technology and increased knowledge-sharing in areas such as digital public infrastructure, financial inclusion, and tech-enabled development in sectors such as agriculture and education. Multilateral Institutions for the 21st century: • Efforts to reform multilateralism and create a more accountable, inclusive, and representative international system that is fit for addressing 21st century challenges. Women-led Development: • Emphasis on inclusive growth and development, with a focus on women empowerment and representation in order to boost socio-economic development and the achievement of SDGs. Challenges Before G20: • Geopolitical tensions, heightened by the Russian invasion of Ukraine but also spurred by strategic competition between China and the United States, have increasingly threatened cooperation. • In the United States, bipartisan legislative efforts have aimed to deny Russia standing in the World Trade Organization (WTO) and other international institutions. Russia’s participation in the G20 has grown contentious, with some Western countries seeking to exclude Moscow, though members including China and Brazil have opposed that idea. • G20 members economic shocks disproportionately affecting emerging economies. The energy crisis resulting from the war in Ukraine has led to food scarcity and soaring energy prices, as well as inflationary pressures that have engendered a stronger U.S. dollar at the expense of depreciating currencies in emerging economies. As a result, more countries are turning to international lenders for bailouts; over one hundred countries have requested emergency assistance from the International Monetary Fund (IMF) since the beginning of the pandemic. • IMF lending to distressed economies soared to a record high of $140 billion in 2022. The G20 introduced a common framework for debt treatment ahead of its 2020 summit, but only four countries—Chad, Ethiopia, Ghana, and Zambia—have requested debt relief under the framework. Experts blame divisions between lender countries. • Russia recently suspended participation in the Black Sea Grain Initiative, contributing to food insecurity and increasing worries among G20 developing countries. When the G20 finance ministers summit earlier this year proposed paragraphs that stated the Ukraine conflict was causing “immense human suffering” and “exacerbating existing fragilities in the global economy.” China and Russia blocked them. • France has already publicly refused to sign any joint statement that does not condemn Russia’s invasion of Ukraine in the same way that the 2022 Bali statement did. • The United States indications from India that dealing with the Russians will not be business as usual. • The group’s long-standing commitment to an international order based on WTO principles of reducing tariffs and other trade barriers has in recent years collided with growing economic competition between great powers. • Strict export controls that restricted China’s ability to buy certain chips made anywhere in the world with U.S. inputs, and an outbound screening regime prohibiting some U.S. investments in Chinese sensitive technology sectors. Recently, China banned iPhones. • Friction within the group regarding climate change. China, India, Russia, and Saudi Arabia reportedly blocked an agreement on phasing out coal use and fossil fuel subsidies at a July 2021 meeting of environment ministers. And following the invasion of Ukraine, Germany and other G20 countries have reneged on previous promises to stop financing fossil fuel projects overseas. Conclusions of G20 New Delhi Summit 2023: Deep Divisions: • Leaders of the world's 20 big economies ended a summit in the Indian capital on Sunday overcoming deep divisions over the war in Ukraine to produce a consensus document and move forward on issues such overhauling institutions like the World Bank. • They also formally admitted the African Union to the bloc to make the grouping more representative. Softer Language On Ukraine War: • G20 nations agreed that states cannot grab territory by force and highlighted the suffering of the people of Ukraine, but avoided direct criticism of Russia for the war. The declaration was seen as an apparent softening from the position that the G20 took last year when it condemned Russia for the war and demanded that it withdraw from Ukraine. • Diplomats said Russia would never have accepted an outright condemnation and that it was still a successful outcome because everyone including Russia committed themselves to not seizing territory by force. • Host India along with Brazil, Indonesia and South Africa, played a key role in avoiding a fracturing of the G20 over the Ukraine conflict reflecting the growing power of the Global South developing nations in the group. African Union Inside the Club: • The 55-member African Union was formally made permanent member of the G20, on par with the European Union, in order to make the grouping more representative. Until now only South Africa was a member of the G20. The entry of the AU would provide greater voice to the Global South within the G20 where the G7 countries have long played a dominant role. • The move also came after the BRICs, another group dominated by China and Russia, was expanded to include Saudi Arabia and Iran among other nations which was seen as an attempt by Beijing to make it a possible alternate to the G20. U.S., Saudi, India Join Hands for Transport Corridor: • Leaders of the United States, India and Saudi Arabia among others announced plans to set up rail and ports links between the Middle East and South Asia and eventually to Europe which U.S. President Joe Biden said was a "real big deal." • The Biden administration is seeking to counter China's Belt and Road push on global infrastructure by pitching Washington as an alternative partner and investor for developing countries at the G20 grouping. • But there were no details about financing or a time frame for the project that involved laying down railway lines in the Middle East and then connecting them to India by port. Incremental Progress On Climate Change: • The G20 leaders agreed to pursue tripling renewable energy capacity globally by 2030 and accepted the need to phase-down unabated coal power, but stopped short of setting major climate goals. • The group did not provide any plan to amend existing policies and targets in order to achieve the target of ramping of renewables. It also said $4 trillion a year would be needed to pay for a green energy transition but did not lay out any pathway to it. • The deliberations of the G20 were being closely watched ahead of the COP28 (Conference of the Parties of the United Nations Frame work Convention on Climate Change 28th Conference) U.N climate summit in the United Arab Emirates later this year. Modi Boosts Standing as India’s Big Moment Arrives: • For Indian Prime Minister Narendra Modi, the leadership of the G20 has been a year-long opportunity to showcase India as an influential diplomatic and economic power, and drive investment and trade flows into the world's most populous country. • It has also provided him with a platform to boost his standing at home as he seeks a third term in office in elections in the next several months. Modi's image has been on G20 billboards across the capital and in the vast and swanky new conference venue. To his supporters the successful outcome of the summit showed India's big moment had arrived. References: 1. G20 summit in New Delhi: How the global media views the event. https://thefederal.com/category/analysis/g20-summit-in-new-delhi-how-the-global-media-views-the-event-95872?infinitescroll=1 2. G20 Summit, New Delhi. 3. https://www.g20.org/en/g20-india-2023/new-delhi-summit 4. G20 New Delhi Summit Summary. https://www.mofa.go.jp/ecm/ec/page1e_000768.html 5. What is the G20 and what are the key issues for the 2023 Delhi summit? https://www.reuters.com/world/what-is-g20-what-are-key-issues-2023-summit-2023-09-04 6. Key takeaways from the 2023 G20 summit in New Delhi. https://www.reuters.com/world/key-takeaways-2023-g20-summit-new-delhi-2023-09-10 G20 Summit 2023 Outcome’s: Delhi Declaration, Guest List.https://www.nalandaopenuniversity.com/g20-summit-2023-schedule-venue-dates 7. Was the G20 Summit a Turning Point for the Global South? https://www.cfr.org/councilofcouncils/global-memos/was-g20-summit-turning-point-global-south 8. G20 Finance Ministers Meeting in India Ends Without Consensus. https://www.voanews.com/a/g20-finance-ministers-meeting-in-india-ends-without-consensus/7186148.html#:~:text=share-,G20%20Finance%20Ministers%20Meeting%20in%20India%20Ends%20Without%20Consensus,-July%2018%2C%202023 9. France won't sign G20 communique unless it strongly condemns Russia. https://www.reuters.com/world/europe/french-finance-minister-says-g20-must-condemn-russia-ukraine-war-2023-02-24/#:~:text=France%20won%27t%20sign%20G20%20communique%20unless%20it%20strongly%20condemns%20Russia 10. Delhi G20 summit confirms isolation of Russia, Macron says. https://www.reuters.com/world/europe/french-finance-minister-says-g20- must-condemn- russia-ukraine-war-2023-02-24/

Welfare Schemes and Programmes in Telangana State – A Critical Analysis

CV of Dr. S. Vijay Kumar, Associate Professor & HOD of Economics (Retire...