Part – I
Economics teaches us to assume that the world is rational, and modernity demands that we become devotees of the church of utility, or the notion that people are rational and therefore make linear, rational, logical choices.
We all know, however, that people are not rational, and do not always make solid, rational choices. The evidence attacks our senses all day, every day, everywhere. Telling unconvincing stories about enormous wealth. Including pop culture references from the 1970s in serious judgments. Mistiming and mishandling meetings with rich, old friends. Making wild and unprovable allegations as a habit. Publicly defying the highest office in the land. Attacking women in the public space whilst investing in a years-long exercise to bequeath one’s public space agency to a woman relative.
Pakistan’s political landscape is replete with stomach-churning and mind-numbing behaviour. None of it is particularly rational, either at the individual or the collective level. Yet here Pakistan is, at the doorstep of emerging market status, poised for sustained economic growth, and possibly, medium to long-term stability. And its leaders, who are to benefit the most from this growth and stability, seem intent on creating and sustaining crises that are eminently avoidable. What gives? Why is Pakistan ambushing itself?
In order to explore the limitations of the utility theory, it is first important to be disabused of the privilege of assuming that there is something unique or fiend-like about those that we find abhorrently in violation of rational behaviour. Telling ourselves that “these people are crazy” may be comforting. But the record of self-destructive and irrational decision-making is so common across time and space and across people and organisations and isn’t useful. One way to tackle the failures and limitations of the utility theory is to break it down into what framework helps us understand these failures at the individual level, and what helps us understand them at the collective level.
Let’s start with the individual. In 1979, two Israeli psychologists named Daniel Kahneman and Amos Tversky wrote a paper in the journal Econometrica titled, ‘Prospect Theory: An Analysis of Decisions Under Risk’. In it, they demonstrated a range of thinking patterns and habits, which are common among large numbers of people and across cultures, that fly in the face of what we would expect to be true if people were “rational”. More interestingly, their research exposed patterns of “irrationality” that were consistent across time, space, cultures and peoples. Among these patterns? When faced with a choice between a certain gain, and a less certain gain, people prefer certainty over relatively less certainty, even when the payoff of less certainty is higher. Kahneman and Tversky call this the certainty effect.
If the choices are between losses, rather than gains, the choice matrix is reversed, and people prefer less certainty of loss, over the certainty of loss. They call this the reflection effect. Another idea their research put forth was the isolation effect: “In order to simplify the choice between alternatives, people often disregard components that the alternatives share, and focus on the components that distinguish them”.
They use these observations to establish a framework to assess decision-making in which they revisit how people value different options, and how they then weigh those options. The prospect theory is a model for decision-making that helps explain inconsistencies or violations of the utility theory. Their two go-to examples of these inconsistencies are the facets of human decision-making that have helped create the insurance industry, and the habit we commonly refer to as gambling. In both instances, the prospect theory offers a bounded explanation of the manner and nuances of the limits of rationality.
What about assessing the breakdown of the utility theory at a larger, collective level? How do we frame or process irrationality writ large, at a macro-scale? In the early 1990s, Douglas North capped a lifetime of research and thinking about how individuals and organisations interact, with a book and several papers that explained how institutions emerge within a society (to help navigate irrationality), why they persist (because collective cognition and behaviour trumps individual choice), and how they change (slowly, incrementally, agonisingly). North was awarded a Nobel Prize in 1993, but the implications of his work have persisted far and wide.
The popular Daren Acemoglu and James Robinson book ‘Why Nations Fail?’ represents an important recent expression of North’s ideas about institutions and their centrality in shaping and determining what goes on in countries over long periods of time. The common shorthand for North’s work, and new institutional economics at large, tends to be “incentives”. But this is an insufficient analytical device. Our exploration of institutions, especially in Pakistan, merits much more reflection about individual decision-making and institutions as mechanisms for the expression of those decisions.
Employing Kahneman and Tversky’s prospect theory and North’s institutions could be potent tools in trying to understand the decisions that have been made in Pakistan in recent days, weeks and months.
Why is it that PM Sharif gets to play the victim, when the first people at the altar of sacrifice are not Ittefaq-backed Sharifs, but middle class devotees to the House of Sharif? Even if we assume that Pervaiz Rashid and Tariq Fatemi, (and poor Rao Tehseen!) hatched and executed the so-called Dawn leaks, could it have been pulled off without PM Sharif’s blessings? Why was the Dawn story, a story at all? Isn’t the timing and tone of Difa-e-Pakistan Council rallies proof enough of the continued use of religious extremism as public policy – not perhaps, any longer, across international borders – but within the Islamic Republic, to hound and harass elected governments? And isn’t the blatant and outright attack on the authority of the prime minister by the DG ISPR, simply an affirmation, and an extension of this institutional culture of hounding and humiliating elected governments?
Similarly, isn’t the stoking of civ-mil fires exactly what helps nervous and incompetent elected leaders regain moral authority? Isn’t meeting with Sajjan Jindal exactly what the doctor ordered for a besieged and weakened elected leader with the prospects of a Mario Puzo-inspired Joint Investigative Team full of young BPS-19 officers looking to make a name for themselves?
Institutions don’t change overnight. The uber-wealthy exist to exploit those that are beneath them in the economic pecking-order. That’s why relatives of the Sharifs – by genetics, or by marriage – are less vulnerable to being thrown under the bus, than people like Rashid or Fatemi. The army has a culture of the active subversion of civilian authority. Though people like me will often paint this as a much more benign distrust, in order to understand the flow of history, we have to understand that this subversion or “distrust” is informed by both incentives, and by norms. Our appeals to formal institutions, like the constitution, fall on the deaf ears of informal rules of the game.
To understand the toxicity of the DG ISPR’s tweet rejecting something from the prime minister, we need to think in months and years, rather than days and weeks. We need to think in terms of language and discourses, rather than narratives and tweets. Exuberant and optimistic fools thought that a change of guard in Rawalpindi would fix civ-mil relations. But almost like clockwork, the civ-mil disequilibrium of this country has manifested itself with the naked ambition of a young investment banker. The so-called Dawn leaks problem won’t be solved with a firing here or there. The insubordinate behaviour of the military won’t be arrested with appeals to Article 243(1) or hashtags belittling the military or its spokesperson.
Asim Ghafoor, Fawad Hassan Fawad, Chaudhry Nisar and Nawaz Sharif have all made decisions exactly in keeping with Kahneman and Tversky’s explanation of individual decision-making. The Pakistani armed forces, and the office of the prime minister of Pakistan, have behaved exactly in keeping with North’s explanation of institutions and incentives.
Change is not going to come about because one or more of the actors in this play are replaced by another actor of similarly limited rationality, belonging to similarly incentivised institutions. Change comes about differently. Enjoy the noise.
To be continued
The writer is an analyst and