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What do stock market fluctuations in 2020 tell us about human behaviour?

By Srijita Ghosh

If I ask you what’s common between choosing the wrong major and not being able to lose the last 5 kgs that you thought you’d lose by summer, most of you would think there isn’t one. But if I ask you the same question for the stock market behaviour during the dot com bubble (most of you were probably not even born by then) and the same stock market behaviour during the recent pandemic, you can probably name a few. However, the common thread amongst all of them is that they are all driven by incorrect beliefs about future events. 

You were so sure that economics was the right major for you, but at the end of the second year, you realize you have gravely underestimated the technical skills required to finish it and now you wish you had chosen something else. It is natural and quite common to have a wrong belief or estimate about a future event since future events are fundamentally uncertain. 

Economists have been aware of incorrect beliefs and their impact on decision making but modelling them formally has started fairly recently. Taking motivation from psychology and neuroscience, economists have started modelling decision-making under the assumption that the agents are cognitively constrained. They can make mistakes while predicting some uncertain events about the future which can have severe consequences on their life and living. 

It’s the same cognitive constraints that drive the seemingly irrational behaviour in the stock market. But the mistakes that people make in the stock market or most economic context are not random. By studying the patterns of mistakes, we can design effective policies to improve welfare. 

In the context of the stock market, recent studies by Bordalo et al (2020) have found that people overreact to good news and overvalue them in the long run. If we overestimate the long-run valuation of stocks, then eventually we will be disappointed since our predicted value will not be materialized. This can lead to perverse behaviour in the market.

For example, during the current pandemic, the stock market remained more optimistic than what would be expected from the condition of the economy per se. It might be driven by the overestimation of the long-run fundamentals of the stock market. The problem, however, is that the pandemic initiates a “regime change”, which means we cannot be sure where the fundamentals of the stocks would lie in the post-pandemic period.

Another cognitive function that severely affects our belief is that of memory. Various puzzles in the stock market can be related to the nature of memory. There are different features of the memory that affect what we believe. The most obvious one would be the temporal nature of memory; we remember things with more clarity that have happened in the recent past than a distant past. This implies that while forming belief we put more weight on the recent phenomenon that is the underlying trend. This can lead to having an overreaction to bad news. 

The other, more complex feature of memory is representativeness, which implies that different cues about the same underlying object can lead to very different beliefs depending on what comes to mind. In a recent study by Wachter and Kahana (2020) has shown that we often associate two events that are temporally related. If one of these events repeats again we remember both the events, as they are contextually related events. This can lead to further distortion in belief and some examples of such behaviour would be under or over-reaction to news, fear being a leading motivator of financial decision-making, and so on. 

However, we should note that this literature is fairly young and researchers all over the world are trying to understand the impact of cognitive functions on beliefs and subsequently on decision-making. So we should proceed with caution when interpreting the results from the early experiments. Just like any other scientific discipline, we can only conclusively make remarks after several studies have reproduced similar results. 

One major problem here is that human behaviour is complex and when combined with the stock market framework the scope of non-standard (from a neoclassical economics perspective) is large. This makes analyzing and predicting behaviour in the stock market particularly difficult. But one way forward would be to understand how humans form beliefs generally and extend that to the stock market scenario. This will also help us become better decision-makers and be more consistent with our own world-view. 

Srijita Ghosh is an Assistant Professor of Economics at Ashoka University and has done her Ph.D at New York University.

Sources:

Expectations of Fundamentals and Stock Market Puzzles by Pedro Bordalo, Nicola Gennaioli, Rafael La Porta, and Andrei Shleifer (2020)

Memory and Representativeness by Bordalo, Pedro, Katherine Coffman, Nicola Gennaioli, Frederik Schwerter, and Andrei Shleifer. 2020

 A Retrieved-Context Theory of Financial Decisions by Jessica A. Wachter and Michael J. Kahana

We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis). 

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My Son’s Inheritance: India’s Invisible Violence

By Aparna Vaidik

Published by Association for Asian Studies on Thursday, August 27 2020.

Mahatma Gandhi and the philosophy of non-violence are facets of Indian history that have inspired generations of world leaders from Steve Biko and Nelson Mandela to Martin Luther King Jr. Also perpetuating this image of India as a land of non-violence and tolerance are some other facets of India’s history such as the conversion of the ancient Emperor Ashoka Maurya to Buddhism; his adoption of non-violence as a state policy in 3rd century B.C.; and the existence of a composite culture known as the “Ganga-Jamni sanskriti” (the comingling of waters of rivers Ganga and Yamuna), a referent to the peaceful Hindu and Muslim cultural intermixing in the Subcontinent. Indian public intellectuals from Amartya Sen to Shashi Tharoor have invoked these elements of India’s historical past to debunk majoritarianism, to decry communal conflict, and to critique right-wing political agendas.

Violence, if at all examined, is primarily done through the Weberian lens by studying state actions such as battles, wars, or political retribution. Other than that, it is the episodes of communitarian riots, gender violence, and subaltern resistance that are scrutinized. Seeing violence as episodic phenomenon, on the one hand, pathologizes it as an aberration or turns it into an exception in need of an explanation; and, on the other, reinforces the presumption that Indian society is fundamentally peaceful, non-violent, and tolerant. My Son’s Inheritance: A Secret History of Lynching and Blood Justice in India challenges this munificent image of India to show that the ubiquity of violence has rendered it banal and thereby historically invisible. It asks, how is the violence not visible? Why is it invisibilised? How does it turn into a secret? What allows the unconscious denial of the existence of violence? Who are the recipients and witnesses of this violence? Finally, what is this violence?

My Son’s Inheritance traverses several centuries and explores the history of Vaishnavism and warrior cults in northern India; the history of Arya Samaj, a nineteenth-century reformist organization; the role of a violent cow-protection movement in forging the Hindu majoritarian identity; and the myths of Hinduism that invisibilised the oppression of the lower castes in the Subcontinent. It uses pamphlets, popular publications, prints, poetry, and myths, as well as my own family history, to offer a cultural reading of violence. The book demonstrates how violence is secretly embedded in our myths, folklore, poetry, literature, and language, and is therefore invisible. Framing my narrative as a message to my son, I acquaint him with his ancestors—those who abet and carry out lynching as well as those who are lynched. In this way, the “son,” a metaphor, embodies both the violator and the violated, much like the country in which he will come of age. The book lays bare the heritage of violence bequeathed from generation to generation and disabuses us of the myth that holds nonviolence and tolerance as being the essence of Indian culture.

The book argues that perpetrators of this violence have not always been the state, the rulers, the police, or the army, but the ordinary Indian who thinks of India and Hinduism, the majoritarian religion of the Subcontinent, as tolerant, spiritual, and non-violent. This person is often the silent witness or a bystander to whom the violence in Indian society remains invisible. In doing so, the book addresses the “banality of evil,” a phrase coined by philosopher Hannah Arendt. She argues it was not just the big generals and the Nazi party officers who were responsible for the Jewish holocaust, or Shoah, but also the normal, ordinary, everyday people who went about their everyday lives, did their jobs and obeyed the laws. It is easier to understand the mind of thinkers and ideologues but, as Arendt shows, it is immensely hard to fathom the mind of an ordinary person. Carlo Ginzberg has attempted this in The Cheese and the Worms: The Cosmos of a Sixteenth-Century Miller, which seeks to understand an ordinary miller’s notions of how the cosmos came into being. In a similar vein, My Son’s Inheritance examines an ordinary law-abiding Indian’s mentality that either denies the existence of violence or sees it as something that foreigners or wrongdoers indulge in.

The inheritance of this violence, the book demonstrates, comes to us in a form of a secret, a secret that is hidden in plain sight. It is visible and yet we don’t see it. Once the secret is unveiled the question of atonement or redemption comes up: How do we redeem ourselves? How do we atone? According to My Son’s Inheritance, atonement lies in Indians owning up to their history of violence. The choice is to either hide one’s shame and generate even more violence, or to own up to one’s historical shame and break the silence around violence. For it is our silence borne out of privilege that perpetuates violence.

This is a crossover book written as creative non-fiction. A nagging worry as I embarked on this project regarded crafting the narrative. After writing years of staid academic prose, I felt unsure about transitioning into a more conversational narrative style. Surprisingly, it was much easier than I had imagined. Ta-Nehisi Coates’ Between the World and Me, Nadine Gordimer’s My Son’s Story, W.E.B. Du Bois’s The Souls of Black Folk, and James Baldwin’s A Letter to My Nephew served as narrative inspiration. Choosing a creative narrative strategy also required me to make “travel-style” field trips, first to my hometown, Indore in Central India and, second, to the ancestral shrine in the small town in Rajasthan. The histories of both places are woven into the book’s narrative. I was now seeing them with the eyes of a writer.

As I started conceptualizing this project, the question for me was how do I tell stories of violence? How do I narrate stories of conflict in a non-conflictual manner? How do I not fill the hearts of the audience with hate in talking about hate? How do I persuade people to pause and examine their own complicity in perpetuating structures of violence? These questions were also arising from the loss of my belief in the persuasive power of the historical mode of narration. For a while I had felt that we needed to tell historical narratives differently, ones that were more accessible to the public. This book is an acknowledgement of the fact that we as social scientists and humanists are accountable to not only one’s peers and the institutions we serve but also to the society and the times we live in.

This article was first written for https://www.asianstudies.org/. The author has commissioned it for use by OpenAxis.

Aparna Vaidik is a decorated academic and an Assistant Professor of History at Ashoka University (India). Here she writes about her new book My Son’s Inheritance: A Secret History of Lynching and Blood Justice in India (Aleph, 2020).

We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis). 

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Should India’s environment laws give the State so much power?

By Mansi Ranka

The Union Ministry of Environment, Forest and Climate Change (MOEFCC) rolled out the draft Environmental Impact Assessment (EIA) notification in March 2020 and introduced changes to environmental governance for the country. These changes focus on making environmental clearance a swift and easy process while giving public consultation a backseat.

The draft has led to widespread public concern. About 100 environmental groups and individuals have opposed draft EIA 2020, calling it anti-environment and anti-people. One of the main causes for distress in the new draft is an exemption from prior environmental clearance to about 40 different industries like clay and sand extraction, solar thermal power plants and common effluent treatment plants. This ex post facto environmental clearance puts aside the primary goal of environmental protection to focus on achieving ease of business. In April, the Supreme Court held that such practice would be detrimental to the environment and that development must be approached through an “ecologically rational outlook”.

The other main cause of concern is the dilution of public consultation. The new draft exempts projects from the public hearing, an important opportunity for local communities to learn about the project and demand social obligations from them. This gives the corporations power to officially evade local development needs, which were anyway rarely met. environmentalists have accused the government of using EIA to expand their own political control by favouring corporations by legitimising environmentally degrading projects.

The new EIA draft incorporates systemic weakness into the law, making environmental violations the norm for corporations. The Ministry does not even pretend to see EIA as anything more than a bureaucratic instrument to make environmental clearance (EC) easier. 

Environmentalists have been arguing for the need to strengthen environmental law more than ever, as we are already experiencing climate change in the havoc wreaked by floods nationwide. The letter sent to the MOEFCC also proposes that we go back to the EIA 2006 notification. But in reality, that is not all that better either.

The MOEFCC is currently reviewing the public comments that they have received on the draft. Right now, it is important to think about what it is that will really help strengthen the environmental law in our country. How can the law ensure that big corporate profit does not override people’s welfare and environmental protection?

The state controls the distribution of state-owned natural resources. What is the safeguard against the exploitation of this power? What if the government allocates natural resources in a way that contradicts public welfare?

A similar question was brought up before the Supreme Court, in the 2011 public interest litigation after the 2G scam. The PIL raised questions about the State’s ownership of natural resources and their fair distribution. The judgement clarified the Supreme Court’s position on who distributes natural resources by saying, “Natural resources belong to the people but the State legally owns them on behalf of its people and …  is empowered to distribute natural resources.” So, the State has the power to decide what happens to natural resources. But on what basis does the state decide? The judgement goes on to say, “while distributing natural resources, the State is bound to act in consonance with the principles of equality and public trust and ensure that no action is taken which may be detrimental to the public interest.”

Thus, as long as we trust the Indian State to “act in consonance with the principles of equality and public trust”, we can be certain that it will distribute natural resources for the “common good”. The judgement concludes that the State should be the trustee or guardian of the people in general, and hence be responsible for natural assets.

Trusteeship is a Gandhian socio-economic idea, which holds that wealthy people should be the trustees and ensure the general welfare of the poor people. The theory relies on Gandhi’s conviction that capitalists aren’t beyond redemption and the wealthy could be persuaded to help the poor by becoming more egalitarian.

Now, the Indian State is supposed to act as this trustee and ensure common good. How does the state define this ‘common good’? Historically, the state has not acted in ways that can foster this kind of trust. The state has often wished to ascertain huge profits through corporations by allowing them to monopolise. This is obvious in the draft EIA 2020. The “common” good then becomes economic development by few big players. This is excluding the very people it was supposed to act as trustee for. And yet, the State can claim to handover natural resources for exploitation to a few players in the name of common good and public trust.

Furthermore, the draft EIA is pushing for people to be excluded from participating in this process, making the idea of common good paternalistic. The tilting of the scale to give the trustee unchecked power is possible under this idea of trusteeship. This is because in Gandhi’s theory it heavily relies on subjective goodness in the capitalist, the trustee, to act for general welfare. It is necessary to question this of trusteeship. Can the state function as a true trustee without mechanisms to ensure accountability and transparency?

Mansi is a student of philosophy and environmental studies at Ashoka University. Her other interests include performing arts, politics and octopuses.

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Targeted ads: Is there an ethical, economically-viable alternative?

By Samyukta Prabhu

Online platforms like Facebook and Instagram have been widely discussed for reasons ranging from increased user data collection to rising misinformation and election manipulation. At the same time, rising internet penetration globally has improved access to information and opportunities like never before. While assessing the current state of the internet, therefore, there is an urgent need to address its limitations, while ensuring that its strengths are not curtailed.

One way to do so is to address the common thread that ties together the above-mentioned pitfalls of online platforms – targeted advertising. However, the contention surrounding targeted advertising is that it is the primary business model of such platforms, thus being viewed as a necessary evil.

To better understand the nuances of this issue, it is helpful to explore how the business model of targeted ads works. This can help us assess the ramifications of potential regulations to the model – both economically as well as ethically. 

As explained in a report by the United States’ Federal Trade Commission (FTC), the basic model of targeted advertising involves three players – consumers, websites and firms. Websites provide consumers with ‘free’ online services (news articles, search features) into which targeted ads are embedded. Firms pay the websites (through ad networks) for publishing their ads, and specify the attributes of their target audience. To target these ads, websites use consumers’ personal data (browsing habits, purchase history, demographic data, behavioural patterns) and provide analysed metrics to firms; this is used to improve the precision of future targeted ads. Firms are incentivised to improve targeting of their ads since they earn money when users buy the advertised products. This model improves over time, with increased user engagement, since the algorithms running the websites analyse collected data contemporaneously to optimise users’ news feeds. It thus follows that lax data privacy laws and user behavioural manipulation (to increase user engagement) greatly supplement the business model of targeted ads. Phenomena such as engaging with and spreading controversial content, as well as rewarding the highest paying ad firm with millions of users’ attention, are then some of the obvious consequences of such a business model.

Over recent years, a few governments and regulatory bodies have taken select measures to address some concerns stemming from the targeted ad model. However, there often seem to be gaps in these regulations that are easily exploitable. For instance, the European Union’s General Data Protection Regulation (GDPR), a data protection and privacy law for the EU region, prohibits processing personal data of users without their consent, unless explicitly permitted by the law. However, loopholes in Member States’ laws, such as the Spanish law, for instance, allows political parties to obtain and analyse user data from publicly available sources. In 2016, a ProPublica report found that Facebook allowed advertisers to exclude people from viewing housing ads, based on factors such as race. Facebook’s response to remedy the situation was to limit targeting categories for advertisers offering housing, employment and credit opportunities, and barring advertisers from using metrics such as zip codes (proxy for race) as targeting filters. However, this is a temporary fix for a larger structural problem as there exist multiple proxies for race and gender that can be used for targeting. We thus see that despite efforts to target specific concerns (such as data processing, or algorithmic accountability) of online platforms, there exist legal loopholes that allow tech firms to override these regulations. Moreover, with rising billion-dollar revenues and tech innovations that far outpace legal reforms, there is increasing incentive for Big Tech firms to exploit targeted ad systems and maximise profits before the law finally catches up. 

As we can see, niche regulations to the targeted ad system are thus unlikely to adequately address the rising concerns of online platforms. That leads us to a seemingly radical alternative: abandoning the targeted ad system altogether, and exploring other models of online advertising. Such models would neutralise incentives for firms to collect and analyse user data since revenues would no longer be dependent on them. The FTC’s report suggests two such models: first, an “ad-supported business model without targeted ads” – similar to the advertising model in newspapers. Websites would use macro-level indicators to target broad audiences, but would not collect user data for micro-targeting or behavioural manipulation. Second, a “payment-supported business model without ads” – similar to Netflix, which charges the user with a subscription fee. Some platforms (such as Spotify) currently work on a mixture of the two models – free to use with generic ads, or subscription-based without ads. The potential economic shortcomings for such a model include “increased search cost” for firms to find potential buyers of their product, and “decreased match quality” for consumers who might see unwanted generic ads. However, this model has been successful for several music streaming and OTT platforms (including Spotify, Netflix) and ensures useful, customised services without the associated perils of targeted advertising. 

There exist a few other measures that continue to work within the purview of the targeted ad system, but use established regulatory frameworks to skew incentives of data collection and processing. One such measure that gained traction since Lina Khan’s seminal essay in 2017, Amazon’s Antitrust Paradox, is for anti-monopoly regulations as well as public utility regulations to be applied to Big Tech firms. Since these platforms effectively capture the majority of the market share for their respective products, they could be subject to anti-monopoly regulations including breaking up of the firm and separation of subsequent divisions, to prevent data collection and processing across platforms (for instance, separating Facebook from its acquired platforms Instagram and WhatsApp.) A more direct measure to limit data collection is to subject tech firms to data taxes. Another measure, that of public utility regulations, has been in play throughout history to limit the harms of private control over shared public infrastructure, including electricity and water. They stipulate “fair treatment, common carriage, and non-discrimination as well as limits on extractive pricing and constraints on utility business models.” Since the internet (and its ‘synonymous’ platforms like Google and Facebook) is an essential resource in the 21st century, being a principal source of information for the public, it can be argued that it is a public utility, thus requiring it to be subject to the appropriate regulations. With the current state of the internet requiring user surveillance and behavioural manipulation, it easily violates the fundamental public utility regulation of “fair treatment”. Making a case for these online platforms to be public utilities ensures that they do not exploit the technological shortcomings of the law, and ensures fairer access for its users. 

In today’s world, where the internet is intertwined with most parts of one’s life, including politics, entertainment, education and work, it is of utmost importance that its online platforms be recognised as a public resource for all, rather than a quid pro quo for surveillance and behavioural manipulation. An essential part of achieving this recognition is to adequately address the harms of the targeted ad system, in an ethical and economically efficient manner.

Samyukta is a student of Economics, Finance and Media Studies at Ashoka University. In her free time, she enjoys discovering interesting long-form reads and exploring new board games.

We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis).