The Confirmation Bias of Demonetisation

rupee-foradian.png.scaled1000

It is interesting to see the kind of responses that Narendra Modi government’s decision to demonetise notes of Rs 500 and Rs 1,000 is getting on the social media.

Those who are in favour of the decision seem to always find examples of how the decision is a good one. Like some people keep running into chaiwallahs who take payments through Paytm. There is no denying that there are chaiwallahs out-there who do take payments through Paytm, but what proportion of the total chaiwallahs do they form, is a question no one is answering.

Those against the decision seem to always find examples of the decision being a bad one. For them, the ATMs are still not dispensing cash or banks are crowded or senior citizens are being made to wait and so on. Most of these examples are correct as well.

This Sunday I stepped out to withdraw cash from an ATM. None of three-four ATMs that I usually withdraw cash from, had notes. Hence, I had to come back home disappointed.

This gave me an idea for a small experiment in which I made posts on Twitter as well as Facebook. The post basically went like this: “No lines in any of the ATMs around where I live. Yay. No cash either… 12 days later. This looks like UPA’s 5-year plan.”

Of course, the post in social media terminology was anti Narendra Modi. This got an interesting series of responses both on Twitter as well as Facebook. One of the first responses I got was that the anti-establishment rant felt like that I had decided not to see merit in the actions of the government.

Then there were the usual responses around I being a chamcha of Rahul Gandhi. There were others who said how ATMs were just fine in their cities. One respondent talked about ATMs dispensing cash in Bhopal. I asked him to send me air-tickets. A cousin talked about ATMs working well in Jammu.

The point I am trying to make here is that everybody seems to have already worked out whether demonetisation is a good thing or a bad thing, even before any data has come out. And having worked that out we are all looking for examples which suit our point of view.

Economists call this confirmation bias. As Richard Thaler writes in Mishbehaving—The Making of Behavioural Economics: “People have a tendency to search for confirming rather disconfirming evidence… This tendency is called the confirmation bias.”

This tendency has been at full play in the aftermath of the demonetisation decision. The trouble is that there is no data either ways.

One of the goals of demonetisation is to destroy the current stock of black money held in the form of cash. The total amount of currency demonetised by value stands at Rs 14.2 lakh crore. The lower the amount that makes it to banks to be exchanged, the higher will be the stock of black money destroyed. This shall only become clear once the last date of submitting the demonetised notes of Rs 500 and Rs 1,000 is over. The last date currently stands at December 30, 2016.

Hence, this shall become clear only in January 2017. At the same time, whether the government has been able to clean up counterfeit notes, will also become clear then (assuming it chooses to release the information).

On the flip side, with the new Rs 500 note not hitting the market quickly enough, there is a shortage of currency going around. This has led to the transactions in various markets coming down dramatically. The real situation will become clear at the beginning of next month when the car sales, two-wheeler sales and tractor-sales data come out.

With the transactions in different markets collapsing, overall consumption is likely to take a beating. This will lead to lower indirect taxes (primarily customs duty and excise) for the government. Again, this shall become clear at the beginning of next month, when the ministry of finance publishes this data.

Also, it will take a few months to figure out the real impact of the demonetisation decision. But who has time to wait for a few months on the social media. We have all made up our minds already.

The column originally appeared in the Bangalore Mirror on November 23, 2016

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: