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  On the other hand, elsewhere in the world, I have seen sales assistants swiping ten lemons ten times through the auto-coder instead of multiplying the price of one by ten. I have seen a dry-cleaner refusing to accept a shawl for cleaning because the price list available did not include a shawl. Of course one could blame this on the systems-driven society that the Western world is, which gives the individual relatively little scope for deviation from norms except when that individual is systemically empowered to make deviations. But somehow I cannot imagine an Indian shop assistant not using his head to price a non-standard product under similar circumstances. In India nearly every situation is encountered as a first-time situation and people respond to them as such—so for sheer survival one has to be extremely intelligent. You have to be extremely intelligent to grasp in a split second that the traffic cop has no vehicle to chase you with, and so you can jump the red light with impunity. Or judge in the flash of an eye whether he has a pen and notebook with him to jot down your number—if he does not have these with him, you assume it is safe to ignore his signal to you to pull over. Or to figure out, when on impulse you spit copiously on the street from the safety of your balcony and a poor pedestrian happens to intercept your wad, that there is precious little he can do, short of DNA testing to prove that it was you who spat.

  We cannot shrug off the fact that we use much of our intelligence to figure out ways of circumventing every law, regulation and norm in a bid to do better for ourselves, and to twist and turn every available opportunity and prospect to our immediate advantage. For example, a cooperative society of an apartment block may be contemplating upgrading or repairing its lifts. The society asks all the residents to pay a certain sum to do this. It does not take long for the quick-witted ground-floor occupants to realize, and quite rationally, that as they do not need to use the lift it is not in their interest to pay towards its upkeep. Tenants on the upper floors realize, equally rationally, that it is not worth their while to pay for the upkeep of the front garden, the benefit of which is largely reaped by those on the ground floor. Likewise, the nonswimmer or the non-gym-user sees little reason to pay for the maintenance of these common facilities. The end result is that we have an apartment block with a defective lift and badly maintained front, a decrepit swimming pool and non-functioning gym. The quality of life of the community and the real estate value of the building take a nose-dive.

  As individuals, we seem more rational and intelligent than those in Western societies. Yet, it appears that the sum total of our individual utilities do not maximize our collective utility as a people.

  It is such contradictions in our understanding of the rationality of the socio-economic man that behavioural economists like Kahneman, Tversky, Thaler and others have tried to explain, based on some deep insights into how most people take decisions. They have shown that in a surprising number of situations people were not rational in the sense postulated by economic theory. When it came to receiving benefits they behaved one way; when it came to giving away benefits they behaved differently. When probabilities of risks and rewards were high they behaved one way, and quite the reverse when those probabilities were low. People often found it rational to free ride, yet not always and certainly not everyone. When questions were posed one way, they responded one way, and when the same questions were put differently, they responded another way, and so forth.

  For example, two samples of doctors are drawn from the same population. One sample of doctors are presented the following poser:

  The bird flu epidemic is expected to hit your town and it is estimated that 600 people will die. Which of the following two drugs, A or B, will you recommend to combat the epidemic, given the following information?

  If Drug A is used: 200 will be saved

  If Drug B is used: 1/3 chance that all 600 will be saved, and 2/3 chance that nobody will be saved.

  It seems a greater percentage of the respondents vote for Drug A.

  Now the second sample of doctors from the same population, who are not exposed to the above poser, are presented a different looking poser:

  The bird flu epidemic is expected to hit your town and it is estimated that 600 people will die. Which of the following two drugs, C or D, will you recommend to combat the epidemic, given the following information?

  If Drug C is used: 400 will die

  If Drug D is used: 1/3 chance that nobody will die, and 2/3 chance that 600 will die

  It seems a greater percentage of the respondents vote for Drug D.

  A moment’s reflection however reveals that the two posers are in fact identical and that Drug A is the same as C and B is the same as D, except that in the first case the problem was presented in the form of life and in the second case in the form of death. And yet, even among professionals, the choice was different depending on how the problem was posed.

  So exactly how rational are we as world citizens? How exactly do we define rationality in the social context? Is there a metalevel rationality? What is it anyway? How does our rationality impact our decisions? How does our meta-level rationality impact our decisions? Can selfishness lead to cooperation? These questions are at the back of many of the situations that we shall encounter in the subsequent chapters, even as we search for the aperture that may give us a better insight into ourselves.

  CHAPTER 3

  Simple Prisoner’s Dilemma and We the Squealers!

  A city boy, Ram, moved to the countryside and bought a goat from an old farmer for Rs 1000. The farmer agreed to deliver the goat the next day. But the next morning the farmer went to Ram and said, ‘Sorry son, but I have some bad news. The goat died last night.’

  Ram replied, ‘Well then, just give me back my money.’

  The farmer said, ‘Can’t do that. I have spent it already.’

  Ram said, ‘OK then, just unload the goat.’

  The farmer asked, ‘What are you going to do with a dead goat?’

  Ram: ‘I’m going to raffle him off.’

  Farmer: ‘You can’t raffle off a dead goat!’

  Ram: ‘Sure I can. Watch me. I just won’t tell anybody he’s dead.’

  A month later the farmer met Ram and asked,

  ‘What did you do with that dead goat?’

  Ram: ‘I raffled him off. I sold 500 tickets at Rs 10

  apiece and made a profit of Rs 3990, net of the Rs

  1000 I paid you.’

  Farmer: ‘Didn’t anyone complain?’

  Ram: ‘Just the guy who won. So I gave him back his Rs 10.’

  Ram grew up and eventually became a successful Indian Businessman.

  THE SIMPLE ONE-TIME DILEMMA

  Prisoner’s dilemma, first identified by Melvin Dresher and Merill Flood of Rand Corporation in 1950 and subsequently articulated by Albert Tucker in its current form, has come to occupy a prominent place in game theory. The problem statement goes like this: Assume you and I are conspirators in a crime. Both of us are supremely selfish and coldly rational. We are being interrogated in two separate cells and are not allowed to communicate with each other. The interrogator tells you that he has enough circumstantial evidence on each of us to put both away in the slammer for two years each. However, if you squeal on me and help him prosecute me, he will let you off right away but give me five years behind bars. He also tells you that he is making an identical offer to me (though you and I cannot communicate). You reflect upon the offer momentarily and ask, ‘But what if both of us confess everything?’ ‘Sorry,’ says he, ‘in that case I will have to put you both away for four years.’

  The payoff matrix for the above problem is shown in Figure 3.1. The years behind the slammer are indicated as negative numbers since it represents the undesirable consequence.

  Being supremely selfish and coldly rational, our response to the offer is guided in terms of what is in our best self-interest. Emotions such as friendship, decency, fairness and graciousness are irrelevant. Jesus’s unsettling query ‘Does it profit a man to gain the world if he
loses his soul?’ does not disturb us. Our only concern is to get as little time as possible in the slammer.

  Now, here is our dilemma: Should we squeal against the other? As rational and intelligent beings each of us would argue thus: ‘If he decides to squeal, it is best that I squeal too. Why should the scoundrel romp home free while I get the slammer for five years? On the other hand, if he, the fool, is naive enough not to squeal, it is in my interest to squeal and romp home free while he enjoys his stay behind the bars.’ So no matter what I do, your ‘rational’ choice is to squeal. So you squeal.

  I, on my part, cannot trump that logic either and so I follow suit and squeal. The squeal–squeal decision earns both of us four years in the slammer. But if we had decided not to squeal, we would have served only two years. It is obvious that in order ‘not to squeal’ one need not be driven by higher-order values like friendship, kindness or altruism. ‘Do not squeal’, in fact, turns out to be the superior option even if we are supremely selfish and rational, though hardly a convincing one when you are one of the prisoners in dilemma.

  HOW DO I GET YOUR GOAT?

  Let us see if we can unwrap the dilemma a little more. Let us say that you have a yard full of bleating goats, but are short of liquidity, and I have money aplenty, but not enough goat meat. Providence puts us in touch with each other and we come to a one-time agreement under which next Monday, 9 a.m. sharp, you will tie a robust goat for me at a place of my choice and exactly at the same time I will leave a cheque for Rs 1000 at a place of your choice. Come Monday morning, you will go and collect my cheque and I will go get your goat. Our arrangement and circumstances are such that we will never ever come face to face with each other or even communicate with each other, once our one-time contract is concluded. We are both supremely selfish and act only in our best self-interest. Ethics, fair play, moral suasion and even legalities, all are assumed irrelevant.

  Now if we both cooperate so that it results in a successful swap of goat and cash, let us say, we derive two units of satisfaction each; if I cooperate by leaving a cheque for Rs 1000, while you defect, leaving no goat at all, or leaving a sick goat or a lame goat or a goat that’s all bones, you will derive four units of satisfaction, for it is fun to get something for nothing, while I derive a satisfaction of –1 as it stings to be duped; likewise if you cooperate by leaving a healthy and meaty goat and I defect by leaving a cheque that bounces, I derive four units of satisfaction for having got your goat for nothing and you derive –1 satisfaction; and, finally, if we both defect, we gain zero satisfaction point each. The payoff matrix for this arrangement is shown in Figure 3.2.

  Figure 3.2 The Payoff Matrix for a Prisoner’s-Dilemma-Like Trade Agreement

  You will find that the payoffs in Figure 3.2 are nothing but number 4 added to each payoff shown in Figure 3.1. For example –2, –2 in Figure 3.1 become 2, 2 in Figure 3.2; 0, –5 become 4, –1, and so on.

  The payoff of 2 in Figure 3.2 is what Hofstadter calls the reward (R) for mutual cooperation; 4 the temptation (T) for non-cooperation; 0 the punishment (P) for mutual defection; and –1 the sucker’s payoff (S). The reward, temptation, punishment and sucker’s payoff in Fig. 3.1 are respectively –2, 0, –4 and –5. It is important to note that for a payoff matrix to represent prisoner’s dilemma, two conditions must hold:

  1) T > R > P > S

  2) (T+S)/2 < R

  The first condition merely ensures that no matter what I do, it is better for you to defect. The second condition ensures that if our agreement is of a more permanent nature, say, exchanging a goat for Rs 1000 every month, even if you and I lock into an arrangement where one month I defect (amassing 4 temptation points) and you cooperate (with sucker’s payoff of –1 point) and the next month I cooperate (with –1 point) and you defect (with 4 points), neither of us will do better. In fact we shall do worse (only 1.5 points a month on average), than if we were both cooperating every month (earning 2 points every month).

  As we set to operate our one-time agreement, my mind begins to mimic the familiar prisoner’s dilemma argument. If you are sucker enough to cooperate and leave a healthy goat—ribbon and all—for my benefit, it is in my rational self-interest to defect on my obligation and leave you a bad cheque, and earn 4 temptation points. On the other hand, should you be vile enough to defect and leave a sick goat or no goat at all, I am still better off defecting, that is, leaving a bad cheque. At least, we will be even with no one earning any points. No matter what you do, it is in my best interest to defect; so I will defect!

  The only problem is that you are as smart as I am and think exactly the same way as I do (don’t most of us Indians think the same way?). Consequently, we both defect and are left without something of value that we wanted. We are both left with punishment points. Had we both cooperated, keeping to our respective ends of the bargain, we would both have reaped a reward of 2 points each.

  PRISONER’S DILEMMA AND OUR EXPORTERS

  The goat trade just described is a common occurrence in India. For instance, a small exporter in India manages to bag a one time export order based on a promising sample sent by him earlier. Let us say the payment is to be received by cheque, or in the form of a simultaneous import of some other product. The conditions are very close to the simple prisoner’s dilemma situation. The two parties have an agreement—each party has to deliver something that the other party desires, in accordance with an agreed timeframe and specifications. The two parties probably will not meet face to face, as they are oceans apart. Nor are they likely to engage fruitfully in expensive legal battles if either party defaults on its obligation. What are the odds that either the Indian or the foreign trader will default on his obligation? I would wager more heavily on our Indian exporter defaulting, say, by supplying spurious consignment that falls drastically short of the agreed standards or weight and so on. We are not talking of cheats and fraudsters here. A perfectly normal, well-respected Indian businessman, acting rationally, believes that he is amassing more temptation points and his shrewd mind grasps the situation as a simple one-time prisoner’s dilemma situation, under which it is very clear to him that no matter what the other one does it is better for him to defect.

  I was amused to read in the press (February 2005) about the UK–India imbroglio over the former banning red chilli powder import from India, amidst allegations of large-scale adulteration by Indian exporters. Only a week before this sad controversy erupted, I was told by a friend that when he was posted in South Korea with a multinational bank, in the 1970s, he was witness to an export outrage by India. Apparently, after striking a deal to import red chillies from India, the Koreans found the very first consignment adulterated with red-brick powder. The Koreans emptied the entire consignment in the high seas, vowing never to source red chilli powder from India. Things have not changed much with our business practices, have they?

  This is not a one-off case. A news item titled ‘Early birds tip the apple cart’ in the Economic Times (5 July 2005) said that apples from India’s largest producer, Himachal Pradesh, would not be at their scrumptious best that year because the producers, in a hurry to make a fast buck, had plucked them much before the harvest month and treated them chemically to get the red glow. The haste had adversely affected the export of apples.

  PRISONER’S DILEMMA AND JOINT VENTURES

  A similar non-cooperative behaviour indicative of misplaced understanding of self-interest is often seen in our joint ventures. For instance, a typical Indian businessman will go any length to ensure that he takes a 51 per cent stake for himself, or his company, to ensure he is the boss who calls the shots in the joint venture. Shortly afterwards, when the foreign partner talks of expanding the business, and there is need for more capital, he is irritated that he has no money to bring into the venture. He thinks it so unfair that the foreign partner should bring all that money and then expect him to match it. They wish to overtake his 51 per cent stake, he reasons. He is unable to see why these overseas partners should wish
to derive as much benefit from the joint venture as himself. Could it be that they entered the joint venture for the same reason as he did, namely to make as much money as possible? He lives in a state of constant anxiety wondering whether the partner is benefiting more from the partnership than he is, his earnest attempts to prevent that notwithstanding. Or else, what is the partner doing continuing in the joint venture with a 49 per cent stake?

  He now brings his razor-sharp mind to bear on the problem, namely, how best to bend, twist and rattle the terms of the joint venture agreement so as to outsmart and outwit the partner. The poor overseas partner will soon discover that in our Kafka-like judicial system, he cannot enforce the joint venture agreement in any case. In short, our businessman smartly defects, while the partner is trying to cooperate. (I am sure you notice that I am stretching the point somewhat, just to make a point. After all there are the Enrons of the world out there too, who would make our hero look like a retarded fiveyear-old.)

  Soon the overseas partner wishes to get out of the venture. In the meanwhile the Indian businessman manages to get that one-time big payoff by buying out his stake for a song.