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How bias and prejudice hurt our long term interest

, November 11, 2016, 0 Comments

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Whether we accept it or not, we prejudge and discriminate on the basis of every conceivable ground starting from race, ethnicity, religion, region, language, caste, class, colour of skin to even food habits.

However, what we don’t realize that our bias and prejudice can hurt us in a doing a job or selecting an employee or worker and running a business.

Bias hurt us when we’re trying to find a suitable partner for marriage or when we’re trying to buy or sell a house, or electing political leaders.

How to be a smart consumer when choosing a job, spouse, home or political leader?

What makes us opt for second or third best alternative?

Why it makes sense to lose our bias and prejudice that we call our preferences, and supply crucial information voluntary or /getting certified by third party independent agencies?

Bias and prejudice create a mediocre team, company, society or country and in the process, we all pay the price of sub-optimal performance that may chop off anything between 5% and 10% from GDP of a typical developing country like India. The economic theory of indifference tells us that by being indifferent among our options, we can do better. Yet we all continue with our bias and prejudice.

Let us first understand what makes us biased and prejudiced in the first place.

  1. We think that our ways of living (i.e. Religious practices, food, and values) are better than those of other communities. Actually, it’s different and not better as there are no commonly accepted standards to grade ways of living and culture. Yet that’s how it is. We don’t want to come out and see the world from others’ perspective.
  2. Secondly, resources and benefits are limited, and so we can get them only at the cost of others. This mostly explains the outrage against immigration and outsourcing.
  3. Thirdly, we prefer to stay in our comfort zone. So, we don’t like to take chances or experience something we’re not used to.
  4. Fourthly, herd mentality, i.e. Doing what everyone else is doing. Overcrowding lowers the returns in any field.
  5. Fifthly, we often face an information gap or asymmetry that forces us to either go by our perceptions about others or pick up less risky options or do the least risky thing.

Thus, we hire someone we know from college or last company we had worked for. We marry or elect someone from our caste or religion and buy a house in a building or in an area where our relatives or friends are already living or bought houses or maybe because MS Dhoni endorses that housing project so it has to be good.

Implications

As a result, we often choose someone (or something) from a smaller pool of options that’s not usually the best, but second or third best alternative that we’d not want but often get. There are other types of bias such as looking with suspicion at someone who has lost his job or lacks past work experience or marrying late, or a politician who has got unconventional views on a crucial issue. Let me be more specific and give some examples.

Job

What happens if I want to hire someone only from my own caste or religion or from my Alma matter for my team? Simply that will reduce my options to choose from. These are self-imposed restrictions on the supply of prospective candidates. As a result, I will hire someone who may not be the most suitable candidate for the salary I’m willing to offer i.e. Budget constraint.

What if a selector of Indian cricket team decides to pick up players only from his caste? Can that team ever win the world cup? Can a manager be the best performer if he picks up his team members only from his own college? What will happen to a company’s performance if it encourages such policies? Your guess is as good as mine. Yet, that’s what happens – mostly because of bias and prejudice that selectors may have, but sometimes also because of information asymmetry or information gap – you don’t know as much as the other party knows and hence don’t want to take chances and repent.

Similarly, what if all students opt for computer engineering and want to work only for top companies? This lack of what’s called indifference among career or company options will push down wages of computer engineers i.e. Lower the return on investment in education. Hence, it’s nothing but bad economics.

Marriage

What happens if you say you only want to marry someone from your own caste, religion or language or who has got similar food habits, and meet your age and height criteria? Well, through these self-imposed supply restrictions, you’re narrowing your choices. As a result, you don’t check out on potential mates from other castes or communities who may be more compatible and/or hotter than what you actually get. You may have to repent for the rest of your life if you’re an Indian as most of us marry only once. If you’re an Indian girl, you make your life even more difficult by being too narrow (or rigid) in your choice based on age, caste, colour or other filters and may have to pay premium in the form of cash or kind i.e. Dowry or compromise on the quality of your spouse – you may have to accept a Fatso groom even if you’re slim and beautiful.

Buying and selling a house

What if, if you say you’ll buy a house only in Building X or Area Y or in Building X in Area Y? Well, you’re artificially creating scarcity for you by narrowing your choices…then, be ready to pay more for a house or get a smaller house for the same amount of money you’re willing to pay. However, if you’re looking for a bargain deal, it makes sense to be as flexible or indifferent as you can about what/where/when/in which project to buy a home – whether a celebrity endorses it or not.

What happens if you say you’ll only sell your house or apartment to a buyer from your own caste, religion or to someone who’s vegetarian? Sometimes, it’s not you, but the housing society rules that force you to behave this way. Many societies in Mumbai don’t allow the sale of houses to non-vegetarian buyers or members of the minority communities, Muslims in particular.

Such rules may have justification (right or wrong) but that’s bad economics for sure. If you’re a house owner in that society, be ready to accept a lower price for your house as such rules simply reduce the number of prospective buyers for your house.

Being an indifferent and maximizing economist, however, I’d be happy to be a buyer for a seller like you, but I would rather not be a seller like you. My advice as an economist would be to avoid buying a house in such societies as it will ensure a lower long-term return on investment. As a buyer or seller one needs to be indifferent among ones choices or options to maximize gains or minimize losses. That’s smart economics.

Electing political leaders

If we elect our political leaders based on parochial considerations such as caste or religion, then we really deserve our politicians. It’s against the principle of indifference or is like self-imposed restrictions on supply. If they can get votes just by using caste or communal identities why should they work harder? Remember, most of us like shortcuts so do our politicians.

Besides, by voting along caste or communal lines, we actually discourage those who seek to be voted on the basis of tougher neutral criteria like education or cleaner image.

The law of supply says that if we’re not paying enough (through our vote) to (elect) the supplier (i.e. the likes of Meera Sanyal and Nandan Nilekani) of good politics, then we’re actually dis-incentivising the supply of cleaner politics. Thus, going forward, we’ll have less and less number of such people who would want to enter politics and get disappointed.

Implications for others

Sometimes our prejudice or preconceived notions can benefit others. For instance, a seller who wants to sell his house only to a vegetarian buyer – maybe because of society rules – can benefit a very flexible or indifferent (and a maximizing economist) homebuyer like me. I’m vegetarian, but I’d be open to buying a house irrespective of whether the seller is vegetarian, non-vegetarian, Hindu or Muslim if the price and quality of the house is agreeable.

However, most often our bias and prejudice that we often call our preferences mar the chances of others who may be more talented or suitable than someone actually picked up by us in the job or marriage or politics markets.

Can the likely losers do something about improving their chances in job, marriage, politics or real estate?

You can’t do much about addressing the implications of bias and prejudice based on points: 1, 2, 3 and 4 at least in short-term, but you can certainly do something to minimize the adverse impact of prejudice based on information asymmetry as highlighted under Point 5. How to do that?

By voluntarily supplying the necessary information – by being visible say, on LinkedIn where you can voluntarily provide all the information about your professional credential, and get yourself endorsed by others who may be knowing you professionally so as to enable employers to take a chance on you. The other option is to get certified/rated by a third party independent agency.

Matrimonial consultants/websites can take upon themselves to verify the credentials of posted profiles maybe by charging fees so that those who want to expand their options don’t hesitate to do so. That will add on the popularity of such websites and boost revenues.

And it’s time homeowners opposed unreasonable rules on whom to sell or rent their houses. One way to do that would be to avoid buying or renting such properties. Falling demand will push the prices/rentals down and force some sense on such societies.