Weekend Reads from India: Thaler, Heuristics, and Capital Gains Taxes

The direction of the US dollar is always a concern. More so now, in this year of change.

But the longer-term structural shift under way is the effort to establish new frameworks for commerce. Trade conflicts and protectionism may be back.

Will the revival of these approaches help address the growing inequality that globalization has so far failed to counteract? Welfare economics, Milton Friedman’s negative income taxes, and a universal basic income (UBI)” are among the other policy measures that are attracting renewed interest. Proponents from across the ideological spectrum and the developed and developing worlds have emerged to voice their support.

The question is: Which policies will governments take up?

We will know next week about the government of India’s plan for UBI and other fiscal policy initiatives. India’s finance minister, Arun Jaitley, will present his fourth federal budget to the Lok Sabha — the lower house of the Parliament of India — on 1 February. This presentation is a widely followed event — and for good reason: Budgetary announcements have played a vital role in charting India’s economic progress.

India’s 2016 currency ban, aimed at driving black money out of the economy, has been a mixed bag thus far. On the negative side, the cash in circulation is still at 47% of the pre-ban level and weaker segments of the economy have been under severe strain. The expectation, therefore, is a pro-growth budget that supports all segments of society.

India’s long-term capital gains tax policy is another area where there is potential for significant change. Capital gains taxes on listed equities held beyond a year are currently tax exempt in India. But this is likely to be under review. Unlike the United States, the United Kingdom, and South Korea, among other countries, India has yet to implement the principle of horizontal equity in capital gains taxation. In addition, equating “long term” to a one-year period is not just an issue of semantics. Framing and the incentive to divest beyond a year is enough to bias market players toward short-term decision making. Consider this: India’s annual retail trading contribution is about 40% — significantly higher than the developed world.

In their book Nudge, Richard Thaler and Cass Sunstein highlight the role “choice architecture” plays in decision-making dynamics. Size, complexity, and behavioral biases are among the major factors that influence all decision making. But even in the face of complexity and size, the authors demonstrate how behavioral biases and heuristics can sometimes be gainfully used to influence important choices. For example, as a result of the French government reversing one opt-in rule, effective 1 January 2017, all French citizens, by default, have become organ donors.

Thaler and Shlomo Benartzi’s Save More Tomorrow program is another example of policy nudges that can induce significant economic change.

Both global and local policy shifts are bound to influence the speed and depth of capital flows, and it’s important to be mindful of the unseen behavioral changes that accompany all policy shifts.

Some of the other stories I found interesting are listed below. Happy reading and enjoy the weekend.

Global and Indian Policy

• Martin Wolf on the perils of globalization. (Financial Times)
• Wolf also has a geopolitical primer. (Financial Times)
• What changes in US policy will President Donald Trump implement? (Business Insider)
• “Akash Prakash: Determining the dollar in Trump’s America” (Business Standard)
• Aswath Damodaran discusses trade conflicts. (Economic Times)
• Free money in India? (Livemint)
• Horizontal equity in taxes may be coming to India. (Financial Express)

Behavioral Economics

• Malcolm S. Salter discusses short-term bias in decision making. (Harvard University)
• “From ‘Economic Man’ to Behavioral Economics” (Harvard Business Review)
• French citizens become organ donors. (The Guardian)
• Nudge: Thaler’s blog

Investing

• “January 2017 Data Update 5: A Taxing Year Ahead?” (Musing on Markets)
• Vol 121 — India’s historical equity return profile (What We Are Reading — RMF team)
• “Beware the Bogleman” (Financial Times)
• “Named: The Best and Worst Funds of 2016” (Financial Times)
• The return game. (Livemint)

Fun Stuff

• “Teddy Roosevelt’s 10 Rules for Reading” (Farnam Street)
• Jason Zweig has a list of good reads. (JasonZweig)
• Riddles from Dan Ariely. (Dan Ariely)
• Why does the sun set red? (Economic Times)
• Aerobics improves cognitive function. (PsyPost)

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Christian Mueller