Added On: Tuesday, January 08, 2008

India's Next Obstacle: Short-Term Thinking

Knowledge@Wharton 01.03.08, 6:00 PM ET

In his book Games Indians Play: Why We Are the Way We Are, V. Raghunathan writes about a farmer whose corn won top awards year after year. When a reporter asked the secret of his success, the farmer attributed it to the fact that he shared his corn with his neighbors. Why, the reporter wondered, would the farmer want to share his seed when those neighbors also competed with him for the prize? The farmer's reply was, "The wind picks up pollen from the ripening corn and swirls it from field to field. If my neighbors grew inferior corn, cross-pollination would steadily degrade the quality of my corn. If I am to grow good corn, I must help my neighbors do the same."

That Indians often fail to act like this farmer is the principal theme of Raghunathan's book. Using examples as varied as their tendency to drive through red lights to their failure to protect the environment, Raghunathan argues that Indians often act in ways that focus on winning immediate gains at the expense of long-term benefits. What makes Raghunathan's approach unusual is that his argument isn't a moral diatribe: He employs game theory--a branch of mathematics--and related concepts, such as the prisoner's dilemma, to present his case.

A former professor at the Indian Institute of Management in Ahmedabad, Raghunathan was named president of the ING Vysya Bank in 2001. He now works for the GMR Group as managing director of GMR Industries, the group's agri-business division, and CEO of the GMR Varalakshmi Foundation. Raghunathan also teaches game theory and behavioral economics at the University of Bocconi in Italy. To relax, he repairs mechanical clocks.

India Knowledge@Wharton: Your book is titled, Games Indians Play: Why We Are the Way We Are. What are Indians like?

Raghunathan: In the first chapter of my book, I describe what I believe Indians are like by offering 12 canons of "Indian-ness." For example, one of our traits is "low trustworthiness." By that, I mean we are most likely not to cooperate in a "prisoner's dilemma" kind of situation. Privately, Indians are reasonably smart--in fact, we are as smart as anybody else--but publicly we are dumb. Our ability to understand the need for cooperation is very low. We believe that cooperation and selfishness cannot go together--which is not true. We also tend to be very fatalistic in our outlook. We give excuses such as, "What can I do alone? Everybody else is looking out for himself, so why shouldn't I?"

What exactly is the prisoner's dilemma, which you just mentioned? How do you use it to explain the behavior of Indian business people?

The prisoner's dilemma, which was first developed by researchers at the Rand Corporation during the 1950s, is a concept that has come to occupy a prominent place in game theory. The problem statement goes like this: Assume that you and I are co-conspirators in a crime. Each of us is selfish and coldly rational. We are being interrogated in two separate cells, and we are unable to communicate with each other. The interrogator tells you that he has enough evidence to put each of us away in the slammer for two years. However, if you squeal on me and help him prosecute me, he will set you free immediately and imprison me for five years. He also tells you that he will make an identical offer to me (though you and I cannot communicate). If each of us betrays the other, he will put us both away for four years. Being selfish and rational, we have to respond to the offer in terms of what is in our best self-interest.

Now, here is our dilemma: Should we defect and squeal against each other, or should we cooperate and hold out against the interrogator? You may reason that if I defect, it would be in your interest to defect as well--otherwise you will be stuck in prison for five years while I go free. And if I do not defect, it is still in your interest to defect, since you will walk free immediately. So you decide to defect. I follow the same reasoning, and I defect as well. As a result, each of us ends up with four years in prison. If we were to cooperate, though, each of us would be better off because the interrogator has evidence to put each of us away for just two years. But for us to end up with that outcome, we need to recognize that the two-year punishment we will have to accept for cooperating is better for each of us than the four-year punishment we would get for defecting and ratting out each other.

Our situation is such that we believe that if we do not cooperate, we benefit more. We put ourselves in the other person's situation: We ask: If he does not cooperate, why should I? If he cooperates, it may still be in my interest not to cooperate, because I benefit by not cooperating.

Although this may sound abstract and theoretical, this is often how Indian business people tend to think. Very often, our exporters show samples that are of a high quality, but when the time comes to ship the goods, they send something inferior. This is very much like a prisoner's dilemma situation. You may initially make money because you have gotten something for nothing, but going forward--in an iterative kind of a context--you will most probably fail. You will stop getting export orders when your customers figure out that they cannot depend on your quality. They will stop trusting you and start suspecting you.

In my book, I cite the example of some Indian companies that had won orders to export powdered red peppers to Korea. Apparently, when the goods arrived, the Koreans discovered that the very first consignment was adulterated with red brick powder. The Koreans emptied the whole consignment in the high seas, vowing never to import this product from India. I read a similar report as recently as last year.

The prisoner's dilemma also explains why Indian companies often fail in joint ventures. We tend to be over-argumentative and often look out for our own narrow advantage rather than trying to make the venture succeed. If you look at the way we behave in all kinds of situations--whether it involves jumping a red light or dumping our garbage in the streets--that kind of behavior can be explained by the prisoner's dilemma. I will keep my own house clean, but the streets are not my business. Since everybody thinks the same way, the public interest suffers.

Is that what you meant when you said that Indians are "privately smart and publicly dumb?" Why is that so, and what are the consequences of this behavior?

Another way of expressing this idea is that we are good lightning chess players but terrible long-term chess players. If I have to see two moves ahead, I may do just fine, but if I have to see 10 moves ahead, I may not. Public interest is like seeing 10 moves ahead, while seeking out private advantage is like seeing two moves ahead. In the prisoner's dilemma, it is clear that in the short run, it pays you to defect. It takes you a longer period of reflection to realize that even given your selfish motive, you are likely to benefit more if you cooperate--and if each player does the same thing, both come out winners. I came to this conclusion through many other concepts of game theory that I have written about in the book. Having seen how people think in other countries and in India, I [realized] that Indians would tend to conclude in a jiffy that it is in their interest to defect and squeal against their partners. It takes longer to think through that if the partner also defects, both would be worse off. Unfortunately, Indians often don't think that far. That is why I say we are privately smart but publicly dumb.

In taking the long-term view, what is the "tit-for-tat" strategy, and how does that apply to business situations?

We tend to deal with the same people over and over again, even though we may interact with hundreds or thousands of parties over our lifetimes. If I tell myself that I will never be the first person to defect, but after that, I will do whatever the other person does, that is the "tit-for-tat" strategy.

In my book, I cite examples from the experiments the mathematician Robert Axelrod conducted on this concept. Life is a series of interactions of the prisoner's dilemma kind, and you deal with the same people several times. I may cooperate with you in an interaction, and you may cooperate as well. Then I go off and interact with other people, and then come back again to you. Remembering that you had cooperated in the past, I cooperate again. Essentially, I keep cooperating in every interaction until you defect. In the following interaction, I too defect, remembering our last interaction. Now it is up to you to decide whether to cooperate or not. If you cooperate, I go back to cooperating as well.

This strategy is different than that of a so-called "massive retaliator," whose response to one act of defection is to never, ever cooperate again. The tit-for-tat strategy does not have a long memory. It is forgiving. It is a good strategy in the sense that it is never the first one to defect, but at the same time it retaliates against defectors. It makes it clear that it will not respond to defection with continued cooperation. It responds to defection with defection, and will not resume cooperation unless the other party cooperates first.

I show in the book that the tit-for-tat strategy never wins against any one individual. But in the long run, people get to know that you are a gentleman; you are never the first to defect. They know that you are forgiving, but also that they cannot take you for granted. All these are, broadly, the hallmarks of a gentleman, and so I call this the "gentleman's strategy."

This strategy can easily be applied to a large number of business situations. For example, consider a businessman who normally supplies materials of high quality but once in a while--one out of 10 times--he supplies sub-standard materials. In other words, he defects one time out of 10, and cooperates nine times out of 10, hoping that you will not retaliate. He is trying to gain some extra points over his interactions. Such a businessman is not using the tit-for-tat strategy; he is using a random-defect strategy. What happens with this strategy is that if one of the players he runs into is a massive retaliator, that player will stop dealing with him completely. His ability to collect any further revenues from that party will end.

However, a tit-for-tat strategist will never defect first. As a result, it becomes clear to all the players over the long run that the tit-for-tat player will never retaliate unless they did something wrong to him first. Unfortunately, in India such business people are few and far between.

In one chapter, you cite the example of the TVS Group, a company in Southern India, which recognized that foregoing short-term benefits sometimes helps you gain long-term advantages.

Yes--Suresh Krishna, chairman of Sundaram Fasteners, which is part of the TVS Group, told me this story about his father, T.S. Krishna. His father had told him this anecdote during the 1960s, but he still remembers it.

The TVS Group, like other traders in Southern India, imported diesel engines during the 1940s. The engines were imported from London for about 1,100 rupees (Rs.), or $220 at the prevailing exchange rate, and were sold in the local market at a 25% to 30% markup, for about Rs. 1,400 ($280). But during the mid-1940s, supply was disrupted because of World War II, and this led to an extreme shortage of engines. Anyone who had an import license could easily sell the engines for Rs. 5,000 ($1,000)--many customers were willing to pay such prices. On one level, you could call this "market pricing," since the demand-supply situation was so skewed. It was a seller's market. But, on another level, you could also view this as a defection of sorts, because the sellers were exploiting the wartime shortage to force buyers to pay a higher price.

Krishna decided that the TVS Group would not follow that approach. Despite the shortage and the prevailing high prices, he insisted on charging the normal markup of 25% and kept selling engines for Rs. 1,400 throughout the war. At that time, the local business community thought he was either naïve or downright daft for missing out on the opportunity to make as much money as possible. When the war ended, however, the traders who had profiteered on the shortage went out of business one after another; today, no one remembers those companies. But the TVS Group survived, and it continues to be recognized as a valuable company.

In today's terms, we might say that TVS had better corporate governance, and its strategy paid off because it delivered long-term shareholder value. Back in 1945, though, it was just one decent man trying to do the right thing for his customers. Krishna refused to defect just because the timing was against his customers. The consequence is that even today, TVS is regarded as a name to be trusted. If the company lists its shares for sale, people subscribe to them. If products carry the TVS brand, people buy them. Krishna probably did not stop to think about the "brand value" of his behavior; still, his actions helped build the TVS brand.

Why do you think Indians are bad at regulation and self-regulation?

I think self-regulation is molded by regulation. Even in the U.S., when you are driving along a highway, if you did not know that a police patrol car might unexpectedly appear behind you with lights flashing, you might be tempted to drive faster than the speed limit. If the U.S. government had not come down hard on emissions, maybe the auto industry would have not revised its production standards. I believe that self-regulation is, indeed, affected by regulation.

In India, part of our problem is that the regulatory environment is weak. Combined with our fundamental lack of self-regulation, matters tend to spin out of control very soon. As I said above, we are like lightning chess players, and a little too quick to see where our immediate self-interest lies. When we think we can get away with something and the probability of getting caught is low, we tend to do whatever we want to do.

For example, consider the Companies Act, which governs disclosure of financial information by publicly listed firms. Today, if a public company does not disclose its financial statements on time, the penalty is Rs. 1,000 ($25) a day. This implies that if a company is willing to spend $9,125 on fines, it can go a whole year without making financial information available in the public domain. To me, that almost sounds like an incentive for companies not to file their annual financial statements. How can we have self-regulation when the regulations themselves are so weak? The reality is, back when these regulations were formulated, a thousand bucks a day was a lot of money. Today, you would need to charge corporations a penalty of Rs. 10 million ($250,000) a day for it to be a deterrent.

The trouble in India is that the chances or being caught are low, and the consequences of being caught are weak. As a result, we have forgotten what self-regulation means. Democracy has been misinterpreted to mean "the right to do whatever you want."

Why is it so hard for Indians to work in teams? Even in a team sport like cricket, one-upmanship often undermines collective performance. Does game theory offer any explanations?

That is a good question, but I don't know to what extent game theory can answer it. The only thing I would say is that it depends on how the team players resolve their own prisoner's dilemma-type situations.

If you approach the resolution of the dilemma externally, you will never resolve the issue. By approaching it externally, I mean asking yourself, "If the other party defects, what should I do?" or "If the other party does not defect, what should I do?" If you ask yourself such questions, the answer at which you will arrive is that you should defect. If both parties ask themselves the same questions, they both end up defecting--and losing.

The only correct way to resolve the prisoner's dilemma is to ask yourself, 'What is the correct thing, deep down, for me to do?' In other words, what is the action that if everyone were to follow it, would lead to the collective good? If you were to approach the prisoner's dilemma that way, both accomplices would arrive at the same answer--not to squeal against the other. You need to approach the issue internally. The problem arises when you expect others to defect, so you try and pre-empt the harmful consequences by defecting yourself.

To what extent are such tendencies uniquely Indian? For example, if you have been following the horror stories about the recall of millions of toys manufactured in China, wouldn't you think these are human traits rather than Indian ones?

Absolutely. I agree completely that these are human traits. You will find them everywhere in the world. The theories I discuss in my book were not developed in India but outside, and people have been writing about and talking about them long before my book came along. But one major difference is that in other parts of the world, the tendency to defect is much lower when you play the prisoner's dilemma type of games. In India, the tendency to defect is much higher.

Consider the example about the toys being recalled in China. It is, of course, true that in this one dimension, Chinese manufacturers--or their subcontractors--did not pay attention to quality. But I can think of 10 other dimensions in which the Chinese have chosen cooperation with one another over defection. For example, Chinese people show enormous discipline when they work in a team. I have seen Chinese cab drivers stopping before a red light at 2:00 a.m.--no Indian taxi driver would ever do that.

The number of medals they win during the Olympics shows that they have systems that work very well.

In Shanghai, in four years, they built out the magnetic levitation train that connects the airport to the city. Or consider a simpler example. When I was in Shanghai, I saw a newspaper ad that addressed the citizens and said, "If you want to be residents of a world-class city, you must behave accordingly and not hang your laundry out to dry on your balcony." When I drove around the city, I did not see a single Chinese home with washed clothes hanging on the balcony. In India, it is unthinkable that you could even make such an appeal.

So it is true that nowhere in the world are people immune to the prisoner's dilemma. But the incidence of defection in almost every walk of life seems to be unique to India. This may seem to be a caricature, but if I am exaggerating certain features, it is because I want to draw attention to them.

Do you have any reason to hope that the way Indians are will some day become the way Indians were?

I am not a spiritual person. But in doing research for this book, for the first time I read the Bhagavad-Gita [the Sanskrit text that is regarded as sacred by Hindus]. I realized that the Gita has a lot of things which help resolve the prisoner's dilemma readily. For example, if you do your dharma [duty] toward humanity, the level of cooperation could be much higher. That is what having a good character is all about.

This gives me hope for the future. As India's economy improves and education spreads, I hope defection will be replaced by cooperation. My question about why Indians are the way they are is a rhetorical one--it is an expression of my frustration. But my attitude toward India is like that of a parent toward a beloved child who needs correction. You don't love that child any less; it is because of your love that you want to bring about change. I hope these ideas will encourage some introspection about how to make things better.

Originally published Sept. 6, 2007.


Post a Comment

Links to this post:

Create a Link

<< Home