Bounded rationality and the onion crisis of Bangladesh

File Photo: TBS

We like to think of ourselves as rational decision-makers, meticulously weighing options and maximising our benefits. But the truth is, our brains are riddled with biases and shortcuts, leaving us open to manipulation. Marketers, armed with the understanding of a buyer's irrational behaviours can easily exploit and influence our spending habits. 

Behavioural economics and bounded rationality are two powerful concepts that challenge the traditional economic assumption of "homo economicus" - a perfectly rational actor with complete information and unlimited cognitive resources. By incorporating insights from psychology and cognitive science, behavioural economics delves into the actual factors that influence decision-making. 

The concept of bounded rationality, pioneered by Nobel laureate Herbert Simon, postulates that human decision-making is limited by cognitive abilities, information availability and time constraints. We rely on mental shortcuts, known as 'heuristics' and 'satisficing' which is another term for finding acceptable solutions, to navigate complex choices. These approaches, while efficient, can introduce systematic biases and deviations from the predictions of classical economic models that assume perfect rationality. 

The recent surge in onion prices in Bangladesh has left many households weeping, not just from chopping the expensive bulbs, but also from a sense of helplessness that comes as their budgets strain under the unexpected burden. The Department of Agriculture Extension (DAE) reported onion production of around 36 lakh tonnes in FY 2021-22 saw a subsequent decline to 34 lakh tonnes in FY 2022-23 while the average demand for onions is around 27 lakh tonnes in Bangladesh. 

It has been estimated that approximately 25% of domestically produced onions are lost due to a lack of robust storage facilities while the remaining 75% typically reach the market. This implies that Bangladesh has attained near self-sufficiency in onion production and has reduced reliance on importers in recent years. Therefore, the recent onion crisis likely stems from factors beyond a significant supply shortage. 

Furthermore, improving storage infrastructure has the potential to transform Bangladesh's onion production to a consistent surplus. However, small-scale farmers and traders have limited control over marketing and prices, leading to suboptimal decisions concerning storage, distribution and pricing. The onion crisis might also be getting some "help" from folks who are stockpiling them like gold bars, hoping to cash in later, creating artificial scarcity.

While supply shortages and global disruptions have played a role in the onion crisis, a closer look reveals a subtler culprit: the manipulation of our irrational minds by those who profit from our predictably unpredictable behaviour.

Faced with the illusion of disappearing onions, our fear of missing out kicks in, driving us to irrational stockpiling, further exacerbating the shortage. Facing limited information about the extent and duration of the price hike, many consumers engage in panic buying, fearing further scarcity and even higher prices. This, ironically, contributed to further depletion of supply and exacerbated the price rise.

Besides this, limited substitutes for onions make them less price-elastic in terms of demand. Moreover, marketers cleverly anchor our expectations to lower prices, making the current hike seem all the more outrageous. It's a mental trap that makes us forget onions weren't always dirt cheap, blinding us to the bigger picture. Heuristics like "stock up when things are expensive" could have fueled unnecessary purchases.

Furthermore, when we see our neighbours stockpiling mountains of onions, it triggers a primal urge to follow suit. Social conformity dictates that if everyone's stocking up, it must be the right thing to do. We forget that their panic is contagious, not the actual scarcity. As we feel losses more keenly than gains, the perceived pain of paying inflated prices for this essential commodity outweighs the potential gain of waiting for prices to normalise. This phenomenon resembles the concept of choosing a guaranteed loss (overpriced onions) over a risky gamble due to the heightened sensitivity to losses.

These are just a few of the tools in the vendors' arsenal, designed to exploit the quirks of our bounded rationality. But just like peeling back the layers of an onion, we can peel back the layers of manipulation if we become aware. By comprehensive research and thoughtful comparison, we can mitigate the influence of emotional biases and safeguard ourselves from manipulations. Let's not be the weeping onions in someone else's profit salad. By reclaiming control over our minds, we can reclaim control over our wallets.

As for the policymakers, perhaps it's time to invest not just in onion storage facilities, but in consumer education initiatives that empower us to see beyond the marketing mirage. After all, a well-informed shopper is a marketer's worst nightmare, and ultimately, the best defence against manipulated spending. The policymakers also need a clear demand pattern to manage the problem, otherwise, the market may turn volatile after any small disruption in supply.

It is important to remember that the onion price hike is a complex issue with multiple contributing factors, and bounded rationality is just one piece of the puzzle. Nonetheless, understanding its role can help us navigate similar situations in the future. Thus, by recognising the limitations of human rationality and the power of psychological influences, we can gain a deeper understanding of how people make choices and ultimately, create a more efficient and equitable world.

Samira Tasnim is a research associate at the Bangladesh Institute of Governance and Management (BIGM). Email- samira.tasnim@bigm.edu.bd.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.