An alternative theory of Pakistani

institutions

Part - I

Economics teaches us to assume that the world is rational, and modernity demands that we
become devotees of the church of utility, or the notion that people are rational and therefore
make linear, rational, logical choices.

We all know, however, that people are not rational, and do not always make solid, rational
choices. The evidence attacks our senses all day, every day, everywhere. Telling
unconvincing stories about enormous wealth. Including pop culture references from the
1970s in serious judgments. Mistiming and mishandling meetings with rich, old friends.
Making wild and unprovable allegations as a habit. Publicly defying the highest office in the
land. Attacking women in the public space whilst investing in a years-long exercise to
bequeath ones public space agency to a woman relative.

Pakistans political landscape is replete with stomach-churning and mind-numbing behaviour.

None of it is particularly rational, either at the individual or the collective level. Yet here
Pakistan is, at the doorstep of emerging market status, poised for sustained economic growth,
and possibly, medium to long-term stability. And its leaders, who are to benefit the most from
this growth and stability, seem intent on creating and sustaining crises that are eminently
avoidable. What gives? Why is Pakistan ambushing itself?

In order to explore the limitations of the utility theory, it is first important to be disabused of
the privilege of assuming that there is something unique or fiend-like about those that we find
abhorrently in violation of rational behaviour. Telling ourselves that these people are crazy
may be comforting. But the record of self-destructive and irrational decision-making is so
common across time and space and across people and organisations and isnt useful. One way
to tackle the failures and limitations of the utility theory is to break it down into what
framework helps us understand these failures at the individual level, and what helps us
understand them at the collective level.

Lets start with the individual. In 1979, two Israeli psychologists named Daniel Kahneman
and Amos Tversky wrote a paper in the journal Econometrica titled, Prospect Theory: An
Analysis of Decisions Under Risk. In it, they demonstrated a range of thinking patterns and
habits, which are common among large numbers of people and across cultures, that fly in the
face of what we would expect to be true if people were rational. More interestingly, their
research exposed patterns of irrationality that were consistent across time, space, cultures
and peoples. Among these patterns? When faced with a choice between a certain gain, and a
less certain gain, people prefer certainty over relatively less certainty, even when the payoff
of less certainty is higher. Kahneman and Tversky call this the certainty effect.

If the choices are between losses, rather than gains, the choice matrix is reversed, and people
prefer less certainty of loss, over the certainty of loss. They call this the reflection effect.
Another idea their research put forth was the isolation effect: In order to simplify the choice
between alternatives, people often disregard components that the alternatives share, and focus
on the components that distinguish them.

They use these observations to establish a framework to assess decision-making in which

they revisit how people value different options, and how they then weigh those options. The
prospect theory is a model for decision-making that helps explain inconsistencies or
violations of the utility theory. Their two go-to examples of these inconsistencies are the
facets of human decision-making that have helped create the insurance industry, and the habit
we commonly refer to as gambling. In both instances, the prospect theory offers a bounded
explanation of the manner and nuances of the limits of rationality.

What about assessing the breakdown of the utility theory at a larger, collective level? How do
we frame or process irrationality writ large, at a macro-scale? In the early 1990s, Douglas
North capped a lifetime of research and thinking about how individuals and organisations
interact, with a book and several papers that explained how institutions emerge within a
society (to help navigate irrationality), why they persist (because collective cognition and
behaviour trumps individual choice), and how they change (slowly, incrementally,
agonisingly). North was awarded a Nobel Prize in 1993, but the implications of his work
have persisted far and wide.

The popular Daren Acemoglu and James Robinson book Why Nations Fail? represents an
important recent expression of Norths ideas about institutions and their centrality in shaping
and determining what goes on in countries over long periods of time. The common shorthand
for Norths work, and new institutional economics at large, tends to be incentives. But this
is an insufficient analytical device. Our exploration of institutions, especially in Pakistan,
merits much more reflection about individual decision-making and institutions as
mechanisms for the expression of those decisions.

Employing Kahneman and Tverskys prospect theory and Norths institutions could be potent
tools in trying to understand the decisions that have been made in Pakistan in recent days,
weeks and months.
Why is it that PM Sharif gets to play the victim, when the first people at the altar of sacrifice
are not Ittefaq-backed Sharifs, but middle class devotees to the House of Sharif? Even if we
assume that Pervaiz Rashid and Tariq Fatemi, (and poor Rao Tehseen!) hatched and executed
the so-called Dawn leaks, could it have been pulled off without PM Sharifs blessings? Why
was the Dawn story, a story at all? Isnt the timing and tone of Difa-e-Pakistan Council rallies
proof enough of the continued use of religious extremism as public policy not perhaps, any
longer, across international borders but within the Islamic Republic, to hound and harass
elected governments? And isnt the blatant and outright attack on the authority of the prime
minister by the DG ISPR, simply an affirmation, and an extension of this institutional culture
of hounding and humiliating elected governments?

Similarly, isnt the stoking of civ-mil fires exactly what helps nervous and incompetent
elected leaders regain moral authority? Isnt meeting with Sajjan Jindal exactly what the
doctor ordered for a besieged and weakened elected leader with the prospects of a Mario
Puzo-inspired Joint Investigative Team full of young BPS-19 officers looking to make a name
for themselves?

Institutions dont change overnight. The uber-wealthy exist to exploit those that are beneath
them in the economic pecking-order. Thats why relatives of the Sharifs by genetics, or by
marriage are less vulnerable to being thrown under the bus, than people like Rashid or
Fatemi. The army has a culture of the active subversion of civilian authority. Though people
like me will often paint this as a much more benign distrust, in order to understand the flow
of history, we have to understand that this subversion or distrust is informed by both
incentives, and by norms. Our appeals to formal institutions, like the constitution, fall on the
deaf ears of informal rules of the game.

To understand the toxicity of the DG ISPRs tweet rejecting something from the prime
minister, we need to think in months and years, rather than days and weeks. We need to think
in terms of language and discourses, rather than narratives and tweets. Exuberant and
optimistic fools thought that a change of guard in Rawalpindi would fix civ-mil relations. But
almost like clockwork, the civ-mil disequilibrium of this country has manifested itself with
the naked ambition of a young investment banker. The so-called Dawn leaks problem wont
be solved with a firing here or there. The insubordinate behaviour of the military wont be
arrested with appeals to Article 243(1) or hashtags belittling the military or its spokesperson.

Asim Ghafoor, Fawad Hassan Fawad, Chaudhry Nisar and Nawaz Sharif have all made
decisions exactly in keeping with Kahneman and Tverskys explanation of individual
decision-making. The Pakistani armed forces, and the office of the prime minister of
Pakistan, have behaved exactly in keeping with Norths explanation of institutions and
incentives.

Change is not going to come about because one or more of the actors in this play are replaced
by another actor of similarly limited rationality, belonging to similarly incentivised
institutions. Change comes about differently. Enjoy the noise.

To be continued