ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Intuitive Economics and the Outcome of an Operation

Difference, Division, Desi Breeds

A fundamental question in economics as well as in adaptive evolutionary biology is when to use difference and when to use division in cost–benefit analysis. At times, decisions taken to maximise the cost–benefit ratio can be diametrically opposite to that to maximise the cost–benefit difference. Common people intuitively know when to maximise the ratio and when to maximise the difference. The contrasting history of hybrid versus “desi” breeds in agriculture as opposed to animal husbandry illustrates this point effectively.

“Suppose, in a business you invest ₹ 1,000 and get ₹ 1,500 as return. You have ₹ 500 as net profit. Suppose you expand on the business by additionally investing ₹ 1,000. Now you get a net profit of ₹ 800 instead of ₹ 500.Would you consider the decision of this additional investment as a wise decision?” We raised this question in a meeting of a mixed group, consisting mainly of social workers working with farmers, fisherfolk, pastoral, and tribal communities. We were discussing the economics of livelihood for people dependent on nature. Some of them said, “Yes. We will invest ₹ 1,000 more because by doing so, our net profit goes up.” Some of them said, “No. This is not wise! Because, even if net profit goes up, it is not in proportion to the additional investment. The ratio actually decreases with the additional investment.”

Which of the answers is correct? Is it really wise to make the additional investment or not? Both the groups certainly used logic which was “right” in their context. Both the groups were doing a careful cost–benefit analysis. But, one group was using net profit, defined as returns minus the cost. The other was using a ratio, defined as returns divided by the cost. Interestingly, even within the latter group, individuals working with farmers appeared to think in a different way than individuals working with tribal communities. For this article, we will use the words “cost” and “benefit” to describe the actualities of a deal, and the words “investment” and “returns” to refer to the perceptions and strategies of an investor.

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Updated On : 21st Feb, 2020

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