Applying Prospect Theory to end Affirmative Action

Los Angeles, California

July 21, 2011 (10pm)

by Dr. M.Bakri Musa
Morgan-Hill,Caliornia

An insight of cognitive psychology (that sub-discipline dealing with mental processes like thinking and decision making) is that humans are far removed from the ideal of a rational self-interested Homo economicus (Economic man) when making decisions, contrary to the core assumption of traditional economics.

Two factors weigh heavily when we make decisions, given a set of alternatives. One, we are loss averse; that is, we magnify the value of a potential loss and minimize the potential gain even if the two are quantitatively the same. The other is that how those alternatives are framed very much influences our decision.

Although these insights refer to individual decision-making processes, nonetheless they can be extrapolated to the societal level, on how we collectively make decisions. This has relevance to the central wrenching issue dividing our Malay community today, on whether to continue or do away with affirmative action.

The example (minus the intricate mathematics and fancy graphs) used to illustrate the Prospect Theory (as this new insight is called) is the potential epidemic of an Asian disease hitting America that is expected to kill 600 people. When asked to choose between an intervention that would save 200 people and another that would have a 1/3 probability that 600 people would be saved with 2/3 probability that no one would, most would approve the first. Both propositions state exactly the same thing. The first however, framed it more positively with the element of undue certainty thrown in.

There are other variations on the same theme. Thus we willingly drive across town to save $5 on a $15 calculator but not on a $125 suit. The savings are the same – $5 in both cases – but what decides is the framing. Never mind that you spend $10 on gas to drive across town! Marketers make full use of these insights of cognitive psychology when advertising their products. Thus the grabbing banners: “Fifty percent savings!”

Returning to the difficult issue of affirmative action, we have made it unduly contentious as we have framed it unwisely. One, we have stated it as taking away special privileges, and being risk averse, we rightly reject that. Two, we have framed special privileges as being part of our character, our right by virtue of being the indigenous people.

We forget that affirmative action was instituted for the explicit purpose of overcoming disadvantages we suffered under colonialism. Those privileges were meant to jump start our development so we could be on par with the rest of the community.

New Frame of Reference

We can deal with the issue of special privileges more effectively and less acrimoniously by tapping the wisdom of modern cognitive psychology. First, we must reframe the discussion differently, away from privileges and the taking away of them, to the more general but pertinent issue of enhancing Malay competitiveness; and second, we must amplify the benefits and minimize or lessen the loss of doing away with these crutches.

By making affirmative action part of our culture and character, we have made it difficult to critically examine it. No matter how noble in intention and beneficial the results, any scrutiny would be viewed as an attack on our values, character and heritage. Those are formidable obstacles.

Instead we should focus not on special privileges per se but on how to prepare our people for this new highly competitive economy. Indeed I would specifically eschew any talk of doing away with special privileges; all that does is to inflame passions and further polarize us. Once we are competitive, then the need for special privileges would simply melt away. Then we can talk of about ending them more rationally as they would have become irrelevant in the lives of most Malays.

What made affirmative action so highly effective at its inception was its emphasis on education and rural development. Under Tun Razak, schools were literally mushrooming in the villages, bringing both development and education. I vividly recall that in the seven-mile bus ride from home to my high school in town, there were no fewer than seven primary schools being built! In the afternoon when the children were finished, those schools would still be full, this time with adults attending literacy classes.

The emphasis on rural development made great sense; the overwhelming majority of Malays then were rural dwellers. Under FELDA, massive land development schemes were initiated, with mass relocations of landless kampong folks, an internal migration of sorts, so they could begin a new life away from the stifling atmosphere of their old villages. Its sterling success in mass relocating poor people remains the only shining example in the world up to this day.

Today the noble mission of FELDA has been hijacked, the entity itself being “corporatized,” another government-linked company (GLC). Tell me, how does the building of a RM 670 million headquarters in the glittering part of KL make those FELDA settlers in Ulu Pahang more competitive? Headquarters are nothing but expensive overhead. Likewise, I fail to see how FELDA’s plantations abroad would help the poor people back in my kampong.

The same query could be posed on the billions spent on GLCs. Najib, like his predecessor Abdullah Badawi, cannot find a GLC he does not love. He and we accept that because those expenditures are being framed as furthering NEP and not on the more pertinent issue of making Malays competitive. Had we done that, then obviously those funds would be better off diverted to making schools in FELDA settlements have the best facilities and teachers, as well as making sure that those settlers have electricity and potable water.

Maximize The Gain, Minimize The Loss

The other insight is of risk aversion. For us to favor a decision, we have to be convinced that the promised gains would vastly outweigh the potential loss, and that the majority would benefit and the loss suffered by the minority, preferably a minority we (the majority) are not enamored with.

If we dispense with inflated contracts to UMNO cronies and instead get the best price through competitive bidding, then we could build two schools for the price of one. Even if that contract were to be won by a non-Malay or even a foreigner, the benefits would fall on the hundreds more Malay families whose children would now have safer and better schools. The losers would be the handful of UMNO-connected “contractors” and Ali Baba “entrepreneurs.” Again, many more gainers with far fewer losers! Besides, those losers are the types we have difficulty identifying or sympathizing with.

Similarly with the billions spent on GLCs; again if we divert those resources to improving our schools and universities by recruiting superior teachers and professors from abroad, thousands would benefit. The losers would be few, those has-been politicians and near-retirement civil servants seeking cushy corporate jobs. Again, those are the people we do not readily sympathize or identify with.<

I advocate this in my forthcoming book, Liberating the Malay Mind. Sell all those GLCs including and especially such jewels as Petronas and MAS, and put the proceeds in a professionally-managed trust fund with the returns to be used exclusively for education and improving the lives of our urban and rural poor. To me, it is far more important to train young Malays to be pilots, airline mechanics, geologists and petroleum engineers than to own an airline or oil company.

One big benefit to selling those GLCs would be the elimination of a major source of undue lobbying and influence peddling by politicians and senior civil servants. Currently they, especially the near-retirement civil servants, are preoccupied with ingratiating themselves to their political superiors in the hope securing a coveted chairmanship of a GLC on retirement from government service. With that no longer an option, these civil servants would then be emboldened to challenge their political superiors should they embark on some silly policies. Were that to happen, we would have a far superior civil service, and the whole country would benefit.

Another benefit to ridding these GLCs is that those highly accomplished Malays presently in Petronas and Khazanah would be free to sell their talents to the highest bidder and then be appropriately compensated. Right now they are being unfairly taken advantage of, in fact seduced by such silly sentiments as national service and misguided notions of patriotism.

As for those less talented who infest the many money-losing GLCs, well, those companies were not created to be public work projects for them.

The other reality to the discussions on special privileges is this. If today we were to embark on a policy to enhance Malay competitiveness, assuming that it is highly effective, it would take a while for its results to be apparent. Further, we do not know or can predict specific potential winners except for the amorphous “Malay masses” and the aggregate results. Hence there will be no one to lobby or vigorously advocate for the changes.

On the other hand, if we were to terminate affirmative action today, the losers would feel the loss right away. Not being saints, they will fight it; they will immediately be on the streets protesting, as those in Perkasa are doing. That is predictable.

This dilemma is the greatest challenge facing policymakers everywhere, especially in a democratic society. China does not have that problem. Thus it would take an extraordinarily enlightened and farsighted leader to achieve this, someone focused on the long term and not on the next election. Such leaders are also the ones most likely to tap the wisdom of others, including that of behavioral economists and cognitive psychologists.

Unfortunately for Malaysians, Malays specifically, our current leaders are content parroting the latest buzzwords of those disciplines, while their long-term strategy never extends beyond the next party elections. Self-interested they very much are, rational they are not.

*What is Prospect Theory? A theory states that people value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former.  Also known as “loss-aversion theory”.