Influence of Cognitive Biases on Individual and Collective Sensemaking Post Demonetization of Indian Currency


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Today morning, over breakfast, a colleague of mine was beating down the demonetization idea and his central argument was that it was causing a great deal of discomfort to people. In support of his argument he narrated an incident. He told us that he was having dinner the previous evening at a ‘Darshini’ (a local mid-range restaurant), and one of the customers there wanted to pay with a 500 rupee note and did not have any lower denominations. However the cashier resolved the situation by telling him that since he was a regular customer he could just eat his food and pay the tab later.

I connected with this story immediately because on saturday night I had gone to Subway (a sandwich shop chain) with my 9 year old son and his school buddy who was staying the weekend with us. I had assumed I would pay by credit card, but it turned out that the their credit card machine was not working. Just like the cashier at Darshini, the shop owner at Subway (who was present in the shop), allowed us to eat our meal on credit with the understanding we would pay in the next couple of days. In this case I was not even a regular customer. We landed up chatting a bit and I learnt more about our local Subway shop and the shop owner than I would otherwise have known.

The two stories (my own experience in Subway, as well as my colleague’s observation of the transaction in Darshini) were remarkably similar. However what surprised me was that while I had come home that day, touched by the Subway owner’s warmth and extension of support, my colleague was using a similar story to fortify his arguments on why the demonetization initiative was a failure. What led the two of us (my colleague and me), two equally intelligent human beings to pick very similar data and information (in this case the incidents at subway and darshini) and then use it to ‘justify’ or reach very different conclusions? The difference in the conclusions drawn by us is best explained through Confirmation Bias.

Confirmation Bias is one of the most well researched human biases and it is also one of the most pervasive. It is defined as the inherent human tendency to interpret new evidence as a confirmation of one’s existing theories and beliefs. My colleague and I both had our own private theories related to the demonetization well before the incidents at Darshini and Subway occurred. My colleague’s theory was that the initiative is a disaster and will cause trouble for people. Therefore he concluded that the cashier and the customer had been troubled by the ‘experience’. My theory was that this initiative was going to usher in positive change for our country and community. This made me prone to conclude that the ‘situation’ had led to the formation of a refreshingly pleasant human connection.

Decades of research tells us that our private theory in our heads is going to significantly influence the way we interpret the incidents that are unfolding around us. What did you conclude about the demonetization initiative as soon as you heard about it? Did you form an opinion that it was going to help us change as a country, or did you decide upfront that it was going to create trouble? None of us is exempt from the powerful effects of confirmation bias and yet confirmation bias is not the only bias that has been driving our individual and collective sensemaking over the last few days. In fact the effect of this bias has been compounded by two other powerful biases – status quo bias and loss aversion.

Status Quo Bias as the name suggests is the tendency of human beings to hold a preference for the current state of affairs. A large amount of experimental and field evidence has been found in support of the status quo bias from contexts ranging from number driven decision like retirement plans, to subjective decisions like ethical choices. If we become more aware of way this bias is currently influencing our attitude towards the demonetization initiative, we would realise that our brains are wired to lead us against appreciating and supporting this initiative, for the simple reason that it warrants a shift away from the ‘status quo’. To offset the effect of this bias we could consciously choose to give the demonetization effect a greater benefit of doubt (at least in our own minds).

Loss Aversion, the other bias relevant to the demonetization,  refers to the tendency for people to strongly prefer avoiding losses as compared to acquiring gains. One of the implications of loss aversion is that when people frame something as a loss then they process information differently than when they have framed it as a gain. Priming of loss triggers the emotion of fear and fear has the effect of distorting perception and therefore introducing more error into decision making. As Daniel Kahneman, who won the nobel prize for bridging economics and psychology, puts it, – “What actually happens with fear is that probability doesn’t matter very much. That is, once I have raised the possibility that something terrible can happen to your child, even though the possibility is remote, you may find it very difficult to think of anything else.”

With regard to India’s recent demonetization initiative, unless the person in concern has hoarded black money, it is technically neither a gain or a loss. It is just a matter of time before which your currency can be exchanged for the new notes. Unfortunately many people however took the ‘kaagaz ka tugda’ metaphor more literally than it was probably intended and the minute they heard the announcement they mentally construed it as a ‘loss’ related to whatever money they had as cash. Once the mind frames something as a ‘loss’, or even ‘potential loss’, the emotion of fear and panic sets in. These emotions then have the effect of distorting the perception, judgement and decision making processes of the human brain.

In severe cases the emotion of fear or panic can also lead to a phenomenon called Amygdala Hijack. An Amygdala Hijack is defined as a strong, immediate and overwhelming emotional reaction that is out of proportion to the stimulus. This happens because something has triggered a deep emotional threat and therefore the amygdala, which is the part of the brain that handles emotions shuts down the neo-cortex, or ‘thinking brain’ which operates on logic.

In the Demonetization context, what we can do to counter the effects of loss aversion and possible amygdala hijack is to consciously remind ourselves (and others who might be around us) that neither our money nor our lives have been put in threat due to this initiative. The disruption in transactions that we might be experiencing is temporary, and there is nothing to panic about. Once the fear and panic has been brought into our own awareness (and dealt with), then we might actually find that our logical brain starts processing the situation differently.

We cannot and should not underestimate the role that the above psychological biases are playing with regard to our individual attitudes and sensemaking of the demonetization initiative. Further, the effect of these biases are compounded when they occur at a group level, and can escalate exponentially at a societal level. To quote Kahneman again, “We know a lot about the conditions under which groups work well and work poorly. It’s really clear that groups are superior to individuals in recognizing an answer as correct when it comes up. But when everybody in a group is susceptible to similar biases, groups are inferior to individuals, because groups tend to be more extreme than individuals.” This phenomenon is called Group Polarization and has been widely researched in social psychology. Both experimental as well as field data exists in contexts ranging from corporate boardrooms to public policy to social media which show that when members of a group hold similar biases then individuals’ initial attitudes get even more strengthened and intensified after group discussion and/or interaction.

I invite people of India to experiment with examining their own mental frames through which they are making sense of this initiative and the news stories that we are hearing. I invite you to reflect on how these psychological biases might be influencing our understanding and appraisal of the situation and related incidents. I invite you to examine if you are allowing the emotions of fear and panic to override your logical brain in a situation which perhaps might not warrant such panic. Lastly I invite you to consider being willing to be put through some churn and discomfort, for disruption need not necessarily be a bad thing. Could you plant a new garden without clearing out the overgrown weeds that had occupied that space? Would you ask your doctor to refrain from clearing out the pus in an infected wound because the procedure might cause some pain?

I want to conclude with the hope that the next few weeks and months will help us as Indians to discover how resilient we actually are – as individuals and as a society. I hope we use this as an opportunity to forge bonds and connections with our local ‘darshini cashiers’ and ‘subway owners’. I hope we can allow this churn to show us that we as a society are connected by and thrive on more than just money exchanges. I know a friend who withdrew cash in 100 Rs denominations but passed it all on to his cook so that it could go back into circulation. My housemaid’s landlord had told her she could pay her rent next month. I have heard of others as well who are giving and receiving credits and bartering services and exchanges in very creative ways to tide through these uncertain times. Let us carry on this optimism and spirit of ‘jugaad’ in whatever ways we can. Let us not allow this event to break us down, rather let us use this as an opportunity to connect, help and emerge stronger and more resilient than before.



Published by Ramya Ranganathan

My identity is crafted around four Ps - Poetess-Philosopher-Parent-Professor. You can read more about my journey here (http://craftingourlives.com/ramya/)

5 thoughts on “Influence of Cognitive Biases on Individual and Collective Sensemaking Post Demonetization of Indian Currency

  1. Very well written.

    I liked it more (again a confirmation bias ) because i have been putting these two biases (confirmation and loss aversion) as main reasons for difference in opinion on Demonetization in my conversation with friends and colleagues.

    These two biases are too strong and I have witnessed very intelligent individuals taking illogical business decisions due to these biases.

  2. It is indeed a time of stress for people who do not bank that often. The big cities are not impacted as are the small towns and villages where the plastic is only used as carry bags. It is imperative for the government to not let these people suffer. This move will definitely test our social and psychological strength. I am sure this is just the beginning of changing the way out society conducts itself day on day.

  3. A very well written article. My take on monetization is that as a country after independence we as citizens have gone into a “Chalta hai” mode. This move is our wakeup call to come out of our rat holes and be the lions we ought to be and the owners of our Country. I sincerely hope and pray that we become true patriots and truely feel all the sacrifices that people before us have undertaken to bring freedom from foreign oppression. To truely get our ancient way of living that brought forth such great development and thought processes and make our country great as before.

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