Monday, April 4, 2011

Game Theory in Nepal- Avoiding the Sucker's Bet

When you travel as a tourist or read guide books to any place you travel to the local population is often portrayed in way that people want to believe they are, and not as they truly are. You watch faux cultural dances, observe "traditional"attire that nobody has worn in at least a generation and in much of Asia the western population is presented something akin to a concept of the "noble savage"....though to make it palatable to modern sensitivities the word savage is never used. Still there is often a romanticization of the cultures we observe, an unwillingness to call a spade a spade and often a self conscious form of collective guilt that does not allow us to come out and make statements about another culture due in part to the West's colonial past. I'm going to say something anyway.

Anyone who has spent any time in south Asia knows that business practices here are abysmal. Scamming, bribing, cheating, fraud, etc. are every day occurrences and almost an expected part of any business transaction here. Credit card infiltration is not low in this part of the world because people are unwilling to spend money, it's because no one pays their bills on time, not even the government of Nepal, and there is very little accountability. I always shop at the few fixed price stores when I can because it avoids the hassle of absurdly high prices I get quoted when someone sees the color of my skin, while many merchants are happy to rip off anyone regardless of skin color, they know white people not only have infinite money (clearly) but we also take the suckers bet- we take people at their word.

While many people I've spoken with in Nepal will go on about things being the way they are because it's a poor country and there has been an insurgency these excuses are just that. Nepal's largest obstacle is the populations state of always expecting the person they are interacting with to be a cheat, and thus for everyone to always be looking for the quick buck and not prolonged relationships which net mutual benefits over time. I don't know a single foreigner that has started a business here that didn't at some point get cheated by their Nepali partner (us aside) and ended up dumping them after losing at least a few thousand dollars. Our first lawyer screwed us and then tried to charge super inflated rates, and we dumped him. My point is not that we got cheated and you should feel bad for us, but that the Nepali people in these incidents cheated themselves in the long term.

Sure these people might have made a quick buck by taking the short pay out, but what if they had been fair all along? If our lawyer had been an honest man and charged reasonable rates I'd still be using him, and not only that I'd recommend him to other expats who ask me for visa advice, instead I'm writing this article about him. The businesses that many expats here run are successful and make decent money for Nepal, and instead of being off somewhere scamming someone else (or possibly getting scammed themselves) they could be part of a decent  honest business that makes good money. Aside from robbing someone else in the short term and being a blight on the better part of humanity, they also robbed themselves of future returns and contacts, something that is often much more valuable.

Game theory is something that I first came across while studying biology and its application to social interactions has always interested me. In a game like prisoners dilemma we can see how in a single interaction we can understand why people might defect or cheat. So cheating tourists that you will never interact with again can be seen in this light, although it assumes they don't interact with other people back home that might be future tourists, but that is another topic and more involved than I want to get. When the math changes is when you can expect to interact with the same people over and over again. Let's imagine a game where two people can choose two different options, cheat or cooperate. Now if both people cooperate they get $50 each, if one person cheats and the other person cooperates the cheater gets $100 and the sucker gets nothing, and if they both cheat they give up most of the pot and only come away with $10 each. So what strategy makes the most sense in a game of an indeterminate number of rounds? Like any game the most successful plan depends on what all of those you interact with will do, how successful you are depends on the environment of other strategies. 

In computer tournaments that pitted a number of these strategies against each other one of the most successful was a simple strategy called tit-for-tat. It always opened with a cooperative play, and if the other program cooperated it  continued to do so, in this way racking up large amounts of money for both programs. When ever the opposing program cheated though, it chose to cheat on all future encounters with that program. I think this in generall sums up how we work in the west, we take people at their word and work with them, but if they show themselves to be untrustworthy, we most often discontinue any association with them (unless they're politicians- we love to elect people that have cheated us for years for some reason.) What happens though if a huge portion of the population always opens with a cheat play? Statistically you too should almost always open with a cheat play, to make sure you don't get the suckers pay out.

This unfortunately is the dynamic it seems in Nepal, and it's why many Nepali people see western people trusting and naive, while we find many Nepali business people to be- well less than ideal partners. In the end though always opening with a cheat play assures a short net of gains over the course of any series of games, and that's what life in Nepal is. At some point there needs to be some ways of allowing trust between people, a way to punish fraud further, to make people not so hesitant to open up in trusting cooperative moves, and most of all to drive home the idea that mutual cooperation over the long term is more advantageous than taking one quick pay out. If you have a goose that lays golden eggs you don't slaughter it to get that one egg out of its belly, you let it lay them every week and reap the rewards over the long term. What Nepal could use is a little education in the dynamics of social interaction, and how as a society they are mostly cheating themselves.

Follow Up:
This post has generated some comments with strong feelings, both in part to the nature of the subject matter and what I feel are some misunderstandings in the original intent of the post. Some of the comments can be read below, and some I did not publish as they were not adding to the discussion and calling people names (these responses came from both sides).

So the first thing I want to clarify is that my initial intent in writing this was mostly brought on by my interest in how game theory affects general decision making processes of populations, and how a better understanding of that theory can lead to a change in actions taken to maximize ones long term gains. That is clearly not what most people got out of it, and that's my failure as a writer. Another point that was a mistake on my part is gross generalizations that were not meant in an insulting way, but merely made in a lazy manner so as to not have to go into details about what I consider very obvious. For instance I am not implying in any way that all Nepali people take actions that look for short term gains, but that this strategy is higher than the average across the globe. It would be the same as saying American people are fat. Well clearly not all Americans are fat, and plenty of very fit and athletic people could take offence to this and tell me I'm full of shit by using themselves as an example and they would be correct. That said, statistically American's are fat, our body mass ratio averages much higher than most of the planet, and we clearly have an obesity problem.

Following this train of thought, while people are indeed the same everywhere, certain cultural habits, social expectations, lifestyle choices and government policies concerning food subsidies have created an environment that makes people fatter than average. In the same way I'm simply stating that these same kind of forces have come together to create an environment in Nepal that makes it so that taking short bets it's often perceived as being better than going for the long haul. Some of these factors can be a less than clear or fair legal system, a lack of accountability, and rules and regulations that often force people to work outside the legal system. For instance bribing public officials is commonly accepted as how things work here due to a number of cultural and social influences, while money laundering becomes common because of currency policies that punish people who earn rupees.

 A key point I was trying to make is that when certain strategies become dominant within a population, it has a direct affect on what strategies other people are willing to take- or more importantly which ones are successful. Over time these strategies become ingrained in what people expect, what they are willing to put up with and how things are generally done. Statistically game theory shows that in strategy populations where you can expect people to take the short bet, it's to your advantage to take the same strategy. The problem is that long term this behavior reaps low returns compared to cooperative behavior. While my wording was chosen poorly, my point was simply that having a better understanding this dynamic shows why it's so important to change this dynamic, and why trust is such an important issue in business and financial environments.

Which brings me to the final thing I want to address which was the somehow insinuated idea that I was suggesting that Nepali's need to work with foreigners to make money or progress. This was not something I was saying or even believe. In fact I generally think that most foreign aid is more detrimental than helpful in distorting Nepal's politics and market, but that's another issue. My point was simply that for anyone to invest, foreign or local, there needs to be trust between people. It's not that just foreigners need to be able to trust locals, its that anyone doing business needs to feel that when they make an agreement with people for employment, for a service or a product that they will get what they pay for or are entitled to, or that if they don't get it there is some kind of recourse. Currently Nepal ranked as the most corrupt economy in South Asia, which is quite a spot considering the company they are competing with. This kind of environment makes it hard for people to trust each other, but the cost of not cultivating trusting environments has long term costs that cost the country dearly. 


  1. Good post. I see a very similar dynamic at work with the students I work with. All having grown up in the cut throat world of refugee camps, they invariably open up with a cheater's play. It takes many years of enculturation to adapt this out of them.

  2. People are the same everywhere. I've had a carpenter run off with my deposit in Miami. I know the owners of a restaurant that has been operating for years fleecing tourists near Faneuil Hall in Boston. We've been robbed during our honeymoon in Thailand. I recently learnt of some very innovative petty scams that happen in Delhi. My mother-in-law fell for a pretty interesting scam involving a sublet over craigslist last year. My classmates were groped and pick-pocketed in Paris.

    The difference between the U.S. and Nepal is not the people. It's the fact that (on average) our incomes are lower. That makes it worth the time to scam someone over $5 whereas cheats in developed countries are scheming of ways to scam someone over $500 and up. Stores in the U.S. didn't start having fixed prices to be fair to everyone - they did it because it's more efficient just like big stores in Nepal are finding out (all big grocery stores in KTM like BB and saleways are now fixed price because it wouldn't be feasible to bargain at that scale). And even fixed prices in the U.S. is a mirage - it's an open secret that grocery stores in expensive (and ironically the poorest which usually means Black and Hispatic) parts of the city charge more for the same items. And just recently Best Buy was caught charging people different prices depending on their surfing habits.

    I disagree that Nepalis see western people as trusting and naive. They just know that on average they have more money and don't know the local language and customs which make them easy targets. Which is the problem for tourists anywhere in the world. I'm sorry you find "many Nepali business people to be less than ideal partners" but Nepalis don't need "education in the dynamics of social interaction" nor are westerners geese that lay golden eggs. What Nepal needs is jobs and stability for an extended period to lift up our economy so that Nepalis earning $5/day (the starting salary for college graduates) can earn more and find that it's not worth their time to scam someone over a hundred rupees.

  3. Look, I'm a big believer in the idea that people are the same everywhere, but there are certain cultural habits around the world that create an environment that shapes how people tend to act. I'm not suggesting that this is something genetic, inescapable, or that western people would act different if their home countries had a similar economic environment, all I'm saying is that in an environment with so many people defrauding each other it's difficult to be that person that goes into a cooperative association and puts their assets out on the line.

    While there is no doubt some bad practices in the west, it is simply not the case that this is just a matter of scams scaling to the relative value of money. Even if 5$ is a days wage here and $100 is roughly a days wage back in the west, I can count on one hand the number of times people have tried to scam me out of either amount back in the US. I even somewhat pardon the short scams that are clearly targeting tourists as to some extent that does happen anywhere (though here more than most). What I'm more concerned with is the number of business partners, lawyers, and other people with often repeated interaction that take to these actions. Every single person I have spoken with that owns a business here has gone through this, people that were here 10 years, 26, 15. I've been lucky and aside from our first lawyer haven't had a bad experience beyond small items like pork prices per kilo or taxis.

    This isn't just about westerner's either, I mention it mostly as it's my point of view and that's where my interaction is. But many of the few Nepali run businesses that I have had a chance to talk to the owners or their associates they have run into the same problem of people cheating their own company, negligence, or been screwed by people not paying on goods they delivered or services they rendered.

    I also was not suggesting that it was westerner's who lay the golden eggs but strategies of mutual cooperation with a little bit of trust that recognizes that if multiple people work together over the long term there is a bigger pay out than the one quick cheat. That one quick cheat mentality is in my experience much more common here than it is in most other parts of the world, and it is from that vantage point that I suggest that a little study or schooling in game theory might not hurt. To deny that this mentality isn't more prevalent here would be looking at Nepal through rose colored glasses.

    "What Nepal needs is jobs and stability for an extended period to lift up our economy so that Nepalis earning $5/day (the starting salary for college graduates) can earn more and find that it's not worth their time to scam someone over a hundred rupees." And that was my point, but what you're missing is that as long as their is a tendency to scam the people you are working with those jobs don't get created, those businesses are slower to grow and it stands as an obstacle to an environment that can produce prosperous living standards and higher wages. It's hard to invest capital when there is a lack of trust.

    Finally- this post was inspired by the fact that over the last few weeks I have talked to every person I know that runs a restaurant or business here and asking them about how they got started- and the same story about getting conned by local partners surfaced consistently. Over half a dozen times. It reinforced my own experiences with our lawyer, observing a few other business, and stories we've been told by other people over the course of being here. It's in the way the government expects bribes, the way poor quality items are passed off as even remotely suitable, the fact that some 50% of bottled water is contaminated, etc. These are the result of cutting corners for quick pay outs, and it's a practice that is almost encouraged because there seems to be so little accountability.

  4. Perhaps Nepalis will follow the advice of recently resigned Finance Secretary, Rameshore Khanal and make 2068 the year to end bribery:

    Forgive me if I'm not overly optimistic...

  5. i'm sorry... this write up is so wrong and offensive in so many ways, i dont even know where to begin. akshay was right 'people are the same everywhere.' for as many corrupt people here, there are just as many honest people. you talk to a few business people and decide that we need to be re-educated? yes our scams here might cost a few hundreds or thousands of dollars but your country's scams cost millions and billions of dollars.

    and we do not all make excuses about the state of our country, some of us are actually doing something about it without western investment. i'm so tired of apologising about nepal, yes, things are not always the best here but atleast we dont pretend we are infallible.

  6. I don't think I was saying that there are not honest people here, I was just noting that there is a larger percentage of the population than average that take short bets on situations that if they went in with a longer term vision would come out better. This isn't just a matter of talking to a few business people, this is a clear problem through south Asia. Business practices here aren't known for their honesty and trustworthiness- maybe it's just a perception problem but it's a perception problem that myself and a good chunk of the rest of the world and many Nepali people an business people I've talked to agree with. This isn't about shitting all over Nepal, it's simply looking at what is a widely perceived problem and one that seems especially self destructive considering it not only hurts investment in the country (not just by foreigners but by anyone) but long term hurts the people taking these actions. It's not a matter of re-education, I'm simply suggesting a more insightful look into long term net gains and consequences of action might not hurt. Maybe more accountability, a more clear legal code where the paper matches the reality, maybe it's any number of things, but pretending that there are no problems with what is considered standard business practices here is in my opinion a mistake.

    As for pretending infallibility you may want to see some of my more recent posts ripping on American policies (Sticking our Noses Where We Shouldn't- defends Nepals right to make it's own destiny free of international meddling in light of wiki-leaks docs, and Looking Back at America From a Distance- I end with stating that I'm happy to be here instead of dealing with the absurdity that is American policy and politics) While at the small business level there are few problems with scams and corruption, my countries upper echelon is horribly corrupt and indeed costs the world billions, if not trillions of dollars in short term thinking that will cause for more suffering in the world than Nepal ever will. But this blog is mostly about my impressions of Nepal, not America or the West, so that's what I wrote about.

  7. I added a follow up couple of paragraphs to clarify the points I was trying to make. While I'm sure there will be people who disagree, I wanted to make it clear that I wasn't trying to crap all over Nepal- but I'm also not backing off the intent of the original post, and game theory has an application to understanding why Nepal is in the spot that it is in. The point wasn't to insult people, but to look at what many people think is very clearly a problem that this country faces.


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