Atrophied Decision Making – A Case of ‘Reverse Moral Hazard’

The other day while having discussions with some friends and colleagues, opinion emerged that, at least in present circumstances, a corrupt official is more beneficial for the ‘system’ as compared to an honest official. ‘After all, a corrupt official has some incentive, however perverse, to take decisions and to act, while an honest official has none.’

This premise throws open some questions worth pondering. The usefulness of rogue and ‘amoral’ elements for the system is a time tested fact. The use of disguised (or at times, known) pirates by the monarchies of Portugal and Spain to search new oceanic trade routes and the deployment of white-collared fraudsters to expand the British Empire in East India are but a few examples where the elements with highly questionable personal integrity have been used to further the cause of the ‘system’; and time has proved that these engagements were immensely beneficial for both the parties – the employer as well as the employed. But the more disturbing aspect of the above mentioned premise is the unwillingness of ‘honest’ officials to take decisions and to act.

Going by the broader definition of honesty (which implies trustworthiness, loyalty, fairness, and sincerity) – any person failing to perform his assigned duties to the best of his abilities is not honest. Thus, indecision and inaction by any official render him unfit of being called ‘honest’ in the true sense of the word. However, in a narrow and better-understood sense, any person who does not ‘mis’-use his official position for personal gains or gratifications is honest; and our current premise is about the rapidly eroding desire among this class of ‘honest’ officials to take the decisions as are expected from them.

I feel that this situation is a variant of the well-known and discussed principle of economic theory – Moral Hazard. In economic theory moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. In other words, it is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others.

But in the scenario being discussed, the situation is reversed. In the prevailing system in government/quasi-government organizations, the cost of erring is too high for any official (if blamed/caught/detected), while there are neither any costs of indecision/inaction nor any personal/professional gains (recognition, praise, career progression, etc) for successful or beneficial decisions and actions. This gives rise to a peculiar situation, which we may call ‘Reverse Moral Hazard’ – which arises because an individual or institution desists from taking decisions/actions, and behaves extra cautiously, for the fear of disproportionately large (personal) negative consequences of those decisions/actions.

The conventional wisdom dictates that errors ought to be divided in two categories – (1) genuine mistakes, which could happen due to misunderstandings of facts or rules/procedures, incomplete knowledge, oversights, or simple bad luck; and (2) deliberate acts of omissions or commissions with mala fide intentions. It is important to distinguish the two, and to take follow-up corrective/punitive action only according to the nature of, and intention behind, the mistake. Unfortunately, the present bureaucratic system treats all errors, including genuine mistakes, as deliberate mala fide acts. In these circumstances, it is explicable that officials behave extra cautiously – which has led to the current atrophy in the decision making process.

The onus to correct the situation lies squarely with the top (policy-making) levels of bureaucracy. If the policies are ambiguous with multiple possible interpretations, any decision taken by the lower rungs of bureaucracy on the basis of those policies will be open to questions. The inevitable aspect of every official decision is that there are always some winners and some losers. If the very basis of a decision is ambiguous – questions are raised; decisions are analyzed, scrutinized, and re-interpreted; and motives are searched for. And if, god forbid, the interpretation of policy as made by the scrutinizing agency is different than the one made by the decision-making official, he (the official) is proclaimed guilty of mala fide intentions. Now it becomes a case of ‘guilty till proven innocent’ – and the burden to prove his innocence lies with the official himself.

Unfortunately, the ultimate loser in this situation is the common man, for whose benefit and welfare the ‘system’ ostensibly exists.