Today, the Constitutional Court issues its decision on the Judicial Review of Article 46 Paragraph 3 (c) of Law No. 32/2002 on Broadcasting ("Broadcasting Law") which basically deals on the constitutionality of the provision of a Law that allow cigarettes advertisement in broadcasting media. You can see the complete 306 pages decision here. The constitutional claim was made by among others the National Committee of Child Protection and the Child Protection Agency of West Java.

From my quick reading of the decision, I can conclude that the main target of this claim is to banish all type of cigarettes advertisement in Indonesian broadcasting media by claiming that the above provision of the Broadcasting Law is contravening with Article 28B paragraph (2) (the right of each child to live, grow, and develop, and to earn protection from violence and discrimination), Article 28A (the right of each person to live and maintain its life), Article 28C paragraph (1) (the right of each person to develop himself through satisfaction of basic needs) and Article 28F (the right of each person to communicate and obtain information to develop himself and his society) of the 1945 Constitution.

In its decision (by 5 to 4 vote, which means that it is a very close decision), the Constitutional Court rejects such claim entirely based on the following reasons: (i) cigarettes industry is still a legal and valid industry in Indonesia and therefore has the same right with other industries to promote and make advertisement on its business activities; (ii) there is already a strict regulation on cigarettes advertisement in Indonesia and therefore, if there is a violation to such regulation, such violation must be handled through the mechanism stated by the relevant regulation, i.e. it is not an issue on the constitutionality of the disputed provision, rather an issue on the implementation of a regulation; (iii) it is not clearly evidenced that there is a causality between cigarettes advertisement and the inability of a person to develop himself and his life; and (iv) even if cigarettes advertisement in broadcasting media is deemed unconstitutional and therefore must be banned, it won't affect the ability of the cigarettes company to use other media and mechanism to promote cigarettes and therefore it would not be effective to deemed such provision as unconstitutional and it wouldn't be fair to the cigarettes industry, i.e. why are they being prohibited to advertise in the broadcasting media only?

How about the dissenting opinion? It's quite simple, they discuss the danger of cigarettes and their bad effect to the youth and also the fact that while the advertisement of any other addictive substance is prohibited in the broadcasting media, the advertisement of cigarettes (which could definitely be considered as an addictive substance) is not prohibited as long as the advertisement does not involve any visualization of cigarettes. Therefore, in their opinion, advertisement of the cigarettes in the broadcasting media should be deemed unconstitutional and should be prohibited.

I tend to support the Constitutional Court official decision. However, before I discuss my reasons to support the decision, let me tell you that I'm not a fan of cigarettes, in fact, I hate them. I can't breath normally when cigarettes are all around, they cause bad odors and will definitely ruin your health. I guess everyone knows that, after all each cigarettes advertisement contains a warning on the danger of smoking and its negative effect to human's health.

So why do I support the Constitutional Court decision? Simply because from legal point of view their analysis is correct. If the Government declares that an industry is legal to be established and operated in Indonesia, why prohibit such Industry to develop its business here, including making advertisements through various broadcasting medias? Such advertisement prohibition would be nonsense and it would be better if from the first place the Government banned the entire cigarettes industry in entirety. Further, it is also correct that rather than arguing the constitutionality of the advertisement of cigarettes in broadcasting media, it would be better to focus on enforcing the regulation on cigarettes advertising. You know, there are already many regulations in Indonesia which deal with the danger of cigarettes and the proper advertising mechanism for cigarettes. Why don't we improve these regulations instead?

Though I would love to see the banning of cigarettes in Indonesia, we need to look at a bigger picture here, as long as the benefit of having cigarettes industry in Indonesia is higher than the costs of having such industry, there would never be an end to the Indonesian cigarettes industry. The case becomes more difficult since the benefit of having the industry is easier to calculate, i.e. the amount of Government income from cigarettes duty and levies, the huge income of most of the cigarettes companies, and the amount of worker which are involved in this industry, compared to the costs of having such industry, i.e. bad development for the youth and public health which is very hard to calculate.

If we really want to prevent people from smoking in Indonesia, I would suggest that rather than prohibiting the development of the business which may also negatively affect the whole economy, we should build an industry which can provide the substitution of cigarettes in a more efficient way and can be easily accessed by all people, such as chewing gum or therapic medicines. If the Government really cares with the quality of life of its citizens, it can encourage the development of this cigarettes substitution industry by providing some incentives such as tax cut, subsidy, easier licensing, etc. Of course continuing education for the people on the danger of smoking would be always needed.

We can also use one of the most famous legal principle, i.e. people must be responsible for the externalities of their acts, or in a less complicated way, if you cause loss to other people, you need to be responsible to such loss and pay the damages. To certain extent, this has been reflected in our current regulation on cigarettes, i.e. this industry pays a huge amount of money to the Government in the form of tax and duties in order to run their business. Further discussion can be made on what kind of policy that need to be established in order to implement this principle.

In the end, our goal here is to replace the cigarettes industry through several stages in order to ensure that the transition would be smooth and would not adversely affect our economy. Remember, there are many stakeholders in this industry, and there is no easy answer when dealing with cigarettes industry. Let us hope that we can find a better solution in the future.

Let me start this article by explaining the basic concept of the Negative List. It is a regulation issued by the President of the Republic of Indonesia stipulating the area of business which are opened (with certain requirements) or closed to foreign investment in Indonesia. The main reason for Indonesia in having this Negative List is to close or limit any foreign investments in industries which: (i) are being prohibited in Indonesia, such as gambling; (ii) are being considered as strategic for the interest of Indonesia; and (iii) are being reserved for small to mid scale business players.

In short, except for point (i), the Negative List can be considered as a protection mechanism imposed by the Government of Indonesia. Is it good? I must admit that I'm not a huge supporter of the Negative List, as I don't believe that restriction of ownership would be effective to protect the what so called interest of the people of Indonesia.

Up until today, it is generally assumed that the Negative List is not applicable for publicly listed companies. The Negative List is not quite clear on this issue, but at least Law No. 25/2007 on Capital Investment ("Investment Law") states that the provisions of the Investment Law are not applicable for any indirect or portfolio investments, whereas the majority of Indonesian legal scholars interpret that indirect or portfolio investments refer to investment in the capital market, i.e. in publicly listed companies. Therefore, as a logical consequence of this interpretation, the Negative List (in its capacity as one of the implementing regulations of the Investment Law) should not be applicable to publicly listed companies.

However, recently I've heard a shocking news, i.e. there are some discussions within Government officials that the Negative List will be revised in order to cover publicly listed companies. If such plan is executed, foreign investment limitations will also be applied to publicly listed companies. Clearly, I oppose this plan and my reasons shall be further discussed below.


First of all, how can the Government limits foreign ownership in the shares of publicly listed companies? Those shares are listed on the Indonesia Stock Exchange and are effectively being traded (at least most of them). Some of the most active shares are even being traded by each second. While it is possible to control the sale of shares in an Initial Public Offering, it is almost impossible, if not entirely impossible, for someone to control or limit parties in purchasing the shares of a publicly listed company in the secondary market, unless such purchase is considered as a change of control, i.e. takeover.

Even if it is somehow possible to limit the foreign ownership in the secondary market, any attempt to maintain such limitation would be mostly inefficient since it will require a great monitoring mechanism. Under the current technology, such mechanism would be very costly. You want to supervise all transactions and then impose a system which will limit the purchase of shares by foreigners if certain thresholds have been satisfied? And then you want the monitoring system to operate on per second basis? I say, tough luck.

Second, an attempt to limit foreign investments in the capital market might cause a turbulence within the capital market. I understand that some people might regard this risk as a theoretical risk rather than an actual risk, but I wouldn't be too confident if I were them. Like or not, in most of the time, capital market is driven by fear and greed. Announcing to the public that foreign investment limitations will be applied to publicly listed companies is a very good way to cause unnecessary fear within market players. And believe me, the imaginations are unlimited, foreign investors may think that the market condition is not conducive anymore, some of them will think that their investments will be reduced or they will be forced to divest their shares, etc. In any case, it wouldn't be good for most of the time!

Third, with respect to foreign investments, most Indonesian regulations do not differentiate the ultimate ownership of foreign entities who made investment in Indonesia, i.e. whether the ultimate owners of such foreign entities are truly foreigners or Indonesians. You may be aware that many Indonesian business entities use foreign companies as their investment vehicle in the capital market, which is mainly done for tax purposes.

As a result of the above policy, any investment made by foreign entities in Indonesia will be considered as foreign investments regardless of the ultimate ownership of such entities. Applying this limitation to publicly listed companies would be counterproductive because it may also jeopardize the interest of Indonesians who made their investments through foreign entities.

In addition, as stated above, is having an ownership restriction would be an effective way to protect the interest of the Indonesian people? By all means, capital investment, whether made by foreign or domestic entities should be good for the development. If we want to have the full benefit of such investment, forget about the ownership, or at least put it as the last issue to be considered. The most important issue that we need to achieve through foreign investments is how we can actually "force" those foreign investors to transfer their knowledge to their Indonesian counterparts and how these foreign investments will contribute to the greater good of the society, i.e. creating job opportunities and establishing infrastructure for stronger industry in Indonesia. Shares ownership would be useless if the Indonesian counterparts are not capable to conduct the business as they will end up as puppets of the foreign investors. Surely, this is not something that we want.

Now, if the Government insists that this new regulation will be applied, I will suggest that: (i) the limitation will only be applied to publicly listed companies established after the enactment of such regulation, so all publicly listed companies prior to the enactment will be exempted and their shares are free from any foreign ownership limitations; (ii) the limitation (if any) should only be applied to foreign investors who clearly control the relevant publicly listed companies (under the current Bapepam-LK regulation, a party will be deemed as a controller of a publicly listed company if it owns at least 50% of the shares of such company).

My advice to the Government, stop trying to make politically correct acts, you won the election with a considerable support from the voters, so please focus on making the best policy available rather than trying to look like a populist government which is a shame.

Here is a long and nice article on the current macroeconomics issue by Paul Krugman. I must admit that I share the same view for some of his thoughts, particularly with respect to the misuse of economic models to explain the world and the argument that the market is perfectly efficient and can always maintain that condition. For further discussion, you can see my post here on the issues of Capitalism. To cut it short, I never believe that someone can explain how the market works through some sophisticated mathematical equations and models. Of course you need to make some calculation in economics, but don't expect that everything will work perfectly in accordance with the calculation, there are too many factors which are affecting the economics performance. Now, let us move to today's main theme. What exactly is Ketchup Economics? According to Mr. Krugman, this is related to the assets valuation method use by finance economists in determining whether asset prices are reasonable, i.e. they don't ask whether asset prices made sense because of its real-world fundamentals like earnings, but whether asset prices made sense given other asset prices. Using Larry Summers' parable, the simplified version would be as follows: The "ketchup economists" have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup, therefore they conclude from this fact that the ketchup market is perfectly efficient. Got the message? Using the Ketchup Economists logic of thinking, the fact that the prices of certain assets are going considerably up or down in certain periods should not be questioned as long as the prices of other similar assets are going up or down together. Without a doubt, this is dangerous. But how can we blame them for making this kind of assessment? If we take the assumption that the market is truly efficient, it is useless to make a price valuation based on the fundamental aspects of the assets, since it is the market force, the supply and demand mechanism, that will determine the exact value of those assets. Let me clarify first, while I do believe the concept of Invisible Hand, i.e. the best way to let the economy moves is by letting the force of supply and demand works automatically, I also believe that the market is not always efficient, there would always be a case where the amount of the supply or demand is too high or too low. There are many factors that can affect such amount of supply and demand, and I can assure you that not all of those reasons were made on a reasonable basis. Sometimes people are being in a state of high optimism and are willing to take more risks and then the economy moves forward, in other times people are being too pessimistic and then we're going through a recession. Then, what could be done? To be honest, I don't know yet. Many professional economists have tried to solve the problem, but no one has ever succeeded, so I don't think that I can provide the perfect solution. However, since most victims of the current crisis are major financial institutions, I would suggest that a better supervision mechanism should be implemented by the Government in the near future. We would also need certain regulations that will encourage financial institutions to have a better assessment on their business and investment risks and to ensure that they can always maintain a prudent approach with their risk management. I was quite surprised with the collapse of some major financial institutions back in 2008, it is just ridiculous that from all the possible companies to collapse, those who should actually be the most prudent companies are the ones who were proven not prudent and therefore collapsed firstly. In addition, since most of the major financial institutions are relying on rating companies in determining their risk of investment, it would also be helpful if the Government can start to have a meaningful discussion with major rating companies concerning their rating standards in order to create a better and more prudent rating mechanism. Further elaboration on this idea will surely be needed in the future.

I'm quite shocked with this piece of letter, especially because it was published in the New York Times. What's wrong with being a highly paid lawyer? Is it that bad to work as a lawyer in the United States? How come the shortage of job with high salaries is good for the development of law graduates? And, the most important question is, how on earth can someone made a claim like this: "as the jobs with large salaries disappear, law students will draw on the thoughtfulness, intelligence and perseverance that got them into law school in the first place in order to find employment that they actually find rewarding."

Is he trying to say that having a career as a lawyer would cause law graduates to lose their thoughtfulness, intelligence and perseverance??? Pardon me sir, but among many types of career that can be pursued by a law graduate, I find that being a lawyer provides the biggest opportunity for a law graduate to maintain and increase their thoughtfulness, intelligence and perseverance. It goes without saying that a good lawyer must combine all of those three qualities in order to survive in their job.

Any law firm who truly cares about the quality of their work and talents would be most probably establish a system which will ensure that all of their lawyers are able to maintain those three qualities. These include proper distribution of work, work review mechanism, and systematic training program. Why I believe that those three qualities will be maintained and increased by becoming a lawyer? See some examples below:

• If you want to train a lawyer's perseverance, throw him into a very boring due diligence exercise. It's very important, but everyone knows that it's an administrative paper work. Those who can survive the hellish due diligence exercise will not doubt have a perseverance of a true knight.
  
  
• If you want to train a lawyer's thoughtfulness, throw him into various negotiation meetings with clients and their counter parts. The first experience will always be scary, but it will definitely train his ability to think and act carefully, as he will have to respond to on-the-spot questions and he will need to understand his clients needs and translate those needs into commercially acceptable legal terms. He will also learn to act in a professional manner all the time to ensure that he can gain trust from both sides.
  
  
• If you want to train a lawyer's intelligence, throw him into structuring a complex transaction or make him do some advisory works. That would done the job easily.

And come on, how can someone says that having a job with less salary is good? No sir, that's not good at all. You ask people to be happy with less salary? You're saying that dreaming a career in a big paid law firm is not worthy to be pursued? My suggestion, if you want to cheer up these poor law graduates about their prospective careers, find a better reason next time.

In my post dated 26 August 2009, we have discussed the basic concepts of Libertarian Paternalism, introduction to better policy making, and examples of human errors with respect to daily economic activities. Today, we will discuss some useful guidelines in making better policies and how to implement such guidelines in actual life.

The Six Guidelines of Better Policy Making

According to Thaler and Sunstein, there are 6 basic guidelines for better policy making:

Each will be further discussed below:


1. Expect Error

I guess this is the first guideline to be considered by policy makers. Since most men make mistakes, a good policy will consider such fact and will ensure that the mistakes can be fixed in the easiest way.

What is the actual implication of this guideline? While governments or private institutions can try their best to design a good policy, they must be aware on the possible failures due to human errors and must ensure that the system will be able to sustain and fix such problem. There are many examples for this problem, but let me show a very interesting case as provided by Thaler and Sunstein, that is the case of birth control pills. Some of you might be aware that in one month, most women will take birth control pills for about three consecutive weeks and then stop for one week (due to the menstruation period). Many women have difficulties to adopt to this system and some of them may forget to take their pills in accordance with the required schedule. So what the companies do with this condition? They provide 28 pills in 28 containers, each having a specific number from 1 to 28. However, pills in containers no. 22 till 28 are only placebos made for the sake of compliance by human users, and thus they don't have any effect whatsoever. Interesting isn't it?

2. Default
The "Default" guideline is made due to the fact that most people will take the options which require the least effort, or in other word, people would instinctively take the easiest route in doing something (seems familiar?). In our daily life, the "Default" option represents an option that, if the chooser does not do anything, will cause most people to end with such option, whether the option itself is good or bad. The case will be stronger if there is any suggestion (explicit or implicit) on such "Default" option, i.e. people will most likely take such option without much hesitation.

In reality, we can't avoid this "Default" problem. Governments and private options in many cases need to provide "Default" option, such as the default choice of menu in a fine-dining restaurant or the default choice for investment policies in your pension funds. Now, since the "Default" option is very powerful, it would be best to ensure that any "Default" option is made for the benefit of the people. How can we do this?

There are two possible ways. First, we can design that each "Default" option requires an active approval from the relevant user. This means that a "Default" option will only be applied once it has been approved by the user. However, in several cases, some people ended up with having no benefit simply because they are too lazy to activate their own "Default" option.

The other way is to design the best possible policy that can be made by the government or private institutions and then such policy will be made as the default option, whereas any people who don't agree with such option will always be free to opt out. Take as an example your computer's download system. All major software company requires the user to actively choose whether they want to download a file or not for each downloading session as a default option, instead of the automatic downloading system. Why? Simply because downloading a file automatically might be dangerous (e.g. causing computer virus attack) and you'll need to properly asses such risk whenever you are trying to download a file. Simple, but important. And in each case, you can always change the setting (of course, if your administrator permits you to do that).

3. Understand Mapping
The third guideline deals with the fact that most people will have some difficulties when they are facing complex choices. A good policy will provide some mapping mechanism to its users, enable them to review the possible options in an easier manner and will allow them to choose the best option for them. In other words, we're talking about better disclosure to the public.

Now, let me ask you some simple questions, do you really understand the actual costs for using your credit card ? Or how to calculate your telephone bills? I bet that most of us wouldn't even know.

That's why we need a regulation which would require companies to have better disclosure system. The implementation of the "Understand Mapping" guideline should be cheap and will maintain the basic freedom of choice for consumers. It would also be good for the business because it can increase fair competition without having to use excessive litigation method (such as the use of Anti Monopoly and Unfair Competition Commission) or forced price control.

As an example, let us see the telecommunication industry. Imagine that the Government now requires each telecommunication provider to provide all relevant information related to the costs of their services and to provide a simple costs comparison with other providers. The information should also be easy to be obtained by all consumer. With this kind of policy, we would have a better understanding on the actual costs for using telecommunication services and can easily spot the best provider which would satisfy our needs. Each telecommunication company will also have better incentives to increase their business efficiency and to optimize their services due to this information disclosure system. Wouldn't that be nice?

4. Give Feedback
It goes without saying that a good policy will be able to provide a feedback to the user, whether they have done well, or were actually making mistakes. A nice example provided by Thaler and Sunstein is our internal computer system that warns us before our computer battery completely runs out.

Based on this guideline, I also have an idea where there is an integrated system to supervise the use of credit cards by each person. We know that each credit card has its own limit. However, in many cases, rather than acting as a limiter for people in using credit cards, such limit encourages people to spend their credit cards up to its maximum limit, and in some other cases, people tend to obtain many credit cards to increase their total credit cards limit. All of these are totally wrong.

Now, by using this integrated system, the banks would know how many credit cards are owned by a person, including each of their limits. Whenever certain amount of the combination of the limits have been reached (which should be in accordance with the credit worthiness of the user), all of the credit cards wouldn't be available for use. We have this supervision system for banking loan and credits application, why not for credit cards? We can help many people by using this kind of system. Remember, having many credit cards doesn't mean that you're becoming richer.

5. Structure Complex Choices
Actually, this guideline is deeply related to Guideline no. 3. When people are facing complex choices, they tend to simplify the choice. That's why a good policy maker will structure its policies to be easily understood and choosed by the user. One of the most useful methods that is being widely used is the "Collaborative Filtering."

Don't be afraid with the name, since it's basically a public review system and the internet really helps the development of this method. As an example, when you want to buy a law textbook and you have many choices but don't have enough time to read all of the available books, what would you do? You'll ask other people's opinion right? In the world wide web, you can simply search the title using Goggle or Yahoo and then you can see whether any people have made a review on such book. It is easy, cheap, and in most cases would be helpful for us in making an efficient decision.

6. Incentives
This is my favorite guideline and has been discussed various times in my other posts. It's very simple, people respond to incentives, they actually calculate the costs and benefits of everything, though maybe not as complex as a professional would be. Therefore, a good policy should always calculate the best incentive to be used in order to make such policy can be effectively applied.

Some legal scholars claim that currently most regulations are no longer effective to bind the people and therefore they are questioning the efficacy of the law itself. If only these people understand the basic nature of men, they would not say such a thing. You can't expect people to follow the law if you don't provide a suitable incentives for them. If you think that people will act according to a law only because of morality or religious reasons, I suggest that you need to reevaluate again your idea, or I'm afraid you will be frustrated.

I wouldn't provide any examples for this guideline as I believe you have seen many in my previous posts and I assure you that you will see more in my future posts.
Concluding Remarks

I hope this article can enlighten you on how the government and private institutions should design a policy which would maximize the benefit for the people without minimum cost to the people's freedom of choice. I personally agree with most of this Libertarian Paternalism movement, but I need to put some qualification here. What matter most to me is finding the most effective policy in improving people's live, so when the circumstances show that preserving free choice would not be efficient, some other methods would be needed. This is especially relevant when we're dealing with major criminal acts, such as terrorism, money laundering, and corruption. Of course it would be really nice to reduce these criminal acts by using positive incentives, but don't put too much faith on that.

All right, this is indeed a hilarious post from Greg Mankiw. The statistics show that children from higher income families are getting higher average SAT scores, and some people claim that there is a correlation between income and better result of tests. However, Mr. Mankiw theorizes that the correlation is not on the income rate, but on the fact that smart people are making more money and these people pass their genes to their children, thus smart children comes from smart parents not from rich parents. Okay, I'm not a professional statistician, but when dealing with statistics, I always remember what David Hume, a Scottish philosopher, has taught us on making a conclusion from our experience: just because in your experience an act is always followed by the second act does not mean that there is a causality between the first act and second act.

In Nassim Nicholas Taleb's wisdom (taken from his book "Fooled by Randomness"): "no amounts of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion." If translated: even after going through 1,000 successfull experiments, you will never be able to claim that a hypothesis is correct with 100% degree of certainty, but it will only need one failed experiment to reject such hypothesis. I agree with both of Hume and Taleb.

Previously, I have made some hypotheses with certain logical reasoning in my blog. Will it always be correct? Of course not! Situation and condition may change or maybe I haven't considered all of the relevant issues and facts, or maybe there is a fallacy within my seemingly fine argument. Mr. Mankiw is correct in saying that the ones who conclude that there is a relationship between family income and better test results might be wrong, but I also dare to say that his conclusion might not be correct either. Are there any relationship between smart people and their incomes, i.e. the smarter you are, the higher your income? I don't know, though I do know some rich stupid people and some poor to average smart people. Further, how many data should we collect before we can make such conclusion? Again, I don't know. My advice is simple, be very careful when we are dealing with statistics as people can always make different conclusions and interpretations from such statistics. When you think that a correlation between facts exists based on a result of a statistic, you better think it through again.

Yes, according to Lucian Bebchuck, a law professor from Harvard Law School. A guaranteed bonus may, to certain extent, create distortion in determining the business risk of a company. By having the benefit to receive a guaranteed bonus no matter what the performance of the company, there would be a considerable pressure for the management to meet the company's business target or even exceed such target. As a result of this, the management may take unnecessary risks in doing the business just for the sake of getting better performance. We need to understand that in some cases, riskier business decisions may provide higher results, but they may also cause greater losses. When the results are losses, who would be the largest victim? The Company and also the shareholders.

Further, Prof. Bebchuk theorizes that if the bonuses of the management were distributed based on the overall performance of the company, say after reaching a minimum amount of annual profit, the management will have better consideration in doing the business, i.e. they would only take the risks if the odd of getting the intended performance are higher than the odd of getting a lower results. Why? Since the management bonuses are now tied to the performance of the company, it would be dangerous for them to take too much risks because if the results are bad, they will also lose their bonuses. As a result, they would play safer.

Again, this shows how incentives work in our life. I would love to see how this will be implemented in Indonesian regulations. While I absolutely don't agree if the regulator is trying to limit the amount of benefits that can be obtained by the management, a policy on how to structure the best benefit package should be okay, provided that companies can freely choose to adopt such policy or not (as will be determined by the shareholders and, if possible, an independent remuneration committee).

To certain extent, the answer would be yes. Why? See here (it is in Indonesian language, but no worries, we will only discuss one article and I'll provide the translation below). On 9 July 2009, the Indonesian Government issued Law No. 24/2009 on the Flag, the Language, the National Emblem, and the National Anthem. The title says it all, so I don't expect to provide a summary of this Law in my blog. While I don't see the necessity to have this kind of regulation, I can understand that the Government is trying to increase Indonesia's profile, particularly the use of Indonesian language.

Now, onward with the main theme for today, I have some concerns with the application of Article 31 Paragraph (1) of this Law, which states (unofficially translated):

"The Indonesian Language must be used in any memorandum of understanding or agreements which involve state institutions, Indonesian government agencies, Indonesian private institutions, and Indonesian individuals"

This is a provision that I would call as inefficient and unreasonable. Why oblige parties to use Indonesian language in their contracts? There are many reasons for Indonesian companies to use foreign languages (notably English) for their contracts with another Indonesian parties, such as: (i) the relevant Indonesian company has several foreign creditors and therefore most of its contracts were made in English so it would be easier for its creditors to review such contracts (if necessary); or (ii) the relevant Indonesian company usually enters into contracts with foreign parties and therefore its standard contracts were mostly made in English. We need to understand that the costs for drafting Indonesian version of the contracts are not always cheap, so I'm asking once again, why force them to use Indonesian language and penalize them with unnecessary costs? If the parties need to use Indonesian language for the best interest of both parties, they would do so without having to be forced by this Law. Having this kind of provision is indeed an exaggeration.

In addition, forcing Indonesian parties to draft all of their agreements in Indonesian language may cause unnecessary risk (due to its ambiguity), i.e. Indonesian parties with bad faith (of course, supported by their lawyers) may claim that contracts made with another Indonesian parties are invalid and should be annulled by operation of law simply because such contracts were not made in Indonesian language. That would be horrendous! What should be considered as an administrative breach can now be deemed as a major breach of law which could cause a contract to be annulled, all because of an ambiguous provision which shouldn't even exist in the first place.

Of course as a lawyer, I would love this provision since it will create additional job for lawyers, i.e. translating standard English contracts into Indonesian language. Sure it's a boring stuff, but it can generate some nice incomes :).

A Libertarian Paternalist is someone who believes in Libertarian Paternalism, but since I'm guessing that most people wouldn't even know the definition of Libertarian Paternalism, you can check the definition here. So, why are we discussing this issue?

I have just finished reading a book titled "Nudge," and a very interesting book it is. Made by Richard Thaler and Cass Sunstein (Professors of economics and law at the University of Chicago, respectively) this book introduces the movement of Libertarian Paternalism, a movement that supports governments and private institutions to adopt policies which can maintain or maximize people's free of choice while in the other hand influence those people to improve their life and important decisions, such as wealth, health, and happiness. The basic reasoning is quite logic, people make errors most all the time and in reality, there is no such a neutral design in making a policy, so why don't we maximize the possible choices for the people, design the most possible best options, encourage people to take the best options, but ultimately let them also be free to take their own actions with regard to the choice alternatives?

The book also offers several forms of incentives and methods that can be used by governments and private institutions to improve people's life in accordance with the Libertarian Paternalism movement. For someone who are trying to find how to structure the best policy or regulation for certain issues in this life, I find that this idea is enlightening.

Human = Error?

I have to admit that the idea that common people tend to err on a regular basis is quite disturbing. However, there are too many supporting facts on this issue that would prevent us from declaring the idea to be baseless. See this site for additional insights on human errors, especially with respect to daily economic activities (by the way, Dan Ariely's book, Predictably Irrational, is also highly recommended).

While I believe that men are rational beings, i.e. able to think rationally and make decisions on a reasonable basis, I can't deny the fact that our decisions are subject to various internal and external factors, and these factors may take a dominant position, even more dominant than our own rationality. Let us face it, how many times did we make a decision based on a cool and wise demeanor? I bet that most of us will answer: seldom. In most cases, decisions are being made by our impulsive side, the automatic system in our mind which is very vulnerable to biases and blunders. Not to mention our weak self control, overconfidence, excessive ignorance, and tendency to follow the herd (i.e. going with the trend without too much thought). All of these factors may negatively affect our ability to make a better choice in our life.

See some of these interesting examples:

1. On Procrastinating
Procrastinating is always be a big problem for most of the people. You might be familiar with these statements: "I'll save money as soon as possible," "damn, I'm getting fat, I should exercise tomorrow," or "well what do you know, the deadline for the paper is still three months, I guess I'll take a break for a week and finish it later." Yes, most of us procrastinate, including myself. But how come? Aren't people aware on the danger of being obese, or retiring from a job without any saving? Then why people still procrastinate? Is it due to irrationality or an overconfidence or simply an inability to grasp the actual risks associated with our actions?

Have you ever think why some governments issue mandatory pension plan for their citizen, where the citizen is forced to put some of their salaries to their pension account? I dare to say that this is one of the reasons.

Having a mandatory pension plan is a positive nudge, although of course how we should structure such plan to reach the maximum results is another case to be discussed. By having a mandatory pension plan which automatically enrolls worker to some form of pension funds, the government may save people from being poor after their retirement due to low saving. True that the pension plan can go bust, but the risk is smaller than letting people not having any pension plan.

2. On the Ownership Bias
Several researches made by Thaler & Sunstein and Dan Ariely reveal that people are having difficulties in determining the value of certain goods due to the ownership problem. Those who possess an asset tend to value their asset higher than those who don't posses such asset, and the discrepancy of the value can be very, very huge. In one of Thaler & Sunstein experiments, participants are being given a mug or a chocolate bar having the same price. Half got the mug and the other half got the chocolate. Interestingly, when they are being asked to trade their mug with the chocolate and vice versa, only 10% of the participants are willing to trade. Why?

In another case, Dan Ariely made an experiment using college students where some of them successfully obtained a ticket for a really famous university basket ball final competition and the others failed to do so. These tickets are very hard to obtain, and most students must spend their nights in tents just to have an opportunity to get lotteries for getting the tickets. Yes, lotteries! Even after spending two days in tent, they still need to push their luck to get those tickets. However, despite the difficulties in getting those tickets, there were many students who participated in getting the tickets.

After the tickets distribution, Dan contacted students from both sides to find out how much they value their tickets, and he found a very amazing result. In general, those who failed to obtain such tickets were only willing to pay max US$170 for buying one ticket, whereas those who obtained such tickets were only willing to sell their ticket for a minimum of US$2,400 per ticket. This is amazing, especially when we considering the fact that before the distribution of the tickets, almost all students were very eager to obtain the ticket.

So, what is the effect of this ownership bias? Because people tend to value their owned goods higher and hates losses for whatever they cost, they would be more likely stick with their current holdings, even when such condition is not always better. In a more complex way, the ownership bias can be used to lure consumer toward what Dan Ariely calls the "virtual ownership," i.e. making people think that they have ownership over an asset in order to increase the opportunity of such people to purchase the assets with a higher value. One example is where your cable TV operator provide you with a "gold package" limited trial period with a discount. after certain period of having a standard package. When you try it for the first time, most of you would probably think that if you don't like it, you can always back to the standard package, or say, downgrade it a little to the "silver package." But in reality, most people tend to just stay with the gold package after the limited period expire even though the price has become more expensive. Why? Because people hate to lose the facility that they have obtained previously.

Ask yourself, it's hard to downgrade your quality of life right? As long as you have sufficient funds, you would most likely try to maintain your quality of life, even if it is getting more and more expensive, rather than to cut some expenses and save more money from the cutting. So don't be confused when some people claim that the richer you are, the bigger your expenses will be.

3. On Free Items Bias
Other experiment made by Dan Ariely shows our fragile way of thought when we are dealing with free items. The experiment was done in a halloween day where Dan gave chocolates and candies to kids wearing costumes. At first, he would give these kids three small Hershey candies and then give them 2 options, i.e. (i) if they are willing to give him back one candy, they'll get a small Snickers chocolate bar; or (ii) if they are willing to give him back two candies, they'll get a big Snickers chocolate bar (twice the size of the small Snickers). The Hershey candy itself only worth 1/10 of the big Snickers.

In the first experiment, almost all children successfully pick option No. 2. However, in the second stage of the experiment, Dan change the condition, i.e. (i) they'll get a small Snickers chocolate bar for free without having to give any of their Hershey candy; or (ii) if they are willing to give him back two candies, they'll get a big Snickers chocolate bar. Interestingly, now most children take the first option which, if viewed by a rational man, should be considered as a very bad choice. Again, how come? It is also interesting that Dan repeated a similar test to other people, including college students, only to find similar results! Seems that there isn't much development in human behavior when we're dealing with this kind of issue as children and adults encounter similar results.

It doesn't take a genius to understand that the free item bias have been used many times for business marketing purposes. Try to think of some, and you'll soon realize it. Next time, when you go to a sale, try to compare, would it be better to have a 50% discount or a buy one get one benefit? Or, what is better, having a 30% discount or a buy 2 get 1 benefit? When you're getting this question, you will start to think carefully in determining the best option. But, if people are not thinking it through, I dare to say that most people will take the buy one get one or buy two get one benefit.

Rational Imperfect Beings and The Need to Design Better Policy
We have discussed above some examples of the great ability of men in making errors in daily life. But let us don't forget that men is able to think rationally, men respond to incentives and information. We might be imperfect beings, but it doesn't mean that we are completely irrational. If the government or private institutions can design a better policy which will encourage people to really think deeply about their life and decisions, wouldn't that be very good?

What are the criteria for designing a good policy? You'll have to wait the second part of my post. So please be patient on that :).