NEET or Mutual Funds or Democracy, we must be aware of the tradeoffs betweem risk and reward

If you are an investor in shares or equity mutual funds, there are basically two approaches. One is the safety-first rule, where you spread your risks over a diversified list of shares or funds. In short, don’t put all your eggs in one basket. But if you have a higher risk appetite, there is Andrew Carnegie’s maxim: put all your eggs in one basket, and then watch the basket. The simple takeout is that diversification reduces risk, but also returns. Concentration increases risk, but offers higher rewards.

None of this is about investment alone, but about every individual, state or organisation understanding the tradeoffs between risk and reward. If you are going to take huge risks, you must watch the basket very closely.

Now, coming to the National Eligibility-cum-Entrance Test (NEET), which is the gateway to a course in medicine, the central premise about the concentration of risk in one examination is that the rewards in terms of reduced student stress are high: lakhs of students don’t have to write many entrance exams run by multiple medical colleges or state boards. But if there is a goof-up, as there was this time and in 2024 when exam papers leaked, student stress increased.

The Union government forgot Carnegie’s crucial advice: watch the basket carefully. Despite one snafu in 2024, the exam papers leaked again. The government took its eyes off the ball and failed over two million students. Now, the re-test process scheduled for 21 June is being run like a military operation, complete with sequestering all the paper setters – almost like a budget exercise with huge revenue implications.

There are huge revenue implications here too. The reason why ordinary safeguards don’t work with NEET or IIT-JEE is the huge investments parents, students and coaching classes make in cracking these exams. When so much money is spent on cracking one exam, the rewards from corruption and paper leaks are also huge. Crooks are also willing to take the risks of being caught and facing the law since the rewards are huge. Given the stakes, no government can take chances with ordinary safeguards. Just as the rewards for passing these exams are high, the costs of protecting them from leaks cannot but be high.

The other option is to revert back to multiple exams, which means the risks and rewards are lower for corruption, and even if papers leak, they are limited to one state, or one institution.

Both centre and states must weigh the risks against rewards again.

The risk-reward equation applies to almost every situation in life, including buying a house (as against renting it), giving up a job and starting a business, or choosing between democracy and authoritarianism.

Democracy is preferred by most liberal people because it restricts the possibility of concentration of power, but in return we (often) pay the price of lower efficiency and poorer quality of public services. What democracy does is reduce the downside risks of wrong decisions, or even poor outcomes due to bad luck.

On the other hand, authoritarianism works when the broad decisions made are in the right direction, even though certain freedoms may be lacking.

Singapore did not become a rich country by following western liberal norms. You won’t be packed off to a gulag for criticising the government, but you may be punished in some way under its draconian laws.

In China, none of even Singapore’s restraints apply. But China is a huge economic success because the post-Mao dispensation decided to adopt capitalism with authoritarian features, where the Communist party reigns supreme despite giving citizens a large amount of freedom in the economic sphere.

Once again, the benefits and faults of authoritarianism are clear in China’s case. In its first three decades after the Communists took power, the party was on the wrong track economically, and authoritarianism held China back economically as all policies were devised to destroy entrepreneurship and business initiative. Post-1976, when Deng Xiaoping took over and decided that the same authoritarianism can be used to generate wealth and prosperity by adopting the Singapore and Asian tigers’ model of development, China made itself unbeatable in manufacturing.

India does not have to choose between an authoritarian Chinese model and an incompetent democracy. One way forward is the one-nation-one-election (ONOE) reform which could reduce the constant pandering to election priorities and weakening of reforms. It is time all parties realised that ONOE is not something Narendra Modi is inflicting on the country for his own personal benefit. Even if it benefits him in the short term, he is not going to be there forever. They should agree with some safeguards. This is one way to reduce the risks in running a democracy while not losing out on the rewards of consistent policy-making.

Whether it is mutual funds, NEET, or democracy, there is no ideal system. We have to weigh the risks and rewards and choose the right model for ourselves.