Behavioral economics serves as centerpiece of World Bank report, demonstrates potential

Much of the insight available on behavioral economics comes from studies of "privileged folk," but the findings apply with greater force to the poor, according to The Economist. Behavioural economics has profound implications for development, and the discipline is considered in the World Bank's "World Development Report." The report shows the poor are more likely than other people to make bad economic decisions, not stemming from irrational or foolish behavior, but because of circumstances.

The poor are more likely to lack the basic information needed to make good choices, such as which fertilizer to use or when to apply it, and they are more likely to live in societies that hold mistaken or harmful views, such as that girls should not go to school. While conventional thinking assumes the poor will want to earn their way out of poverty, studies from countries as different as Ethiopia and France show that poverty makes people feel powerless and dulls their aspirations so they might not try to escape poverty. Stress presents further challenges for the poor, as does the lack of institutional frameworks of education and pension systems that are present in the West.

While traditional development programs stress resources and markets, a behavioral approach to development is different. Instead of focusing on giving resources and developing markets, it focuses on how decisions are made and how they can be improved. Subtle shifts, like changing the timing of payment for a conditional-cash transfer program in Bagota to just before the start of the school year, or programming that taught Jamaican mothers to play with chronically malnourished toddlers (with no other invigilation), saw significant impacts: school enrollments were up sharply, and twenty years after the play program, the average earnings of these children (among the most deprived in the country) were higher than those of children who had not been malnourished, and far higher than malnourished children who were not part of the program.

The Poverty Action Lab at the Massachusetts Institute of Technology has championed randomized control trials to test tweaks to policy, and with this serving as the central issue for the World Bank's main publication, the Bank has brought behavioural economics into the mainstream of development.

Image source: The Economist

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