How behavioral economics can help change the fight against poverty
“So what if we created savings products that had the disciplinary features of debt? This is the challenge that policymakers, donors, and foundations will have to wrestle with.”
Introduction (Via Seed Magazine)
All too often, the choices of the poor are viewed as a result of either some intrinsic failing (“they’re just very myopic people”) or some deep psychological feature of poverty (“they’re desperate”). Behavioral economics — the integration of psychological insights into economic analysis — offers a third interpretation: All of us face difficulties in making the right choices; the poor are just asked to do it more often and in tougher circumstances.
This perspective will eventually alter the way we fight poverty. It should affect the way in which governments in developing countries set their policies, donor agencies like the World Bank provide aid, and foundations and others give support. In much the same way that the move toward market-oriented policies transformed policymaking, I think a psychologically richer view of poverty will transform both how we understand and how we deal with poverty. As a behavioral economist, I am optimistic that this influence will be for the positive.
An Example (Via Seed Magazine)
Let me illustrate the behavioral economics view through one specific type of behavior: shortsightedness. Among the poor this could include everything from inadequate savings, high-interestrate borrowing (such as through payday loans), or even lack of adherence to lifesaving medications. These problematic behaviors, though, are not so different from the shortsighted decisions and lack of self-control of which we all are guilty.
Please imagine the following scenario. It is Friday afternoon and you are thinking about the slow weekend ahead of you. This, you decide, is the weekend you’ll get your various taxpreparation documents in order. Your returns are due in a few weeks, and you don’t want to be stuck doing taxes in a panic at the last minute, like last year. But as the weekend unfolds, somehow these good motives yield to a Saturday full of little chores and distractions and a Sunday spent relaxing in front of the television. Before you know it, it’s Sunday evening, at which point you decide next weekend is the weekend for doing taxes.
Findings (Via Seed Magazine)
Under the behavioral economics view, choices that have consequences over time are different. Looking into the future (“what will I do tomorrow”), individuals may do the same costbenefit calculation as in the traditional view. The difference (and the problem) arises when the future arrives. In the moment of action, individuals can weigh the present far more heavily than they do when contemplating the future. Sitting on the couch and watching TV does not seem very attractive when thinking about tomorrow, but in the moment it is a particularly attractive option. This means that even if individuals would like to behave as the traditional economics view would suggest, they find it difficult to do so. The patient me looking into the future wishes I would do one thing — my taxes this weekend — while the deciding me in the present does another thing — watches TV. This inconsistency is the core difference between the traditional and behavioral views: People can want one thing and do another. A variety of behavioral studies have shown this, by offering hypothetical choices, crafting real choices in lab settings, observing actual choices in natural settings, or more recently in MRI scans of the brain, while subjects made choices with consequences over time. This inconsistency means not just broken plans but a very basic recognition that when we choose we may not always choose what is best for us.