Human Behavior for Economic Development

There are three general sections in the part of the report, each covering a different aspect of the proposed framework for understanding the recent findings in human decision making.

1. Thinking Automatically

Anyone who is has read or is familiar with Danny Kahneman’s book “Thinking Fast and Slow” will immediately understand this point. Human brains have two systems (a deliberative system and a automatic system). Kahneman calls these system 1, which is fast, instinctive, and emotional; and system 2 which is slower, more calculative, and logical. The deliberative system thinks it’s the star of the show, but it is really simply a supporting actor, as the automatic system is responsible for most decision humans make.

Some of you may be thinking right now, “Umm no kidding, why is this just catching on in policy, development, and economics now?” Surely, the idea of automatic thinking is not new. What is new are the implications:

  • Framing: For example, assume 600 people are affected with a deadly disease. There are two proposed treatments, each can be presented in a positive or negative frame. Positive: Treatment A “Saves 200 lives” and Treatment B “Has a 33% chance of saving all 600 people, and a 66% possibility of saving no one”. Negative: Treatment A “400 people will die” and Treatment B “Has a 33% chance no one will die, and a 66% possibility that all 600 will die”. Which do you favor in each framing? Treatment A was choses 72% of the time under the positive framing, while under the negative framing, it was only chosen 22% of the time.
  • Confirmation Bias: People fail to recognize that they do not know what they claim to know, and they may fail to learn from new information. For example: I’ve spent considerable time (in Ghana and Kenya) working with entrepreneurship training programs. Often times on the pre-test class attendees report accounting, marketing, and management skills at a 4 out of 5 level. These are the people who actually came to class, mind you. In my eyes the class is “successful” if the attendee reports accounting, marketing, and management skills at a lower level than before the test. This is contrary to the way one may expect success to be interpreted from a pre-post evaluation.
  • Anchoring: Sometimes the last thing to come to mind has a disproportionate influence on decision making. For example a group of Judges and experienced lawyers were given a case to read. At the end they were to asked how long of a jail sentence they would prescribe. Before they made their decision, however, a dice was rolled which was rigged to land on either 3 or 9. Those who saw a 3 prescribed shorter sentences than those who saw a 9.
  • Loss Aversion: People hate losses more than we like gains. For example: instead of giving teachers a performance bonus at the end of the year, one school in Chicago gave the bonus at the beginning of the year and told teachers they would loose the bonus if their performance did not reach a certain threshold.

So why is this so interesting? Perhaps those in the loan industry should simplify their loan products, making it clear the implications of taking the loan. Thinking about confirmation bias and overconfidence is instructive when a poor farmer in a rural area is calculating the risk of taking a loan. Perhaps careful thought should be included in what we set our defaults to be. Humans often are biased toward the default, meaning even if the default isn’t what we want, we often choose it anyway. This has implications into how we frame organ donations, retirement funds, college admissions, and many many other areas of policy.

If you are interested in the “so what” of automatic thinking, I highly recommend, “Nudge” by Richard Thaler and Cass Sunstein.

2. Thinking Socially

Humans are deeply social beings. Our beliefs, desires, and behaviors are affected by social preferences, our relationships, and the social contexts in which we live and make decisions. “Humans are not purely selfish and wealth-maximizing actors, we value reciprocity and fairness, we are willing to cooperate in the attainment of shared goals, and we have a tendency to develop and adhere to common understandings and rules of behavior”.

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A key consequence of sociality for development is that groups and even entire societies can get stuck in collective patterns of behavior–such as corruption, segregation, and civil war–that arguably serve the interests of no one. Yet by the same token, temporary interventions can have large and lasting positive effects on the community by shifting a pattern of social interactions from one suboptimal self-reinforcing arrangement (or “equilibrium”) to another arrangement that better promotes well-being and becomes self-sustaining. Sociality is also a lever for new types of development interventions that harness the tendencies of individuals to seek social status, to build and maintain social identities, and to cooperate with others under certain conditions.

I spent the end of 2013 and the beginning of 2014 working and researching in Western Kenya. A colleague of mine had an idea to improve the way entrepreneurship interventions are run worldwide. Traditionally, a microfinance institution (MFI) will have a loan product and also provide a business training class. The client will attend the training with other people from the area (whom may not necessarily be from the same social network) and receive the loan product. That’s pretty much it. Extension agents are common, but mostly for the purpose of the MFI ensuring they will collect their money at the end of the loan period. My colleague had the idea of placing this type of entrepreneurship intervention in local churches. Effectively embedding the intervention in an existing social context and potentially creating new social norms and social network learning effects. I hope I’m not guilty of confirmation bias (see above) but I think this is an excellent example of a development program taking into consideration human’s innate disposition toward social thinking.

For an excellent book written all about this sort of thing see “The Social Animal” by David Brooks. Seriously, even if you don’t enjoy Brooksian Op-Eds, you’ll enjoy this book. Also, in the WDR itself there is an excellent short (two page) “spotlight” on When Corruption is the Normpage 60-61.

3. Thinking with Mental Models

When humans ‘think automatically’ and ‘think socially’ at the same time mental models (or heuristics or rules of thumb) are developed. These mental models simplify the complexities of the world so that we are able to function effectively in it. Designing development programs, policies, and theories while keeping mental models in mind is important. Often people who have been entrapped in poverty develop mental models that may hinder their own escape. For example, in Ethiopia disenfranchised people sometimes report feelings of low psychological agency. I.e. “We have neither a dream nor an imagination” or “We live only for today”.

People develop mental models of how the world works based on their own experiences. This truth pervades much of the miss-understandings we see in our world today. A rural farmer in Western Kenya (almost certainly) has a different understanding of how the world works than an executive with a Tech start-up in Northern California. The world is an incredibly complex place and without mental models, humans would be unable to act, work, or live at all.

There is an important, and very fine point, that must be made clear when thinking about how this sort of theory effects development theory and practice. There is a very important distinction to be made between institutions (broadly speaking) and culture. A couple decades ago there was a destructive and ethnocentric theory that was very unproductive. The idea of a culture of poverty led to policies which (probably) created more harm than good. If you believe in a culture of poverty than (one) logical solution is for others, presumably from outside of that culture, to change the culture. It is important to note here, that mental models are not necessarily driven by culture. More specifically mental models are driven by institutions. Institutions (broadly speaking) include social norms but also include other aspects of life such as political systems, police structures, path dependency, individual beliefs, climate patterns, business practices, and religious traditions. I’ll go out on a limb and say that any time there seems to be something that is caused by (so-called) culture, there is an institution hiding in the weeds in the background which plays a much larger role.

For example when I lived in Kenya I often found myself waiting for my Kenyan colleagues to show up for a meeting as they were often late. Much is made of this Kenya (or even more ignorantly) Africa time. I noticed something interesting, however, after several months living and working on a seminary campus. The same Kenyan colleagues who routinely arrived late for our meetings would arrive exactly on time when they had to catch a class at the seminary. Why? (as I previously blogged) time is not a concept that is driven primarily by culture, it is most fundamentally driven by institutions. It is true many institutions in Kenya (and other places of the world) do not punish people for showing up late, the Africa Theological Seminary, however, did and people showed up on time.

Links I Like [7.14]

1. The implications of Complexity for Development
I’ve been banging on about complexity for quite a while now. This is an, as they say, oldy but goodie. Owen Barder, one of the only people who actually justifies the title “expert”, runs through the implications of complexity for development. (Seriously, Owen Barder is so good, Francisco Toro of Boring Development asks the rhetorical question, “Why do people spend thousands of dollars on degrees in International Development when they could just download Owen Barder’s podcasts for free?) The policy implications are important: resist engineering, avoid isomorphic mimicry, resist fatalism, promote innovation, embrace creative destruction, shape development, embrace experimentation, and act global. The ultimate conclusion, however, is perhaps the most important: be humble!

2. 25 Thoughts on the 25th Anniversary of the ‘Seinfeld’ Premier

3. God Loves Cleveland
I’m only slightly ashamed that LeBron news breaks into this list, but this article is really great. Sports are an important part of life and LeBron might be the most important athlete in professional sports right now.

4. Daron Acemoglu and James Robinson on Why Nations Fail Blog have been writing a series of posts on James Scott’s book Seeing Like a State. They are all worth a read:

Prelude to Seeing Like a State
Images of the State
Seeing Like a State
The Art of Not Being Governed
An Application of the Art of Not Being Governed

Needless to say, I’ve recently purchased Scott’s book.

5. Tyler Cowen on Global Inequality.
This is the best summary on what we know (and don’t know) about income inequality, broadly speaking.

The History of Honor

Something that becomes very clear very early in anybody’s study of economic development is the importance of a solid foundation in economic history. In fact there is a recent NBER working paper that advocates for a marriage of the two academic sub-disciplines.

In light of this, one of the things I think a lot about these days is how institutions (broadly speaking) influence how we make decisions and behave. Through reading the works of Douglas North (and commentators) and through my work grappling with the optimal role of the Church in encouraging and equipping business growth, in particular, and in propelling economic development, more broadly, I’ve begun to learn something seemingly important.

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