Simeon Djankov and Ugo Panizza, in partnership with the Center for Economic Policy Research (CEPR) and the International Development Policy Journal, have an edited volume on “COVID-19 in Developing Economies.” Aside from a questionable (at best) cover image, this seems to be a valuable resource. The included essays are short and will likely be helpful for many involved in policy-making or research in low- and middle-income countries. I will highlight a few chapters that I found particularly insightful.
I visited my childhood home this past weekend. One afternoon I toured the school I attended from kindergarten through 12th grade. Although a lot has changed (and improved) since my time, many of the classrooms remain the same. One of these classrooms was the room where I took middle school math. Upon entering this room one memory that came back clearly was a presentation we had to make about how one of our parents used math in their every day work or life. (I suppose this was an attempt to try to convince middle schoolers of the practical need to actually learn algebra.) For this project I interviewed my dad who owned a small business in town.
The [World Bank’s 2015 World Development] report states in all earnestness that poverty “shapes mindsets”. From here, it is a hop, skip, and jump to holding, as the leading behavioural economists of the day do, that the poor are poor because their poverty prevents them from thinking and acting in ways that can take them out of poverty.
Thus the focus as well as the burden/responsibility of poverty-alleviation would shift from the state — from macroeconomic policy, from having to provide employment, health and education — to changing the behaviour of the poor. The structural causes of poverty — rising inequality and unemployment — as well as the behaviour of the owners of capital are evicted from the poverty debate, and no longer need be the focus of public policy.
Behavioural economics, insofar as it is concerned with the behaviour of people in poverty is simply the latest addition to the neo-liberal toolkit of political management.
This is just part of a blistering critique of behavioral economics broadly speaking and the World Bank’s 2015 World Development Report “Mind, Society, and Behavior” in particular. While the article seems to present an unfair and slightly antagonistic survey of the literature of behavioral economics and poverty, this presents a unique opportunity to discuss some common misunderstandings about how behavioral economists view poverty and global development. I will present three myths that were implied by the critique and discuss (my understanding) of what the literature actually says.
Myth 1: The Poor are Less Intelligent than the Rich
This is a subtle point of the behavioral economics literature. As the author correctly points out, psychologists and behavioral economists will typically say (indeed I have written) something like: the context of poverty creates stress, similar to the type of stress an important deadline at work creates. To cope with this stress humans allocate increased mental energy on this stressor and this taxes a person’s mental ‘bandwidth’ – the mental resources necessary to think properly. Other studies have found that “living in poverty” (broadly, and perhaps poorly, defined) creates a cognitive tax similar to skipping a night of sleep or becoming addicted to alcohol. Poverty is a unique stressor of life, however, as one really can’t take a vacation from poverty the way one can take a vacation from work. Neither can one escape poverty by sleeping in on a Saturday morning or going to an Alcoholic’s Anonymous class. As a result those in poverty behave in ways that (a) do not align with the typical economic model of the rational actor and (b) are often thought to perpetuate their poverty.
The nuance here is that while “the poor” may score lower on IQ tests than “the rich” or “the middle-class”, this difference in intelligence is not due to some character flaw of the poor themselves. Rather this reduction in cognitive ability is caused by the added complexities of living a life with small amounts of money.
Understanding this distinction is critical (in my view) as it informs how we think about helping the poor. This leads us to the second myth.
Myth 2: The Poor Must be Taught How to Behave
If the reality is that the poor are less intelligent than the rich due to some unique character flaw then the correct policy response would be to teach the poor to behave better. I’ve just discussed how this understating of the literature really isn’t the most complete. As I’ve already stated, the experience of poverty makes it difficult to behave in a way that (a) is understood by classical economic models of behavior and (b) allows for the poor to escape poverty.
Behavioral economics provides new insights on why the poor stay poor. The broad point of Sendal Mullainathan and Eldar Shafir’s research is not to ignore the structural causes of poverty it is rather to more completely (and accurately) study the nature, causes, effects, psychology, politics, economics, sociology (… aka, structure) of poverty so that public policy can be more effective.
A recent article by The Economist illustrates this point well:
Traditional development programmes stress resources and markets. People are poor, the argument goes, because they lack resources: not just money but roads, clinics, schools and irrigation canals. The job of development is to provide those things. And since resources also need to be allocated properly, prices have to be right. So a lot of development is about freeing prices and making markets more efficient.
A behavioural approach to development is different. It focuses on how decisions are made and how they can be improved. For example, in Bogotá a conditional-cash transfer programme paid mothers a monthly stipend if they took their children to school. Attendance during the school year was good but re-enrollment rates were low. A shift in the timing of the hand-out—withholding a part of the regular payment until just before the start of the school year—boosted enrollment sharply. This makes little sense in conventional economic terms: going to school is so beneficial that families should not need extra incentives and the overall sum available did not change. Yet the pay-off was substantial.
The goal of behavioral economics is not to teach the poor how to behave, for how am I (a nerdy-white-twenty-something-male-graduate-student) supposed to know how to behave in Bogota, Colombia. Perhaps the schools are so bad that parents know that sending their kids to school is not worth the cost. Perhaps families don’t have access to the correct information regarding the economic returns to education. Perhaps families who have lived at a subsistence level for generations and who didn’t complete formal education themselves have formed mental models and psychological biases that tell them that school isn’t worth the costs. The fact is we don’t know.
Myth 3: Behavioral Economics is the Newest Tool of the Neo-liberal agenda
Let’s break down the individual aspects of the behavioral approach described above, try to keep track of the political ideologies at play.
The program gives a hand-out. A cash transfer to the poor in Columbia on the condition that they send their children to school. Neolibralism is classically against government hand-outs for many ideological reasons (i.e. austerity, laissez-faire economics, and free trade). However, this program does uphold people’s ability to be free to choose, a characteristic neoliberalism classically supports for many ideological reasons (i.e. austerity, laissez-faire economics, and free trade).
The behavioral tweak is that timing matters. The success of the program hinged on when the families received the cash transfer. Humans (you may be familiar with the breed) are historically famous for struggling with self-control. Even when we know what we want to do, we have trouble staying committed to that preference.
(A great example of this is in Richard Thaler’s new book, “Misbehaving” in which he tells the story of having a dinner party at his house. He could set out a bowl of nuts for his guests to munch on while they wait for the delicious dinner, however, many may eat too many nuts and either ruin their appetite for the more delicious main meal or over-eat and ruin their diet. In either case his guests may actually prefer not to eat a bowl of nuts before the main course, but will be unable to resist eating them if they are readily available. Traditional neo-liberal economic thought stresses the importance of choices. More choices are always good, the argument concludes.)
So, what is the political ideology of behavioral economics? I’d say one does not actually exist. The rise in the popularity of behavioral economics has coincided with the rise in the popularity of data and evidenced based management (see Moneyball for an example). The political ideology of behavioral economics is mixed. Behavioral economics recognizes the complexity of the world. Instead of knowing what works, behavioral economics is a bit more humble. More testing, gathering feedback, iteration, and collecting data. It is only through this process of guess and check, of adaptation, that we will be able to find what works in a complex world.