Behavioural development economics: A new approach to policy interventions

WB scholars explain the key findings of the 2015 World Development Report which focused on behavioral insights.

Economists typically assume people behave in a rational and self-interested way, making standard models limited in their explanatory power. This column argues that psychological and sociological factors – though usually ignored in economic models – affect decision-making. The findings, drawn from the World Development Report, further suggest that better behavioural understanding could subsequently aid development efforts.

They look at three insights:

  • The first principle is that all people think automatically
  • The second principle of thinking in the Development Report is that humans think socially.  
  • The third principle of thinking that the Report introduces is the least familiar to economists. It states that people think with mental models. 

Summing up:

Since framing and context influence attitudes and decision-making, in many situations it is not possible to deduce the best policy from theory. The World Development Report emphasises that development policy can be improved by experimenting with different variations of a proposed intervention. To illustrate this point, consider again the experiment on health savings. The lockable box intervention was one of five interventions tested in a randomised controlled trial. Researchers didn’t know ahead of time which would work and which would fail because they didn’t know exactly why people weren’t saving. Testing several interventions gave researchers insight into the barriers to saving and a better understanding of the fine supports that would shift behaviour. The results of the study were not obvious or inevitable.

The parsimonious explanatory power of standard economic models has made them powerful in spite of their limitations. The Report shows that expanding our understanding of the rich set of factors that influence decision-making can aid development efforts. Incorporating behavioural insights from psychology, sociology, and other sciences can help policymakers develop innovative and sometimes low-cost interventions that help people advance their goals and increase their well-being. 

Amen to that..

People criticise beh eco on the basis that people who apply these insights suffer from same biases. But the reality is there is no choice. Government/policymakers will make choices for people and there is no harm in designing policies keeping these behavioral insights in place,,

 

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