The recent work published by the 2024 Economics Nobel Prize winners has brought to light once again the role institutions play in economic development, making some countries rich and others poor. However, in modern society, it is important to consider the role behavioural economics plays in this, as acknowledged in the “World Development Report” by the World Bank.
Policies aim at solving or preventing existing problems by incentivising alternative decision-making on behalf of individuals and firms. But “some of the simplifying assumptions of economics are not always correct”, as humans are not rational Econs (The Economist, 2014).
The report shows that “the poor are more likely than other people to make bad decisions”, mostly because they lack the information necessary to make sound decisions and are more likely to live in communities that convey conflicting ideas regarding development (The Economist, 2014). Foreign aid has often relied on classical economic principles, assuming that “the poor will want to earn their way out” but research has often proved otherwise. Given that the poorer population experience stress and uncertainty, and lack a supportive institutional framework, it often makes them risk averse (The Economist, 2014).
Economic development often relies on providing the necessary resources to those that need it. However, behavioural approaches stress the importance of understanding “how decisions are made and how they can be improved” (The Economist, 2014). This has proven successful in small-scale policies that played with the timing of financial support to incentivise certain decisions – “paying attention to how the poor actually think would imply big changes to financial-inclusion policies, encouraging financial products that people want to buy” (The Economist, 2014).
This same argument extends to politics, as “attempts to improve governance in some of the world’s most troubled states have been based more on the rational design of formal institutions than on the behavioural logic of the individuals that work inside them” (Power, 2024). The concept relies on the rational assumption that if the regulatory norms are correct and that there are sufficient resources, then the result should be a sound political system. But a political system is comprised of people, and the fallacy in this reasoning is that it relies on politicians being Econs (Power, 2024).
An analogy can be made – driving in different countries, despite shared principles, requires an understanding of the underlying behavioural norms of locals rather than the application of formal rules. The resulting congested traffic system is reinforced by the shortcuts taken to get from point A to point B. Thus, “politicians are also continually navigating flaws in their own structures of governance”, meaning that “where the state is weak, politicians get good at going around the state” (Power, 2024).
The problem is self-enforcing because “the inadequacies of the state mean that voters want politicians who can circumvent the system rather than go through it”, as in the short term, this will contribute much more to improving aspects people selfishly care more about (Power, 2024). Exporting western democracies and creating institutions based on rational principles will always ignore “the human logic behind political behaviour” (Power, 2024).
Development, whether economic, social or political, cannot rely on rational ideals, but must acknowledge the complexity of human responses to life-determining problems. “Politicians will always behave logically rather than rationally” and therefore, achieving change through institutions must take this into account (Power, 2024).
Economic development also requires social change, but the solutions provided must never fail to consider the unbreakable social norms that make up a community and society. The innovative clean cookstoves aimed to reduce the harms of indoor air pollution in the world’s poorest communities never became successful because they didn’t provide a solution that matched the lifestyle of the people it was theoretically invented for (Bessonova, 2018). From an objective point of view, the intervention may be sound, but from a subjective perspective, it lacks the understanding of the changes it would impose on its intended users.
So how can behavioural economics support the creation of policies and solutions that will truly have an impact on the development of a country?
- People are at the core
- Understanding what motivates individuals will form a complete picture of the problem and how it is connected to its context
- Change takes effect in system defaults
- Systemic change requires understanding the normative systems that frame decision making
- Public policy becomes more effective
- Tools of government intervention rely on the creation of incentives, which should be backed by behavioural insights
- Theory matches with reality
- Behavioural economics provides the additional information necessary to develop models that reflect the reality people live in
- Consumer engagement goes up
- Targeting specific behaviour requires understanding its motives in depth
- Sustainable choices become natural
- Framing can be used to create the right environment for sustainable consumption
- Precise solutions emerge
- Behavioural economics provides the context necessary to test hypotheses, results and limitations, making the resulting policies much more effective
(Bessonova, 2018)
Thus, in developing policies, it is necessary to not only understand the context of the problem, but understand its underlying causes, which often have to do with human interaction, which is often more logical than rational. Acknowledging the biases that form decision making in different societies provides the necessary base to implement solutions that nudge behaviour towards growth and sustainability both in the short and long run.
Bibliography
Bessonova, E. (2018) 7 reasons why behavioural science is crucial to sustainability, SEI. Available at: https://www.sei.org/features/7-reasons-why-behavioural-science-is-crucial-to-sustainability/ (Accessed: 25 October 2024).
Poor behavior (2014) The Economist. Available at: https://www.economist.com/finance-and-economics/2014/12/04/poor-behaviour (Accessed: 25 October 2024).
Power, G. (2024) For decades, a behavioral blind spot has plagued political development – by Greg Power, Behavioral Scientist. Available at: https://behavioralscientist.org/for-decades-a-behavioral-blind-spot-has-plagued-political-development/ (Accessed: 25 October 2024).
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