The Behavioral Economics of Poverty and Development
Gautam Rao, Harvard University
Economics has traditionally assumed that individuals are perfectly rational, self-interested maximizers of utility. The new field of behavioral economics departs from these assumptions by incorporating insights from psychology into economic models. For example, behavioral economists study how savings decisions and health behaviors are affected by people having limited willpower; how hating losses more than valuing gains affects investments; how having a deep concern for fairness affects wages and productivity; how individuals infer too much from small samples and too little from large samples; or how a concern for one’s social image drives charitable behavior and consumption.
In this talk, I will describe recent advances in using behavioral economics to understand and reduce poverty and under-development. There are two reasons why behavioral economics might be particularly important in this task. First, the welfare consequences of the behavioral mistakes and departures from rationality we all display are often much higher for the poor. Paying attention to behavioral economics principles is thus crucial to the design of development and anti-poverty programs. Second, an emerging body of evidence from economics, psychology and neuroscience suggests that poverty, and its correlates such as stress, poor nutrition and even poor sleep, themselves directly and powerfully influence decision making and cognitive function. Thus, living in poverty might itself have psychological effects which make it harder to escape poverty, creating a “psychological poverty trap”.
I will describe exciting recent research in behavioral development economics, highlight the value of working at the intersection of different disciplines, and point to future directions for the field.