Applying Behavioural Economics to International Development Policy

Abstract

Many development policies and programmes are premised on a traditional economic model of rationality to predict how individuals will respond to changes in incentives. Despite the emphasis of these programmes on poverty reduction, economists and the development community in general are still unable to understand fully how the poor make decisions, especially under uncertainty and over time. We do not understand why, for example, individuals do not regularly adopt subsidized technologies, such as ventilated cooking stoves to reduce health risks. Even when cultural norms and other constraints are considered, our models do not explain why a massive HIV/AIDS information campaign does not encourage individuals to regularly use condoms. Individuals avail themselves less than predicted in health programmes, participate less than expected in market opportunities, under- or over-insure themselves and make short-run decisions that are inconsistent with their long-run welfare. The rise and fall of different descriptive models and paradigms of poor-household behaviour can partly be attributed to this limited understanding. We believe that some more helpful answers may lie within behavioural economics, that these insights are particularly important for poor populations, and that they can improve the future design, implementation and subsequent effectiveness of development programmes.