The Poor Don’t Misbehave: Poverty and Behavioural Economics

Behavioural economics seeks to root economic decision-making in psychological theory, and in recent years has gained significant traction in the teaching and practice of economics. Evidence of this can be found in various forms – from more academic programs incorporating behavioural perspectives in teaching microeconomics, to a greater acceptance in academic journals (Samson, 2015). Since Richard Thaler and Cass Sunstein’s ‘Nudge’ (2008) was published, government policy in certain countries (such as the UK) have begun experimenting with applying insights from these fields to improving welfare. Recent academic research and popular writing in economics have focused on applying insights from behavioural economics to understanding better the problem of development (e.g. Banerjee and Duflo, 2011; Mullainathan and Shafir, 2013). In this context, the World Bank’s annual World Development Report (2015) covers the theme of ‘Mind, Society, and Behaviour’. In this article, we wish to highlight specific research studies that aim to broaden the understanding of applications of behavioural economics, well beyond those that are provided in the WDR.

Many have been quick to call out the World Bank’s renewed focus on behavioural economics, with an opinion piece in the Hindu going as far as calling it the ‘latest addition to the neo-liberal toolkit of political management’ (Sampath, 2015). There is no claim in the WDR that suggests that ‘the poor are less intelligent than the rich’, and it was not stated in as many words because it would be a thoroughly misread implication. If anything, recent research in development studies (also cited in the report) attempt to shift the reasons for poverty away from the poor for their inability to income-optimize. Thus, the poor’s decision-making efficiency should not be confused with intelligence. Comparing behaviour of the rich and poor in “the context of poverty” may offer far greater implications for development research than simply the influence of cognitive load on decision-making of the poor. One particular study deals with the behaviour of sugarcane farmers, and asserts that people are internally inconsistent in their behaviour based on periods in which they are rich/poor themselves. “Cognitive tax” is not a concept exclusive to the poor only more frequently experienced by the poor, and also applies to anyone who is hungry/sleep-deprived/tired/stressed.

There is a wide variety of research in the field of behavioural economics that engage in a broader way with economic development and policy, outside of poverty. One area that government policy has been trying to grapple with is tax evasion (often by the rich, who stash away their assets in tax havens). Castro and Scartascini (2015) show that tax payers comply better with payment when primed with messages related to fines and legal consequences.

Another area that may be of interest relates to charitable giving by the affluent. Gneezy et al (2010) use data from a large scale field experiment to argue for a shift to the shared social responsibility model, where a pay-what-you-want set-up elicited greater contributions than pre-decided denominations. Similarly, Kamdar et al. (2015) found that a once-and-for-all donation call induced greater contributions than regular reminders to contribute. This is only a snapshot of mountains of empirical evidence that is attempting to understand how to achieve greater charitable donations (see List and Gneezy, 2013).

Furthermore, the theory of ‘poor’ behavioural economics is only a recent one – only propounded in recent research by a group of authors (Sendhil Mullainathan, Marianne Bertrand, Eldar Shafir, to name a few). This is by no means equivalent to the entire field of behavioural economics, rather it is simply one application of the intersection of behavioural science and development economics. Other fields in which behavioural economics has been applied are as diverse as charitable giving, financial trading, dieting, road safety, social norms, and consumer behaviour. The theory of Scarcity as put forth by these authors, is, by their own admission, a work in progress at best, and aims to understanding pertinent development issues in a new context.

Yes, the World Bank does assume significance in terms of policy influence, probably more than most other multilateral lending institutions, but is it a cause for concern that they have ‘co-opted’ behavioural economics (as the Hindu article would have us believe)? Probably not, because the World Bank is still by and large focused on other mechanisms to alleviate poverty, which has been part of its agenda since time immemorial.

Can we safely say that public money and effort should not be spent on attempting to modify the behaviour of those already well off, but instead focus on lifting those currently in most distress out of poverty? The poor are the biggest stakeholders in poverty alleviation, and that is perhaps part of the reason why a report on economic development (and an entire subset of academic research) might focus solely on their behaviour.

Anirudh Tagat and Sneha Menon