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Applying behavioural economics to development policy.

Article Excerpt
Behavioural economics combines the insights of psychology and economics to better understand and predict decision making by considering how, for example, emotions and attitudes (psychological tendencies) influence how preferences translate into choices.

Applying behavioural economics to development policy is a particularly relevant, but neglected, field of inquiry given that in developing countries the poorly educated, the spatially isolated and those in highly risky environments, may be disproportionately represented in the group for whom standard models do not regularly apply--and further, that behaviours may more acutely affect policy outcomes because there are fewer formal institutions, such as credit and insurance markets, to temper their effects.

Despite the growing literature on development policy we are still unable to fully understand how the poor make decisions, especially under uncertainty and over time. It is not clear why, for example, individuals do not regularly adopt subsidized technologies such as ventilated cooking stoves to reduce health risks. They 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...