Behavioral Development

Behavioral and Experimental Development

Economics

Marcela Ibanez
1

Behavioral Development Economics,

Poverty and decision making

▶ Poverty changes the set of options available to individuals.

▶ Not enough economic resources (land, money).
▶ Low education level, poor health.
▶ High exposure to shocks (unemployment, weather shocks,
natural disasters).

▶ Poverty thus aects behavior.

Poverty and decision making

▶ Poverty changes the set of options available to individuals.

▶ Not enough economic resources (land, money).
▶ Low education level, poor health.
▶ High exposure to shocks (unemployment, weather shocks,
natural disasters).

▶ Poverty thus aects behavior.

Neoclassical Economics View

Ted Schultz (1964)

▶ Poor people do the best they can under their circumstances.

Poor but ecient

▶ If the poor are not dierent from non-poor, why do their

circumstances dier so much?
Standard Development Economics
Market ineciencies:
▶ Limited access to credit
▶ Restricts opportunities to take productive investments, migrate
in search of better employment opportunities,
▶ Constraints human capital investments,
▶ Is an obstacle for land redistribution.

▶ Information asymmetry
▶ Wages are above market clearing prices generating
unemployment, distorting incentives to migrate
▶ Interest rates are too low so there is credit rationing.
▶ Share-cropping: inecient land contracts

▶ Externalities
▶ Low private incentives for human capital investment, but high
social return of doing so.

Ray (1998): Existence of poor is neo-classical but not necessarily

ecient.
Policies can be implemented to ght poverty
Standard Development Economics

▶ Neoclassical theory is very powerful and oftentimes produces

accurate predictions of behavior.
Can we ght drugs using communication campaigns?

▶ Ibanez and Vasquez, 2015

▶ Colombia is one of the largest producers of cocaine.
▶ Extraordinary eorts in the war on drugs:
1 billion USD are invested annually (1.2% of GDP)
▶ Little evidence on the eectiveness of anti-drug policies
Experimental design

▶ Decision between investing in coca or cattle farming

▶ Here: coca is more protable, prone to sanctions (risky), and

generates negative externalities
Conclusion

▶ The likelihood to invest in coca decreases with:

▶ Return on cattle
▶ Probability of getting a sanction

▶ Consistent with Becker (1968) Economic Model of Crime

▶ But,
▶ Not all endowment invested
▶ Persons who are protestant invest less
▶ Messages that highlight negative consequences in terms of
increased crime result in higher investments.
Neoclassical economic model

Rational Decision Making

▶ Coherent and internally consistent theory

▶ Provides rigorous, parsimonious and falsiable models of a

wide range of human behaviors

▶ Predictions of the model are sensible

▶ Simplifying the messy and mysterious internal workings of

actors (Freese, 2009, 98)

Less appreciated by other social scientist: (e.g. Angelica the

anthropologist and Micro 1.)
Normative view
Neoclassical Economics View

Rational Decision Making.

▶ Individual lives for two periods. Decide to cut or conserve the

forest today. Two possible states: normal rain or high rain

∞ ∞
Maxxi εXi ∑ δ t ∑ p(st )U(xit |st ) st. px ≤ Y
t=0 st εSt

▶ Xi is the set of lifetime strategies, St is the set of state spaces

▶ p(st ) is the set of rational beliefs of probability of the dierent
states, δ is a time consistent discount factor
▶ U(., s, t) is true utility at time t in state s
Normative view
Neoclassical Economics View

Rational Decision Making.

▶ Individual lives for two periods. Decide to cut or conserve the

forest today. Two possible states: normal rain or high rain

∞ ∞
Maxxi εXi ∑ δ t ∑ p(st )U(xit |st ) st. px ≤ Y
t=0 st εSt

▶ Xi is the set of lifetime strategies, St is the set of state spaces

▶ p(st ) is the set of rational beliefs of probability of the dierent
states, δ is a time consistent discount factor
▶ U(., s, t) is true utility at time t in state s
Neoclassical Economics View

Implicit assumptions:

▶ Consistent preferences (rationality).

▶ Unlimited cognitive abilities.

▶ Unlimited willpower.

▶ Self-regarding preferences.
Behavioral Decision Theory
Simon (1955)

▶ Most real-life choices still lie beyond the reach of maximizing

techniques. ....In real life (decisions) must involve something
simpler than maximization of utility or prot.
Behavioral Decision Theory
Simon (1955)

▶ Decision makers opt for satiscing behaviordecisions that

are good enough given the time and ability to analyze the
available information.

▶ Decision making is a process of achieving mental subgoals that

lead to a larger decision.

▶ In psychological theories the impulse to act is driven by

satisfaction.
▶ Satisfying level depends on aspirations.
▶ If available alternatives satisfy aspirations, the best alternative
is chosen.
▶ If not, adjust by:
▶ searching for new alternatives
▶ moving the aspiration level downward
▶ If adjustment is too slow, emotional states (anger, frustration)
are triggered.
Behavioral Economic View

Psychological foundations of decisions

▶ People do not behave as they should.

▶ Systematic and deviations from assumptions and predictions of

neoclassical economics

Examples:
Behavioral Economic View
Psychological foundations of decisions

▶ People do not behave as they should.

▶ People consider limited choice sets!
▶ Not enough information (narrow frames).
▶ Not enough capacity to process all information (Bertrand and
others, 2010).

▶ Do not behave rationally.

▶ Limited cognitive capacity to solve problems (Giné, Martinez
Cuellar, and Mazer, 2014).
▶ People fail to realize optimal inter-temporal plan (Ashraf,
Nava, Dean Karlan, and Wesley Yin, 2006).
▶ People are aected by alternative presentations of the same
problem (Bertrand and Morse, 2011).

▶ Psychological and social factors can be incorporated into

economic models to improve understanding on how people
decide and to suggest better policies.
Denition Behavioral Economics

▶ Wikipedia:

Behavioral economics study the effects of psychological, so-

cial, cognitive, and emotional factors on the economic
decisions of individuals.
Behavioral models typically integrate insights from psychol-
ogy, neuroscience and microeconomic theory.

An alternative to neoclassical economics.

Behavioral Economic View

▶ What do we do?
▶ Enhance neoclassical model to consider empirically supported
evidence on how individuals do decide
▶ Renement and improvement of existing models
▶ Incorporate insights of other social sciences.
▶ Toolkit of neoclassical economics is often in use

▶ How does it work?

▶ Show that there are regular anomalies in behavior
▶ Propose alternative explanation for the anomaly
▶ Modify the model to account for the proposed mechanisms
(Not necessarily a unifying framework)
▶ Test for those mechanisms (experiments)
▶ Suggest better policies
Objective

▶ Sanjit Dhami:

Behavioral economics ceases to exist as a separate eld in

economics and becomes the normal way in which we do economics.

▶ Students discover anomalies in neoclassical theoretical model.

▶ Students are presented with behavioral theories to rationalize

those anomalies.
Outline of the course

▶ Biases in decision under certainty

▶ Mental Models
▶ Decision under risk and uncertainty (EUT)
▶ Non-Expected Utility theories
▶ Prospect Theory: Evidence from the eld

▶ Time preferences
▶ Defaults and Commitment

▶ Social Preferences
▶ Altruism
▶ Fairness, Reciprocity, and Cooperation in the eld
Books

▶ Just, D. R. (2013). Introduction to behavioral economics.

Wiley Global Education.
Other sources

▶ UN (2021) Behavioral Science Report. UN Innovation Network

2021. link

▶ Samson, A. (2017). The behavioral economics guide 2020.

Behavioral Science Solutions Ltd. Link

▶ Behavioral Policy Journal

Grading

▶ 6 credit points
▶ Term Paper: March 8, 2024
▶ Pre-registration March 1, 2024

▶ Term paper: Public policy or business practice application of

behavioral economics
▶ First draft due on January 12 (6 pages including references)
▶ Peer review due on January 26 of proposals (1-2 pages) -
individual
▶ Written document due on March 8 (10 pages including gures,
tables, charts)
▶ Groups of 3 students
▶ Formatting: A4, 2.5cm margins, Times New Roman 12, 1.5
line spacing.
Grading

▶ 6 credit points
▶ Term Paper: March 8, 2024
▶ Pre-registration March 1, 2024

▶ Term paper: Public policy or business practice application of

behavioral economics
▶ First draft due on January 12 (6 pages including references)
▶ Peer review due on January 26 of proposals (1-2 pages) -
individual
▶ Written document due on March 8 (10 pages including gures,
tables, charts)
▶ Groups of 3 students
▶ Formatting: A4, 2.5cm margins, Times New Roman 12, 1.5
line spacing.
Content of the term paper

1. Motivate the problem

2. Explain predictions of neoclassical economics and argue

whether individuals behave accordingly

3. Select a behavioral model to conceptualize anomaly

4. Present a experimental design that allows testing the

behavioral/neoclassical model

5. Discuss the implications for

5.1 Research (contributions to previous work)
5.2 Policy (how to incorporate the idea in policy making)

Proposal should develop 1 to 3. Term paper should include 1 to 5

and improve on those points incorporating comments of reviewers.
Recommended Reading

▶ Datta and Mullainathan (2012) Behavioral Design A New

Approach to Development Policy. CGD Policy Paper 016.
Washington DC: Center for Global Development.

▶ http://www.cgdev.org/content/publications/detail/1426679
Behavioral Policy

▶ At the center of development economics is the question

▶ Why do people choose what they do?
▶ What motivates them?
▶ How can we design policies that are more eective?

▶ Development programs work better when they are designed to

match people's actual psychology.
How to design programs and policies that work?

▶ Project cycle:

▶ Example: parents failing to vaccinate their child

▶ Diagnose:
▶ Neoclassical economics: ..... cost benet analysis,
▶ Behavioral economics: ....
How to design programs and policies that work?
▶ Project cycle:

▶ Example, parents failing to vaccinate their child

▶ Design:
▶ 

Attention decit Send a reminder
▶ Procrastination Set a plan of action

▶ Behavioral economics is not simply about intuition or about

trial and error.

▶ It is a scientic, systematic approach to dening, diagnosing

and designing solutions to problems in many dierent areas.
Limited Attention

▶ Individuals intend to save but fail to realize the plan. Karlan et

al. (2010): Send reminders on own saving goals
▶ Generic reminder increased savings by 6%
▶ Goal specic reminder led to a 16% increase in savings
Graph
Example 2: Low Fertilizer use in Sub-Saharan Africa
Why is the demand so low?

Think about the neoclassical view!

Neoclassical approach

▶ It is not available
▶ High cost → subsidies
▶ Lack of knowledge on eectiveness → information
▶ Weak property rights → legalize land holdings
Why is the demand so low?

Think about the behavioral view!

Behavioral approach

▶ Mismatch between intentions and actions

▶ Favor the present at the expense of the future.

Fertilizer use in Sub-Saharan Africa

Behavioral approach
▶ Inconsistent time preferences
▶ Naive: believe that they will be more patient in the future
▶ Sophisticated: anticipate that they will fail→ Commitment

▶ Self-control and procrastination → Defaults or Nudges

Fertilizer: empirical approach

Randomized controlled trial:

▶ Basic SAFI program group (SAFI):
▶ Early visit directly following harvest oering fertilizer with free
delivery at later date
▶ Avoids procrastination by requiring farmers to decide early

▶ Control group (Comparison):

▶ Similar group of farmers that was not visited

▶ Further extensions to the model incorporating late visits with

free delivery and subsidies
Fertilizer: Results
Other Limited Resources

▶ Limited understanding
▶ Some rice farmers in India overuse fertilizers
▶ Government works to disseminate information on correct use
▶ But, mental models, the way individuals rationalize a
problem, might be part of the problem
▶ Nitrogen use helps leaves to grow  green plants are healthier!!
but, they decrease cereal yields

▶ Can mental models help to promote female economic

empowerment?
Misperceived social norms
▶ Bursztyn et al. (2018): Female labor force participation in
Saudi Arabia

▶ Husbands typically have the nal word on their wives' labor

supply decisions in Saudi Arabia

▶ Evidence in Riyadh shows that the vast majority of young

married men in Saudi Arabia privately support Female Labor
Force Participation (FLFP)

▶ Yet, they underestimate the support for this norm among

similar men.
▶ Randomly correcting these beliefs about others increases
married men's willingness to let their wives join the labor force
▶ Are willing to pay to sign-up for a job-matching service for
their wives.
▶ The wives of those men are more likely to have applied and
interviewed for a job outside of home.
Diagnosis

▶ What is the root of the problem?

▶ Quantitative studies
▶ Ethnological studies
▶ Dog-fooding

▶ Neoclassical and behavioral barriers (think outside the box)

▶ Consult existing interventions
▶ INudge, 3ei, Jpal,
▶ Behavioral Insight and public policy (OECD, 2017)
▶ Mind, Society and Behavior
Design
Experiment during implementation

▶ It is not only necessary to know if the intervention works but

why it works.

▶ Variations in the implementation can allow testing the

mechanisms.

▶ Use of designs implemented elsewhere can help to increase

external validity
Groups for term paper
Next Lecture

▶ Biases in decisions under-certainty.

Reading:

▶ Just, 2014 Introduction to behavioral economics Chapter 2

and 3