Development Economics and Development Policy Are Due For a Redesign, Says World Bank Report

December 2, 2014

WASHINGTON, December 2, 2014 — Development policies based on new insights into how people actually think and make decisions will help governments and civil society achieve development goals more effectively. A richer and more accurate understanding of human behavior can make it easier to tackle such difficult development challenges as increasing productivity, breaking the cycle of poverty from one generation to the next, and acting on climate change, finds a new World Bank report.

World Development Report 2015: Mind, Society, and Behavior, examines early, exciting work that suggests ways of diagnosing and solving the psychological and social factors that influence development. The new approaches are complements to a host of other standard economic tools.

People do not always make deliberative, independent decisions based on careful self-interested calculations, the report finds. Rather, they tend to think quickly and to use mental shortcuts and shared mindsets. By factoring this in, governments and other actors can design programs that make it easier for individuals to cooperate in the pursuit of shared goals.

For instance, in an experiment in Colombia involving a modified cash transfer program, part of the funds for beneficiaries were automatically saved and then given as a lump sum at the time when researchers knew decisions about school enrollment for the next year were typically made. This adjustment, designed to encourage people to focus on schooling decisions, increased enrollments for the following year.

“Understanding how people make choices doesn’t help just those who sell bars of soap or new cars – it also can help us in the field of development become more effective in delivering programs to the poor and vulnerable,” said World Bank Group President Jim Yong Kim. “In the case of Ebola, for instance, we must tackle stigma, inaccurate understanding of disease transmission, mistaken panic, and other biases and misconceptions. Having a deeper understanding of how people think can ensure that we improve our responses now and in the future, whether in tackling an epidemic or in taking on a global challenge like climate action.”

To inspire a fresh look at how development work is done, the report outlines three principles of human decision making: thinking automatically, thinking socially, and thinking with mental models. Much of human thinking is automatic and depends on whatever comes to mind most effortlessly. All people are deeply social and many will cooperate as long as others do too, and they are influenced by social networks and norms. Finally, most people do not invent new concepts; rather they use mental models drawn from their societies and shared histories to interpret their experiences.

Interventions need to take account of these insights and be designed through a ‘learning by doing’ approach. The factors and mindsets affecting decisions are local and contextual. It is hard to predict in advance which aspects of program design and implementation will drive the choices people will make.

"Marketers and politicians have long understood the role of psychology and social preferences in driving individual choice," said Kaushik Basu, Senior Vice President and Chief Economist of the World Bank, "This report distills new and growing scientific evidence on this broader understanding of human behavior so that it can be used to promote development. Standard economic policies are effective only after the right cognitive propensities and social norms are in place. As such, this WDR can play a major role in enhancing the power of economic policymaking, including standard fiscal and monetary policies. My only worry is that it will be read more diligently by private marketers selling wares and politicians running for office than by people designing development interventions."

The  report applies the three principles to multiple areas, including early childhood development, productivity, household finance, health and health care, and climate change 

“A key implication from recent research is that poverty is a cognitive tax, and policy towards the poor can be designed to reduce some of the  damaging effects of poverty on the ability to make choices and plan for the future,” said Karla Hoff, WDR co-director.

Take the case of sugar cane farmers in India, who were asked to participate in a series of cognitive tests before and after receiving their harvest income.  They did much better after the harvest, when resources were less scarce, reflecting the equivalent of an increase of roughly 10 IQ points.

Policy makers should try to move crucial decisions out of periods when mental resources are scarce. This may mean shifting school enrollment decisions to periods when poor farmers’ seasonal income is higher. There may also be ways of simplifying typically complex decisions such as applying to a higher education program. These ideas apply to any initiative in which good decision making is a challenge.

Poverty in childhood, which is often accompanied by high stress and neglect from parents, can impair cognitive development, according to the report, so public programs that provide early childhood stimulation are critical. A 20-year study in Jamaica found that a program aimed at altering the way mothers interacted with their infants led to an increase in earnings by 25 percent once those children became adults, as compared to others who did not participate in the program.

The report cites several illustrative examples of innovative approaches to development, including:

  • Changing social norms by posting stickers on buses in Kenya that encouraged passengers to complain to reckless drivers, which ultimately halved the number of insurance claims involving injury or death
  • Deploying commitment devices such as a lockable metal box with a passbook households used to write the name of a preventive health product, which increased savings and resulted in an increase of up to 75 percent in investment in preventive health products in Kenya
  • Creating social incentives by publicizing water consumption figures in Bogota, Colombia and naming individuals who were helping conserve water during a severe shortage, which led to citywide water savings.
  • Using social networks to amplify the effects of information programs in Malawi, where a small performance incentive to encourage farmers to communicate to peers the benefits of a new agricultural technology was a cost-effective way to  increase the take-up of the technology       
  • Using status awards and indicators, like the UN’s Gender Empowerment Measure or the World Bank’s own Doing Business results, to motivate policymakers and firms
  • Creating entertainment education, like ‘Scandal!’, a television soap opera in South Africa that carried messages on financial literacy, which led to lower rates of gambling and better financial decision making among viewers.

The report stresses that focusing more closely on correctly defining and diagnosing problems can lead to better designed interventions. Since even experts’ initial assumptions about the causes of behavior can be wrong, the implementation period should test several interventions, each based on different assumptions about choice and behavior. After adoption, the interventions’ effects should inform new rounds of definition, diagnosis, design, implementation, and testing. The process of refinement should continue as interventions are scaled up.

“The arguments and findings in this report provide a new rationale for public action. Governments should take action not only when markets fail, but when there is good evidence that policies can help people overcome the psychological and social obstacles to good decision making,” said Varun Gauri, WDR co-director.

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