What falls outside the standard assumptions and models of
economics? How does that matter for
development? Last week, the Africa Chief
Economist’s Office and the Development Economics Research Group of the World
Bank sponsored a star-studded course exploring exactly this issue.
Nobel Prize winner George Akerlof highlighted how, because
of all the advantages of markets, we ignore the traps that come along with
them. Sellers can deceive buyers and
prey on their unconscious biases, lack of self-control, and naiveté.
Using his famous “lemons” market example, Akerlof showed
that, instead of there being no equilibrium, naïve buyers will in equilibrium
buy poor-quality used cars. He calls this phenomenon “Phishing for Phools”.
Decisions are also consistently affected by beliefs about
what is right and what is normal, the “framing” of our choices. World Bank economist Karla Hoff showed how
soap operas have dramatically affected people’s beliefs about reconciliation
and a willingness to disagree with leaders in post-genocide Rwanda; they have
also positively affected views of women’s roles in India. Likewise, quotas on women community leaders
in India have transformed people’s views on the appropriateness of women in
leadership positions. Not only is
framing powerful: Popular media can be used to shape frames and open people to
a wider array of choices.
Esther Duflo of MIT showed how a rational decision maker
could be affected by hope and hopelessness, often leaving him or her in a
poverty trap. Imagine a business which
must cross a certain threshold to reach high profitability. A small business owner who doesn’t believe
she has a chance of ever crossing that line may decide it isn’t worth doing her
best on other business decisions.
Likewise, someone who doesn’t believe they’ll ever be truly healthy may
not see a point in investing in nutrition.
“A little bit of hope allows people to realize their potential,” she said.
Taking the long view, Nathan Nunn of Harvard University
demonstrated how slavery patterns hundreds of years ago still affect trust
today, and how the type of agriculture employed by ancestors (plow or hoe?)
affects gender views today. These
historically determined views can be slow to evolve, a counter to the
frame-shifting examples given by Hoff.
A panel of researchers in behavioral economics highlighted
that behavioral economics can inform the design of policies and programs to
influence take-up and compliance. Shanta Devarajan (if you don’t know who he
is, you must be new to the blog) underlined that some of the apparent
deviations from rational decision making may be due to political forces rather
than psychological biases. At the same
time, political actors are subject to these same biases.
Beyond being interesting, these insights need to be applied
to the first-order poverty problems facing the world today. How can knowledge of framing, hope, and
culture be put to work to reduce poverty?
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