Lessons from behavioural economics for development policy.

Author:Pirttila, Jukka
 
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In conventional economic theory, agents are assumed to be able to make rational choices, unaffected by emotions and not constrained by decision-making errors. This theory works well in some situations, but in the last two decades, it has become increasingly clear that the theory also fails in providing guidance in many important strands of economic decision making. The insights of behavioural economics have begun to be applied to development economics also, and in particular to the behaviour of poor households in poor economies. Does poverty promote departures from the standard text book model of rational choice? Are the departures from conventional models different in developing countries than in developed economies and are they possibly also more important when the decision makers are poor? And what policy interventions are appropriate for growth and poverty reduction in such a world?

An open access special issue of the Review of Income and Wealth, which is now published as the first issue of the journal in 2014, deals with these questions.

In conventional economic theory, agents are assumed to be able to make rational choices, unaffected by emotions and not constrained by decision-making errors. This theory works well in some situations, but in the last two decades, it has become increasingly clear that the theory also fails in providing guidance in many important strands of economic decision making, such as savings and investment behaviour, consumption choices (of addictive substances, for instance), and redistributive preferences. Therefore, the 'imperfections' of individual choice behaviour are increasingly accepted by the profession as viable empirical phenomena to be explained and incorporated into economic theory. Non-standard objectives and decision making--procrastination; overweighting low probability outcomes; focus on changes from current wealth as a reference point; willingness to sacrifice returns for fairness of process or outcome, etc.--have been investigated theoretically, empirically, and experimentally. [1]

The insights of behavioural economics have begun to be applied to development economics also, and in particular to the behaviour of poor households in poor economies. Does poverty promote departures from the standard text book model of rational choice? Are the departures from conventional models different in developing countries than in developed economies and are they possibly also more important when the decision...

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