The World Bank just released a new report “Mind, Society and Behaviour”, to inspire and guide researchers and practitioners who can help a new set of development approaches based on a fuller consideration of psychological and social influences (Gauri, 2014). The idea is that paying attention to how humans think (the processes of mind) and how history and context shape thinking (the influence of society) can improve the design and implementation of development policies and interventions that target human choice and action (behaviour). To put it differently development design is due to for its own redesign based on careful consideration of human factors.
If you are not trained as a neoclassical economist who believe in the model of the wholly rationality-driven “economic man”, this may not sound so radical or strange. But standard economics, taught so prominent for so long in economic courses at all the leading universities, places human cognition and motivation in a “black box”, by using models that often assume that people consider all possible costs and benefits from a self-interested perspective and then make a thoughtful and rational decision. Still today this flawed thinking is mainstream at Central Banks, leading policy makers and also in the world of development. But this school of thinking (and acting based on mathematical models) ignores the psychological and social influences on behaviour. Individuals are not calculating automatons, as explained by Yannis Papadogiannis in his book: “The rise and fall of Homo Economicus, the myth of the rational human and the chaotic reality” (2014). Rather, people are malleable and emotional actors whose decision making is influenced by contextual cues, local social networks, and social norms and shared mental models. In short human behaviour is a mix of ‘nature and nurture’ as wonderfully described in “Happiness, the best is yet to come” (2014) by Don Ezra (a financial economist). You can watch his presentation on Vimeo http://vimeo.com/88365541. If you would like to explore this topic in more detail, I highly recommend reading the work of the ‘god father’ of behavioural economics, Daniel Kahneman. He shared the 2002 Nobel Prize in Economic Sciences with Vernon Smith. His latest publication was Thinking, Fast and Slow (2013) which was a global bestseller, and had profound impact on psychology and economics. (See also article in the Guardian http://www.theguardian.com/science/2014/feb/16/daniel-kahneman-thinking-fast-and-slow-tributes and his TED talk http://www.ted.com/talks/daniel_kahneman_the_riddle_of_experience_vs_memory?language=en ).
The Economist (December 6th-12th, 2014) published an article ‘Poor behaviour’ http://www.economist.com/news/finance-and-economics/21635477-behavioural-economics-meets-development-policy-poor-behaviour referencing the World Bank Report and mentioned: “making this the subject of its main annual publication, the Bank has brought behavioural economics into the mainstream of development. It is likely to prove a challenge to traditional ways of combating poverty, as well as a complement to them”.
This is a welcome, important and necessary step because the history of scientific revolutions shows that that the leaders of a field almost always resist new ways of thinking, whereas younger students and interested laymen are often receptive to new ideas, as pointed out convincingly by George Cooper (2014) in his book “The origin of financial crises: money, blood and revolution; how Darwin and the doctor of King Charles I could turn economics into a science”. Richard Feynman (1918-1988) once said: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong”. That sounds pretty obvious but Thomas Kuhn explained in his famous book “The Structure of Scientific Revolutions” (1962) that the problem he found was that the way we analyse and interpret the world and look at experimental data is intimately entwined with our existing, pre-conceived understanding of how the world works, which he called incommensurability. In other words, in economics it is quite common for people to agree about the data but disagree entirely about what the data means, according to George Cooper.
I strongly believe that behavioural economics is extremely relevant for finance, development, policy making and sustainability. Ideas 42 (www.ideas42.org ), a non-profit design lab and consulting firm that applies insights from behavioural science to complex social problems, uses behavioural economics to social good and have impact at scale. Below I have listed a few of their behavioural principles as posted on their website:
Limited attention affects the decisions people make. When attention is stretched, people have a difficult time focusing on both the benefits and consequences of options. Being aware of these attentional limits allows us to make changes that mitigate their negative consequences. Setting default options or forcing choices that require individuals to stop and consider the pros and cons of choosing an alternative can refocus their attention.
Status quo bias: This memorable quote from The Wizard of Oz sums up how many of us feel about home—it’s comfortable and familiar. But beyond the physical place, people consider other things “home” too, sometimes unconsciously: beliefs, previous choices, set routines. These things form an individual’s status quo, which people tend to prefer to stick to. As a result, people often “choose” pre-set options even when many others are available. As a result, even arbitrary options that set the status quo – for example, default settings – play incredibly important roles in decision-making, and can influence what people choose and what eventually happens.
Mental accounting: We often think of different bits of our income as falling into different buckets, each intended for a different purpose: the monthly bills account, entertainment funds, food money, and mortgage down payment fund. This has its uses: it can protect us from self-control issues, for instance by preventing us from spending too much of our pay check on tempting goodies. But there’s a flip side: the practice of viewing money as having specific labels can become generalized and cause us to behave in ways that are not in our best interest.
People procrastinate. They put off for tomorrow what they could (and want to) do today. These delays have real consequences: for example procrastinating on filing taxes costs an average of $400 in fees and unclaimed returns; putting off that health check may account for men’s higher death rates for preventable diseases. Farmers in the developing world procrastinate about making a trip to town to buy fertilizer – often resulting in none being used when planting season comes around. Procrastination is one of the ways in which self-control problems manifest themselves.
Prescriptive and Descriptive Norms: People usually have a good sense of what they should and shouldn’t do: do offer your seat to a pregnant woman; do wash your hands after you use the restroom; don’t double dip potato chips. But we don’t always follow these rules. Much the same is true of the decisions we make. We know what decisions we should be making, but sometimes we do something quite different. Yet often the messages we receive, especially for important decisions like retirement savings and organ donation, tend to focus on reminding us of what we should be doing. An alternative approach is to simply inform people of descriptive norms— what the majority of people actually do. In a review of twenty-one studies ranging from pertinent topics such as condom use, healthy eating, smoking and infidelity, researchers found that knowing what other people do is a stronger influence on how they eventually behave than knowing what society says they should do.
Choice overload: Too many choices can be overwhelming. When faced with a huge range of options, many people fail to choose the best option. Worse, they may fail to choose altogether. Too much information – a plethora of product features, combinations or specifications, for instance – can also have a similarly paralyzing effect on people’s decision making. An (over)abundance of options can mean that nothing is chosen.
Another very important principle, which was not mentioned by Ideas 42, is: overconfidence. This effect is a well-established bias in which a person’s subjective confidence in his or her judgements is reliably greater than the objective accuracy of those judgements, especially when confidence is relatively high (which is mostly the case for man), as described by Wikipedia http://en.m.wikipedia.org/wiki/Overconfidence_effect.
Going back to the World Bank report, they mention the following: from the hundreds of empirical papers on human decision making that form the basis of this Report, three principles stand out as providing the direction for new approaches to understanding behaviour and designing and implementing development policy. First, people make most judgements and most choices automatically, not deliberatively: we call this “thinking automatically”. Second, how people act and think often depends on what others around them do and think: we call this “thinking socially”. Third, individuals in a given society share a common perspective on making sense of the world around them and understanding themselves: we call this “thinking with mental models”.
My message for the readers of this blog post is perhaps controversial, but simple: according to Robert Roy Britt, humans are arguably the most bizarre creatures in the animal kingdom. The proof is in the many gross, unnecessary, contradictory and simply inexplicable things we do. And of course we’re different in our capacity to ponder all these oddities and sometimes figure a few out (http://www.livescience.com/4907-humans-strangest-species.html). So we just can’t ignore human behaviour and should incorporate this how we are learning, thinking and apply this in designing and implementing solutions to improve sustainable finance, development or any of the UN Millennium Development Goals for that matter, as promoted by the World Bank.
For the readers who are interested in this field, especially related to economics and finance, please see and join the debate at http://www.boombustclick.com/thebigidea.php , a Cardano Education initiative promoting the following: Boom Bust Boom proposes a simple idea – let’s adapt economics to human nature https://m.youtube.com/user/boombustclick.