Behavioral Development Economics

Economics, like all behavioral sciences, incorporates premises about how people think. Behavioral economics emerged in reaction to the extreme assumption in neoclassical economics that agents have unbounded cognitive capacity and exogenous, fixed preferences. There have been two waves of behavioral economics, and both have enriched development economics. The first wave takes into account that cognitive capacity is bounded and that individuals in many situations act predictably irrationally: there are universal human biases. Behavioral development economics in this first wave has shown that low-cost interventions can be “small miracles” that increase productivity and well-being by making it easier for people to make the rational choice. The second wave of behavioral economics explicitly takes into account that humans are products of culture as well as nature. From their experience and exposure to communities, humans adopt beliefs that shape their perception, construals, and behavior. This second wave helps explain why long-run paths of economic development may diverge across countries with different histories. The second wave also suggests a new kind of intervention: Policies that give individuals new experiences or new role models may change their perceptions and preferences. New perceptions and preferences change behavior. This is a very different perspective than that of neoclassical economics, in which changing behavior requires ongoing interventions.