A Behavioral Economic Framework for Fighting Poverty and Promoting Freedom & Development

Introduction

Institutional solutions towards addressing human rights and developmental problems are often grounded in empirical analyses, with a predominant focus on macroeconomic indicators with socio-political dimensions. While economics is the study of choices and incentives, purely analytical approaches often tend to ignore the human dimension and the human basis for those choices. Policies that have their basis in such empirical measures whilst ignoring the human dimension are at best incomplete. Uvin (2009), for instance, states that good human rights work does not automatically constitute human rights progress, and highlights the need for social and legal guarantees. Both Pogge (2000) and Sen (1999) also make similar arguments regarding the need for understanding moral and cultural aspects in promoting freedom and development. In this context, it becomes important to understand the human dimension of a society in enabling freedom and development.

Behavioral Economics is the application of economic and financial analyses with emotional and psychological levers to better understand “human” decisions. Given the human dimension that Behavioral Economics propounds, it could provide us with a lens through which to analyze empirical solutions, adding a qualitative and human element.

Designing a Behavioral Economic Framework

Adam Smith (1759, 1776) tells us that enlightened self interest is a fundamental economic driver, and both Jeremy Bentham (1789) and John Stuart Mill (1906) expound upon the psychological basis for economic choices. Behavioral Economics extends this further by focusing on three major themes in human choice (Hersh, 2002) –

• Cognitive biases in decision-making including emotional and rational basis that can only be examined through heuristic analyses
• Perception biases in decision-making that are a function of how problems and solutions are framed
• Cost-benefit and risk analysis of the human aspect of decisions that highlight extra-rational choices stemming from externalities, market inefficiencies etc.

In this paper, we will examine these aspects and their applicability in promoting development and eliminating poverty. In addition, whereas current empirical measures are often at the macroeconomic level, we will examine how Behavioral Economics can help provide a microeconomic perspective to the problems at hand.

Analyzing Development

Development is often measured through macroeconomic indicators such as GDP and industrialization. While this accounts for one dimension of development, it ignores the social and cultural impacts of progress, including quality of life as people perceive it. The proposed framework can be used to examine not only how people perceive development, but also in addressing consequences of and roadblocks to developmental efforts.

There is a commonly held view in developing nations that projects sponsored by organizations such as the World Bank may be beneficial to the political establishment, but are detrimental to the general populace. The lack of support – or in some cases, open hostility – towards such projects often results in a perception that developed nations are forcing their wills on less privileged nations. (Mudho, 2006) Understanding and offsetting these biases can be achieved by framing problems and solutions in a manner that is designed to help the people rather than further the goal of donor countries. This would also alleviate negativity towards various structural development programs, such as conditionality and policies that mirror “Washington Consensus” without due consideration towards domestic needs – including cultural freedoms.

Indeed, several biases are rooted in the lack of understanding of cultural identities, wherein development for the sake of development is equated with consumerism; and the effect of such consumerism on social, cultural, and religious identities is overlooked, resulting in the overtly misused phrase, “clash of civilizations”. Offsetting these would require us to understand that incentives need not always be monetary in nature, but could also be cultural. (Sen, 1999, 2006)

Performing analysis with these biases in mind would be useful in not just understanding roadblocks to development but also in providing incentives that could successfully alleviate such perceptions.

Analyzing Freedom & Human Rights

Pogge (2008) talks about moral universalism and the need for global economic justice. Unfortunately, such a view ignores the domestic perception of rights and freedom.

In the same vein as development, biases against promoting freedom and human rights are often rooted in the view that they threaten domestic sovereignty and cultural identity (Sen, 2006). Behavioral Economics can be used as a tool in understanding where and how such threats are perceived, and how appropriate incentives could be used to alleviate them. As Sen (1999, 2006) states, people and societies are comprised of multiple identities, and appealing to specific aspects of our cultural identity could be leveraged in promoting freedom. For instance, fundamentalist adherents of a religion that subjugates women could be fought by appealing to and strengthening the feminist identities of the women in helping themselves.

In addition, the framework can also provide us with a way to understanding the human cost of risk, by evaluating the extra-rational nature (and consequences) of our decisions.

Analyzing Poverty

Bertrand et al (2004) leveraged Behavioral Economics in understanding and helping decision making among the poor. In understanding poverty, it is vital to not only understand choices that result in poverty, but also in examining how the poor are perceived.

With the former, providing a clear understanding of their choices and incentives would go a long way in helping the poor with decision-making. This could be done by framing solutions and choices in a way that would best promote the “right” behavior (such as participation in the mainstream financial system) through appropriate incentives (such as appealing to the right identities).

The latter, however, is more complicated – there is often an association of the poor with the inability or unwillingness to better themselves (Sen, 1999). Attacking the heuristics (Poundstone, 2010) of such perceptions will greatly help facilitate solutions that address social, political, economic, and cultural dimensions of poverty. As Sen (1999) tells us, poverty in and of itself is a result of capability deprivation that further degrades the ability of the poor in helping themselves. Reality constraints (Poundstone, 2010), such as biases against fighting poverty (e.g. fighting what constitutes a public good), are often the result of a lack of understanding of the relationship between freedom and development (Sen, 1999). Understanding and eliminating such biases will go a long way towards helping the poor enable themselves.

Caveats

While Behavioral Economics certainly provides a human dimension, it in no way guarantees that the human dimension is right. Contrary to Pogge’s (2008) arguments, cultural backlash to certain elements of freedom and development is inevitable, and acknowledging the relevance of human rights and integrating human rights are two separate things (Palacio, 2006). Therefore, it helps to remind ourselves that Behavioral Economics is only a tool that can help us better understand the problems that face us. It in no way guarantees a universal solution, but rather provides a unique lens with which to examine those problems.

In addition, there is also a risk of institutionalizing Behavioral Economics, which goes against the fundamental grassroots nature of its applicability. Economic policies often work at a macro level, and Behavioral Economics is microeconomic by its very nature.

Conclusion

As human beings, we would like to believe in our rational natures, the repertoire of our irrational behaviors notwithstanding. Behavioral Economics provides us with a human dimension to evaluate our society’s problems, both rational and extra-rational. But more importantly, it provides us with an argument for flexibility in our decisions because at the end of the day, we are only human – sometimes, predictably so.

References

• Bentham, Jeremy. The Principles of Morals and Legislation. 1789.
• Shefrin, Hersh. Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. 2002.
• Mill, John Stuart. Utilitarianism. 1906.
• Mudho, Bernards A. N. Structural Adjustment to Human Rights (Development Outreach). October 2006.
• Mullainathan, Sendhil. How behavioral economics can help change the fight against poverty. 2009.
• Bertrand, Marianne; Mullainathan, Sendhil; Shafir, Eldar. A Behavioral-Economics View of Poverty. 2004.
• Office of the UNHCHR. International Covenant on Economic, Social and Cultural Rights. 1966.
• Palacio, Ana. The Way Forward: Human Rights and the World Bank (Development Outreach). 2006.
• Pogge, Thomas. World Poverty and Human Rights. 2008.
• Poundstone, William. Priceless: The Myth of Fair Value (and How to Take Advantage of It). 2010.
• Sen, Amartya. Development as Freedom. 1999.
• Sen, Amartya. Identity and Violence. 2006.
• Smith, Adam. Theory of Moral Sentiments. 1759.
• Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 1776.
• Uvin, Peter. Human Rights and Development. 2004.

© 2010, Karthik Narayanaswami. All rights reserved.

Tags: Behavioral Economics, Development, Freedom, Human Rights, Poverty

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