Newswise If the interest rate banks paid on customers deposits were to soar from 0.3 percent to 5 percent, you would expect that most people would start saving more. But, it turns out, most people arent that calculating.
In a recent field experiment in Chile, a large majority of people did not increase their savings in response to the higher interest rate. What did prompt them to save more? It was when their peers were watching. Savings almost doubled when the participants in the experiment announced their savings goals to a self-help group and had their progress publicly monitored.
It is just one example of how behavioral science can help policymakers spur changes that impede economic development around the world.
In the paper, Overcoming behavioral obstacles to escaping poverty, published in the journal Behavioral Science & Policy, University of Chicago Booth School of Business Assistant Professor Christopher Bryan and coauthors from several universities and development organizations, find policies aimed at serving the poor are more effective when they take into account the human tendency to procrastinate and the limits poverty puts on attention spans.
The scholars focus on two well-studied psychological phenomenapresent bias and limited attentionthat have wide ranging implications for international development policy.
Everyone has limited attentional bandwidth, but wealthy people, freed from having to spend this precious attention on acquiring food, shelter and other basics, have more attention available for handling unexpected hassles and making strategic decisions to improve their circumstances, the authors write.
Likewise, people often fail to expend small amounts of money, time or effort up front to obtain much larger benefits in the future. This human tendency towards present bias is common in rich and poor populations alike, but has a larger negative effect on people with low incomes.
The authors outline simple interventions that policymakers can take to overhaul international development policy with these behaviors in mind. Removing obstacles upfrontsuch as lowering upfront costs, simplifying or eliminating complicated paperwork, and timing the delivery of subsidies to correspond to when major payments (like school fees) will be dueimprove outcomes.
How does it work?
The bottom line here is that, by taking into account even just a couple of important behavioral principles, we can improve the effectiveness of many development programs and policiesoften dramatically, said Bryan. More exciting than that: we can often achieve those gains in effectiveness at little or no added cost once the policies are in place.
The other co-authors of the research are Nina Mazar, World Bank and University of Toronto; Julian Jamison, World Bank and Innovations for Poverty Action; Jeanine Braithwaite, University of Virginia; Nadine Dechausay, MDRC; Alissa Fishbane, ideas42; Elizabeth Fox, United States Agency for International Development; Varun Gauri, World Bank; Rachel Glennerster, Massachusetts Institute of Technology; Johannes Haushofer, Princeton University, National Bureau of Economic Research, and Busara Center for Economics; Dean Karlan, Yale University and Innovations for Poverty Action; Renos Vakis, World Bank. The authors are members of the BPSA Working Group on International Development.
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