How Cross-Disciplinary Research in Behavioural Economics, Psychology, and Psychiatry can help design better development policies.
Social norms and psychological influences cannot be ignored in the context of creating effective developing policies, according to findings presented at a recent two-day international conference on behavioural economics and development. And, when incentives are used in combination with social and psychological interventions, these incentives tend to perform better.
The conference, co-hosted by the Bureau of Research on Economic Development (BREAD) and the newly established Mind & Behaviour Research Group at the Oxford Centre for the Study of African Economies (CSAE), took place in February. The aim was to encourage a deeper understanding of behavioural economics among development researchers, while inciting behavioural economists to realise the exciting research opportunities made possible by working in developing countries.
Case studies presented at the conference examined the social and psychological response to policy interventions in order to understand the effects of using competitions and incentives, and highlighted how, by incorporating behavioural economics, we can help design better development policies.
Incentives and competition still matter but they work better when social norms are considered
How do incentives and competition work within the context of developing countries? Where intrinsic motivation in areas of development is lacking, the use of incentives and competition may provide a positive incentive to increase productivity and effort. There are arguments, however, that this can lead to longer term de-motivation once the initial effect of incentives have expired.
With colleagues, Dr. Clare Leaver (Associate professor of economics and public policy, Blavatnik School of Government) examined the effects of pay-for-performance contracts for civil servants in Rwandan Primary Schools. They found that while pay-for-performance contracts tended to inspire more effort in the classroom – leading to a positive effect on student performance. However, teachers who were highly motivated at the start tended to leave the job by year two; indicating a ‘crowding-out’ effect of monetary incentive. Despite this, the performance-based incentive did lead to better learning outcomes.
There is a large evidence and literature base to suggest the strong influence of social norms on a women’s ability and willingness – or lack of – to compete. During an empowerment programme for girls in Tanzania focused on building confidence around entrepreneurial skills, Vincent Somville (Assistant professor of behavioural and development economics at the Norwegian School of Economics) found that providing empowerment training increased competitiveness when girls were asked to complete in a maths challenge, and risk aversion was reduced overall. However, when lower-ability performers were over-encouraged to compete, and therefore lost, the overall number of women choosing to compete declined. Perhaps an interesting question is therefore raised about the extent - and conditions - in which willingness to compete should be increased?
Social norms and psychological challenges to development
Harmful social norms often persist despite high individual costs, and individuals are often reluctant to abandon costly traits due to the constraints imposed by social norms. For example, harmful social norms relating to female genital mutilation (FGM) are still prevalent in many developing countries, despite conventional approaches by governments in introduce legislation against them.
More than 200 million women are being cut worldwide (UNICEF, 2015). Eliana la Ferrara (professor, development economics, University of Bocconi, Milan) presented a study in Somalia in which she and colleagues introduced a “stepping stone approach” to eradicating FGM.
Over 90% of women have reportedly undergone FGM in Somalia, where it is believed virginity – and therefore family honour – will remain intact if daughters are subjected to the procedure. Two forms are practiced in Somalia, the most common being a severe type known as ‘Pharaonic circumcision’.
La Ferrara and her colleagues explore whether the second, less severe procedure, Sunna, could be used as a ‘stepping stone’ for the change in social norms towards FGM. Because the social cost for Sunna is lower, fewer girls are cut which suggests that the intermediate state can be a stepping stone to transition to a ‘good’ equilibrium. However, the danger is that the intermediate approach could slow down the transition or become the new dominant norm.
Credit market failures and psychological biases are often cited as barriers to investment in high-return technologies. Joshua Dean (assistant professor behavioural science, University of Chicago Booth School of Business) and Susanna Berkouwer (graduate student researcher, Energy Institute, Haas School of Business) designed an experiment to shed light on the drivers of energy efficiency adoption (or lack thereof) by low-income households.
They implemented a Randomised Control Trial (RCT) with 1,000 low-income households in Nairobi, Kenya, to study the adoption of an energy efficient replacement to their primary energy consuming appliance – a charcoal cook stove. When they provided participants with randomly assigned subsidies for the stove to estimate the causal impact of stove adoption on charcoal expenditures, they found that - in spite of high returns – both adoption rates and average willingness-to-pay (WTP) were low.
Further interventions found that providing a loan instead doubles WTP and closes the energy efficiency gap over the period of the loan. In addition, the authors found that credit works in part through psychological mechanisms, with around a third of the total impact of credit is caused by ‘inattention to loan payments’ rather than disinterest in energy savings per se.
Self-belief for goal-setting
Finally, Stefan Dercon (professor of economic policy, Blavatnik School of Government) examined psychological and material determinants of economic investments and outcomes in rural Kenya. Through multi-armed RCT with 8,200 women in 415 villages in western Kenya from relatively poor households, the intervention was to improve self-beliefs through vicarious experience i.e. a documentary video. The aim was to examine the effects of increasing wealth and altering ‘self-beliefs’ (or aspiration) and goal-setting on economic outcomes, by providing participants with either a cash transfer, psychological (aspiration) video, or both.
The authors found that both cash and psychological intervention increase asset stocks and raise an index of economic outcomes, but adding the psychological intervention increases education spending in addition to food consumption. All treatment arms have an immediate effect on self-beliefs, although this is only temporary.
Reducing the effect of poverty in the mind
For people living in poverty, a tendency to cling on to traditional norms may be connected to a sense of security and certainty that is not available in everyday life. Living in a state of poverty creates stress and reduces cognitive bandwidth, which may lead to less attention to loan payment and low self-belief. Social norms are difficult to shift, but stepping-stone approaches may help gradually change behaviour and then beliefs about what is a socially appropriate behaviour within a specific context.
There’s evidence that poverty may affect cognitive function in adults, and growing up in poverty or adversity is a risk factor for impaired development of some cognitive functions, potentially with economic effects. However, studies have rarely explored the relationships between mental health, cognition, and poverty.
Steps for the future
Further exploration is needed to establish whether interventions from psychiatry or neuroscience might be effective as part of poverty reduction interventions. This includes understanding:
- What mechanisms and interventions, with elements from cognitive neuroscience and psychiatry, might affect economic decision-making?
- What economic behaviours are most effective to target?
- Who should be targeted?
- Which interventions have potential for scale?
Development economics has come a long way since its cross-sectional regression days of the 1990s. Informed by behavioural sciences, psychology, and even psychiatry and neuroscience, the ultimate goal of the discipline today is to not only reduce the effects of poverty economically, but also to reduce the effects of poverty mentally and in minds.
Successful development programmes rely on people making decisions that are best for themselves, given their context and circumstances. Behavioural economics and psychology help us understand why behave and choose as they do. Learnings from the conference make it clear that designing effective development policies requires not only better incentives, but also social and psychological interventions that can improve both economic and mental wellbeing.
In light of the current COVID-19 pandemic, it is vital that social norms and psychological biases are understood when designing policy responses and measures to protect the lives and livelihood of people. There are already lessons that can be learned from policy responses by governments around the world. The Blavatnik School of Government at University of Oxford is currently collecting and tracking data of government’s responses to COVID-19 at a global level, and a fiscal response tracker has been launched by the IMF. This could provide OPM with an opportunity to evaluate the effectiveness and lessons that can be learned from policy responses by governments around the world; and the role that social norms and psychological biases play in determining the success of these responses.
For more reading on behavioural economics, see also our recent In Focus piece by OPM’s senior consultants Paul Jasper and Michele Binci, which reflects on the use of RCTs and the implications on development policies.