What does behavioral economics have to do with development policy and jobs?  Exciting new evidence now shows that it has much to tell us. In particular, improving the productivity of the informal sector is a major challenge in many regions, and experience so far suggests that the provision of support and services needs to be approached in quite different ways. This looks like a major opportunity to apply approaches derived from behavioral economics.

This month the Jobs CCSA was delighted to welcome to the Bank one of the foremost global experts in this field. Professor Dan Ariely of Duke University gave a fascinating talk in which he showed how small interventions can remove the barriers which lead to shortsighted behaviors. This makes good behavior more likely. He demonstrated that this is not necessarily about education; people generally know what’s best for them. It is all about execution.

We, in the Jobs Group within the World Bank, are working with Professor Ariely to see how we can apply these approaches in a project that seeks to enroll informal sector workers from the slums of Nairobi in pension plans, and encourage them to save.

Using both financial and non-financial incentives, we have been exploring how we can encourage these informal workers, many of whom are poor—to plan for their future. The work in Kenya suggests that most decisions that impact the welfare of a family – including decisions about saving – involve psychological aspects.

The most surprising finding of our studies so far, is that physical signaling encourages people to save, more than financial incentives, or other psychological triggers. (You can watch Professor Ariely describe the project in detail here).

Speaking alongside Professor Ariely, was our colleague Karla Hoff, the Co-Director of last year’s WDR. The WDR presents three principles of decision making that are left out of the standard models that economists use.

First, people have two ways of thinking—deliberative and automatic.  We all think the hero in the story of our lives is the deliberative thinker.  But actually he has only a bit part. Automatic thinking—intuitive, associative, and impressionistic—is the “secret author of many of the choices and judgments you make,” said Karla, quoting the psychologist Daniel Kahneman.  That means that interventions that shape attention matter, though in principle, they should not.  interventions may  be more if they

  • focus attention on critical tasks
  • make the benefits of a good action more salient
  • change meanings to overcome an impediment to development
  • make the default option the socially optimal choice
  • activate pro-social norms
  • provide position social role models that change norms or aspirations

These interventions can address big development problems, even though, according to standard models they should not matter much.
Here are some more examples:

  • Under-5 mortality could be cut in half through investments in readily available preventative health products.  Besides standard policies, what more could be done to increase savings for health products? A recent experiment in Kenya in a region with a high incidence of malaria gave 771 people more information about the value of saving for health needs.  A random subset was also given a lockable box and a passbook that they labeled with their savings goal. The subjects had the key.  They had no commitments to put money in the box.  Yet the intervention had large effects.  The proportion of people who reached their savings goals was only one third for the control group (without the box and passbook) but one half for those with the box and passbook – and they saved a lot more money. The survey results show that the effect depended not on safety but on the effect of the box on the salience of savings goals.
  • There is a broad principle from psychology and sociology that is left out of the standard economics model: the WDR calls it ‘thinking socially.’ In Ethiopia, many poor people say things like: “we have neither a dream nor an imagination” and “we live only for today”.  To combat this negative thinking, a 1-hour video of four personal success stories was shown to randomly chosen subjects in 64 villages. The videos were documentaries about people from similar communities who had succeeded in agriculture or small business. Others, in the placebo treatment, watched a standard Ethiopian recreational TV show. For the treatment group, aspirations rose, savings increased, and the number of hours worked went up. The effects were small but statistically significant.  They were caused only by watching a one-hour video six months earlier.

These studies show that standard price effects are not the only determinants of behavior. Thinking is generally intuitive: it is shaped by context and historical background. We need to create interventions that can efficiently shift behavior towards individuals’ goals and broadly endorsed social goals. This is particularly true of our work to make informal sector jobs more productive, where our traditional approaches designed for formal sector firms may not be appropriate.

 This post first appeared on The World Bank Jobs and Development Blog.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nigel Twose is the Senior Director responsible for the World Bank Group’s work, together with its development partners, to tackle the global jobs challenge. 

Image: Silhouetted workers walk in front of office towers in the Canary Wharf financial district in London. REUTERS/Luke MacGregor