Free exchange: Poor behaviour | The Economist

Free exchange: Poor behaviour | The Economist: "Conventional economic thinking assumes the poor will want to earn their way out of poverty. But as studies from countries as different as Ethiopia and France show, poverty makes people feel powerless and blunts their aspirations, so they may not even try to improve their lot. When they do, they face obstacles everywhere. They have no margin for error, making them risk averse. If they do not know where their next meal is coming from, saving and investing for the future is hard. George Orwell said, “Within certain limits, the less money you have the less you worry.” He was wrong. The poor are subject to exceptional levels of stress: childhood sickness is more likely to be life-threatening; crop failure can lead to destitution. And stress makes good decision-making harder. Above all, the poor lack the institutional framework which, in the West, improves decisions. Everywhere, people underestimate the benefits of education and save too little for their retirement. But children in the West go to school as a matter of course; pension systems make some savings automatic. Poor countries provide few such props.

All this helps explain why the poor stay poor; why (for example) subsistence farmers do not buy fertiliser or put children into secondary school, though they would benefit from doing so. More important, though, behavioural economics provides a different way of thinking about some of the problems of poverty.

Traditional development programmes stress resources and markets. People are poor, the argument goes, because they lack resources: not just money but roads, clinics, schools and irrigation canals. The job of development is to provide those things. And since resources also need to be allocated properly, prices have to be right. So a lot of development is about freeing prices and making markets more efficient.

A behavioural approach to development is different. It focuses on how decisions are made and how they can be improved. For example, in Bogotá a conditional-cash transfer programme paid mothers a monthly stipend if they took their children to school. Attendance during the school year was good but re-enrolment rates were low. A shift in the timing of the hand-out—withholding a part of the regular payment until just before the start of the school year—boosted enrolment sharply. This makes little sense in conventional economic terms: going to school is so beneficial that families should not need extra incentives and the overall sum available did not change. Yet the pay-off was substantial."

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