Behavioral Economics and Development - Saugato Datta

January 03, 2013

SaugatoEconomists, development and otherwise, often assume that people given the right information will make informed decisions in their own best interest. Not! Just like the rest of us, the poor people targeted by development programs sometimes lack self-control and fail to take actions that would benefit them in the long run, even when they understand the potential benefits. My guest on this week’s Wonckast, Saugato Datta, draws on findings from his recent policy paper, co-authored with CGD visiting fellow Sendhil Mullainathan , Behavioral Design: A New Approach to Development Policy, to show how program designers and policy makers can become more effective in helping poor people by systematically taking behavioral economics into account. Saugato is the vice president of Ideas 42, a nonprofit that applies behavioral economics to real world problems that have the potential for social impact. He begins by explaining what he sees as a fault in the way development policy is often designed. “We all recognize in ourselves we have limited self control,” Saugato says. “But the funny thing is that when you think about the way policy is designed, quite often people seem to forget that the people the policy aims to target also have these same problems.” Saugato uses the example of low fertilizer use in developing countries to show how peoples’ behavior often complicates development policy. Drawing from a study in Kenya, he explains that almost all farmers in the study intended to use fertilizer, but three quarters of those farmers did not end up doing so. I ask Saugato why this happens. “It turns out that farmers have exactly the same self control problems  that you or I might have when it comes to going to the gym or skipping dessert,” Saugato tells me. “The farmers would like to save some of their money for buying fertilizer in the next season, but it just turns out that they find other uses for this money and it just doesn't happen. Once you understand that a self control problem is playing out, you can think of ways to remedy this.” Armed with this knowledge, Saugato says, researchers tried increasing fertilizer use in Kenya by creating commitment accounts—a feature added to existing bank accounts—which allowed the farmers to lock away money until a specified date. Farmers who opted to use these accounts saved more money and used more fertilizer. Saugato also tells me that easy interventions like text message reminders can have big effects. In Bolivia, Peru, and the Philippines  text message reminders about bank customers’ own savings goals increased savings by 16 percent, he tells me. I end the Wonkcast by asking Saugato to propose one way for development professionals to take advantage of the ideas in his recent policy paper. “It would be really exciting if someone who worked in a particular area were to read this, and it would spark thoughts about how these psychological factors, and how some bottlenecks we talk about in the paper could apply to their work,” Saugato says. “Then you might begin to see people rethink the way they go about doing their work that could be quite powerful.”


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