Nudgers should be snubbed

It is sad fact that as the emerging economies have become wealthier the discussion of development has become ever more degraded. Whereas the focus used to be on economic transformation, attempting to turn poor countries into rich ones, the new generation of experts promotes behavioural correctness.

Take a look at the 2015 edition of the World Development Report, the World Bank’s flagship publication, with its focus on “Mind, Society and Behaviour”. Among the interventions it suggests are giving lentils and metal dinner plates to those who have their children immunised, showing inspirational videos on escape from poverty and sending weekly text messages to remind patients to take their HIV medicine. It is a long way from the old orthodoxy where the emphasis was on such projects as building dams, power stations and roads.

The patronising “nudges” favoured by contemporary experts are based on supposed insights gleaned from behavioural finance. Although psychology can throw light on individual behaviour its use by development experts tends to be banal and misleading.

To begin with it identifies three principles of human decision-making: automatic, social and using mental models. The first and third of these are drawn from the work of Daniel Kahneman who won the Nobel prize for economics in 2002, except he refers to system one (fast) and system two (slow) thinking.

Fast and slow thinking are contrasted with the economists’ conception of rational economic man. Individuals often make quick fire judgments and they also use mental models which can sometimes be misleading.

The problem with the behavioural argument is that the notion of rational economic man is made of straw. Few economists would argue that humans act solely as calculating machines when it comes to making decisions. People often do make decisions without much thought and they can indeed be misled by the concepts they use. These are not the great insights that the behavioural finance experts often suppose.

On the contrary, humans have the ability to interact with each other and to reflect on their choices. This provides the opportunity to make important decisions through the clash of ideas in public debate.

Although the World Development Report does discuss social decision-making its conception is exceedingly narrow. The focus is one-sidely on how social pressures can influence people to think in a particular way: “human sociality implies that behaviour is also influenced by social expectations, social recognition, patterns of cooperation, care of in-group members, and social norms.” There is little appreciation of how, through social interaction, it is possible to change society for the better.

The behaviourists have a dim view of the ordinary people of the developing world. Such pundits are so pessimistic about human potential they think progress consists of nudging individuals towards behaviour that the experts deem as correct.

The most positive outcome would be for the nudgers to be ridiculed. Living standards in Asia in particular have risen tremendously in recent years through ignoring the obsession with individual behaviour and promoting economic growth.

This blog post was first published today on Fundweb