The World Bank’s World Development Report 2015 focuses on the application of behavioral economics (study the effects of psychological, social, cognitive, and emotional factors on the economic decisions of people and institutions and the consequences for market prices, returns, and the resource allocation. Behavioral economics is primarily concerned with the bounds of rationality of economic agents) to development policy. The focus, since people tend to be emotional beings than geniuses or ideal humans, is on consideration of human factors and social norms for policy design.
For eg; What is poverty? Apart from the definition how should a policy maker read it, that the policy being designed is reaching the needy?
Poverty is general scarcity or dearth, or the state of one who lacks a certain amount of material possessions or money. It is a multifaceted concept, which includes social, economic, and political elements. Poverty seems to be chronic or temporary, and most of the time it is closely related to inequality. The idea that poverty is not only the absence of resources but it’s a certain mindset. It’s a perspective on the choices that a person has. We need to keep focusing on the material side of poverty. But it is also true that poverty is a cognitive tax. It depletes one’s mental resources. People having stable jobs are fortunate, when they want to get lunch they know where to go. When you are very poor on the street you have a lot of decisions to make during the course of the day. Where do I get my supplies, where do I sell, where do I get my food, is someone going to harass me, how do I save. One study found that here in India the same sugarcane farmer had ten IQ points higher when they had cash during the time of the harvest compared to when they didn’t have cash.
So, its not just lack of resources but often determines how people behave. There’s something that people call the scarcity mindset. If money or time is scarce, you very much focus on what you have to get done which is important for attacking that problem but at the cost of other things. You start paying less attention to long term objectives. So, this hypothesis has been known for some time and we now have evidence (which is beyond the scope of this article) to say that scarcity actually affects fluid intelligence and executive function. Executive function is self-control. This matters a lot especially during times when you are particularly pressed. Like the sugarcane farmer before the harvest they don’t have much money, they are poor. After the harvest they certainly have substantially more resources. You can see that they are much more likely to take out loans before the harvest. So that’s trying to point out that, poverty is kind of mindset. There are times when you are particularly bandwidth-depleted.