metadata: authors: 0: author: Demeritt,Allison Davis
1: author: Hoff,Karla
count: World
docna: 0: docna: "Small miracles" -- behavioral
            insights to improve development policy : World Development
            Report 2015
docty: Policy Research Working Paper
subtopic: Health Care Services Industry,Disability,Educational Sciences,Educational Institutions & Facilities,Services & Transfers to Poor,Economic Assistance,Access of Poor to Social Services,Effective Schools and Teachers
teratopic: Poverty Reduction,Education
abstracts: cdata!: One of the most fruitful advances in
            modern economics has been the introduction of psychological
            realism into the model of "economic man." The
            World Development Report 2015 organizes the evidence about
            how humans actually think and make decisions into a coherent
            framework useful for designing development policy. This
            paper elaborates on the three principles of human thinking
            that constitute the report's intellectual framework:
            Human thinking is dual process -- automatic as well as
            deliberative (thinking automatically); it is conditioned by
            social context and the salience of social identities
            (thinking socially); and it is shaped by mental models that
            are socially constructed (thinking with mental models).
            Behavioral insights create scope for policy interventions
            that produce "miracles" from the perspective of
            traditional economics.
repnme: repnme: "Small miracles" -- behavioral
            insights to improve development policy : World Development
            Report 2015
display_title: "Small miracles" --
            behavioral insights to improve development policy : World
            Development Report 2015
listing_relative_url: /research/2015/02/24021435/small-miracles-behavioral-insights-improve-development-policy-world-development-report-2015
topicv3: Teachers Management m1326119 1523,Education m1327048 470,Cash Transfers m1327437 1608,Health m1504661 3480,Psychiatry, Psychology m1504686 3613
publishtoextweb_dt: 2015-02-01T00:00:00Z
historic_topic: Poverty Reduction,Education
no_of_pages: 33
author_keys: 0: author_key: 1263955
1: author_key: 165628
model_extractions: WPS7197 Policy Research Working Paper 7197 Background Paper to the 2015 World Development Report “Small Miracles”—Behavioral Insights to Improve Development Policy World Development Report 2015 _Allison Demeritt Karla Hoff_ Development Economics Office of the Senior Vice President and Chief Economist February 2015
Policy Research Working Paper 7197

# **Abstract**

One of the most fruitful advances in modern economics has been the introduction of psychological realism into the model of “economic man.” The _World Development Report 2015_ organizes the evidence about how humans actually think and make decisions into a coherent framework useful for designing development policy. This paper elaborates on the three principles of human thinking that constitute the report’s intellectual framework: Human thinking is dual process—automatic as well as deliberative _(thinking automatically)_ ; it is conditioned by social context and the salience of social identities _(thinking socially)_ ; and it is shaped by mental models that are socially constructed _(thinking with mental models)_ . Behavioral insights create scope for policy interventions that produce “miracles” from the perspective of traditional economics.

This paper—prepared as a background paper to the World Bank’s _World Development Report 2015: Mind, Society, and Behavior_ —is a product of the Development Economics Vice Presidency. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at allisone@uw.edu and khoff@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
“Small Miracles”—Behavioral Insights to Improve Development Policy: _World Development Report 2015_ Allison Demeritt Karla Hoff
“Small Miracles”—Behavioral Insights to Improve Development Policy: _World Development Report 2015_<sup>*</sup> Keywords: Behavioral economics, Psychology, Sociology, Schemas, World Bank JEL Codes: D03, O20, Z13 Behavioral economics policies are beautiful because they are small and concrete but powerful. They remind us that when policies are rooted in actual human behavior and specific day-to-day circumstances, even governments can produce small miracles.

Brooks, _The New York Times,_ December 12, 2014, A29 Rational actor models dominate much modern economic thinking. But rational choice theory cannot explain the striking effects of the policies discussed in the World Bank’s latest _World Development Report_ (World Bank Group 2015) _._ In his review of the report in _The New York Times_ , David Brooks celebrates the behavioral approach to development because it creates opportunities for policy interventions that produce “small miracles” from the perspective of traditional economics. Brooks’ review focuses on the proven small policy successes of behavioral economics, but the report is meant to do more than showcase small wins. It also aims to show that behavioral insights yield entirely new understandings of the causes of economic underdevelopment and social exclusion, which create scope for new interventions to promote “big” development outcomes. Advancing this work, which is still at an early stage, is a key aim of the _World Development Report_ (WDR).

_______________

> *Forthcoming in the Proceedings of the 17th World Congress of the International Economics Association, Amman, Jordan, edited by Joseph E. Stiglitz. The authors are grateful to the entire team of the _World Development Report 2015_ .  These are the views of the authors and do not reflect those of the World Bank, its Executive Directors, or the countries they represent.

> † University of Washington.  Email: allisone@uw.edu

> ‡World Bank.  Email: khoff@worldbank.org

2
This essay elaborates on a key contribution of the WDR – an analytical framework for understanding human decision making. Whereas the WDR centered on successful interventions in the developing world, this paper pays special attention to the sociocultural roots of underdevelopment and the deep consequences of psychological, social, and cultural influences on decision making. It shows how small changes in the choice environment can alter behavior in ways that can have real consequences for individuals’ lives and societal outcomes. It thus shows how behaviorally informed interventions may produce both small miracles and big changes in society.

# _A brief history of behavioral economics_

A focus on the psychological, social, and cultural characteristics of _homo economicus_ has been long in the making. For many years, psychologists, sociologists, and other social scientists questioned the dominant economic paradigm based on rational and self-interested actors with fixed preferences. Gradually, armed with experimental methods and new tools for measuring decision making, behavioral economists made inroads into mainstream economics by demonstrating that people are often psychological rather than logical and that their preferences are malleable rather than fixed. The inroads inspired changes in finance, game theory, and macroeconomics (Akerlof 2002; Camerer 2003; Camerer, Loewenstein, and Rabin 2004). Some of Adam Smith’s ideas about human nature that were rejected at the onset of the neoclassical revolution have now become widely endorsed (Ashraf, Camerer, and Lowenstein 2005). Economics has thus come full circle—from _homo sapiens_ to _homo economicus_ and, within the behavioral approaches, back to _homo sapiens_ (Thaler 2000).

Yet most definitions of behavioral economics have emphasized what people cannot do. Humans have bounded information-processing power and so might not respond to true probabilities. They have bounded attention and so might not respond to true costs and benefits. They have bounded willpower and so might not act on their intentions. By generating lists of mistakes and biases that people make, behavioral economics insights remained tightly tethered to the rational actor framework. Since behavioral economics did not emphasize alternative foundational elements that drive decision making, it provided limited direction to practitioners interested in creating new instruments to improve development outcomes.

3
# _A new approach – three principles of thinking_

The _World Development Report 2015_ moves behavioral approaches center stage. It develops three principles of thinking and decision making by synthesizing evidence from across the social and natural sciences – including psychology, sociology, anthropology, political science, neuroscience, and cognitive science. The principles are: _Thinking automatically._ Most human thinking is automatic, not deliberative. It is based on what effortlessly comes to mind. Changing what most easily comes to mind can thus be a powerful means to change behavior.

_Thinking socially._ Human thinking is socially conditioned. What others are doing and expecting others to do intimately shapes an individual’s own preferences. Enhancing the salience of others’ cooperative efforts can thus shift preferences. Introducing change initiatives at the group rather than the individual level and cueing an aspect of social identity can also shift preferences.

_Thinking with mental models._ Thinking uses mental models to interpret the environment (Denzau and North 1994; North 1994). Examples are categories, identities, default assumptions, and automatic causal narratives. Many are widely shared social constructions ( _cultural schemas)._ Most are useful, but some are not. What people take to be common sense may be shaped by the political and economic institutions to which they have been exposed. Exposure to different interpretive ideas and role models may change mental models and so make possible sustained changes in behavior.

The three principles encompass psychological, social, and cultural influences on thinking that fall outside rational actor models. By presenting alternatives to standard economic assumptions about decision making and illustrating their applicability to areas including health, savings, productivity, child development, and climate change, the report demonstrates the broad relevance of behavioral insights and the importance of engaging with them in policy-making.

A central message of the WDR is that the causes of underdevelopment are not limited to — the core factors in the standard economic framework poor technology and resources, distorted incentives, and problems of information. Psychological, social, and cultural factors are also core factors. Although people generally believe that they respond objectively to a situation, culture 4
affects what they attend to and how they interpret the situation. A consequence is that development policy can work both _with_ and _around_ psychological, social, and cultural drivers of behavior: It can work _with_ them by harnessing them to promote development; it can work _around_ them with techniques that refocus attention. The new approach to policy making does not replace traditional development tools; it supplements and expands them. The following sections elaborate on the three principles of thinking.

# **Principle 1. Thinking automatically**

The rational actor in standard economics has remarkable abilities: he processes information costlessly and without bias. In fact, careful thought is exhausting and is often avoided. Much of human thinking is based on what comes to mind effortlessly and on the use of simple rules of thumb and heuristics. Automatic thinking—intuitive, associative, and impressionistic—is the “secret author of many of the choices and judgments you make,” the psychologist Daniel Kahneman (2011) writes in _Thinking, Fast and Slow._ For his work on automatic thinking, he was awarded the Nobel Prize in Economic Sciences in 2002. He demonstrated that automatic thinking leads to systematic biases in judgment (Tversky and Kahenman 1974, 1983; Kahneman 2003). The next paragraphs present an example of automatic thinking and gives examples of two biases that a need for psychologically informed economic policy.

# _Anchoring_

A math exercise demonstrates how automatic thinking can radically shape the judgments individuals arrive at. Consider asking one set of people to estimate in five seconds the product 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 and asking another set of people to estimate the product 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1.

Tversky and Kahneman (1974) posed the questions to high school students. As shown in figure 1, the first group made a median estimate of 512, and the second group made a median estimate of 2,250. The correct answer is 40,320. The starting value “anchors” the estimation process such that different starting points yield different estimates. The adjustments that individuals 5
- 1x2x3x4x5x6x7x8=? Median answer is 512

- 8x7x6x5x4x3x2x1l=? Median answer is 2,250

- The correct answer is 40,320 Source: TverskyandKahneman 1974. |
<!-- Start of picture text --> 2<br>3><br>5%°<br>g,:2<br>3s 20---- mee<br>3 2<br>2<br>£ 34 48<br>ce]<br>MW Verbal encouragement to save for health needs<br>Gl Verbal encouragement+ labelling + a lockable box<br><!-- End of picture text -->
_A decision format_ Thinking automatically is a universal trait. It is not a problem of only poor countries or only poor people. The next example illustrates the power of a decision format to change the behavior of people in a rich country. In the example, a substantively irrelevant decision-making format affects the number of colleges that students apply to. It has large effects on the estimated lifetime earnings of students from poor families.

Many colleges in the United States require that applicants take a college readiness exam called the ACT. Before 1998, the ACT administration allowed students to send free score reports to three colleges and charged $6 for each additional report. Most students took the threescore report rule as a guideline for how many colleges to apply to. As figure 3 shows, over 80 percent of ACT-test takers sent their scores to only three colleges; less than 10 percent sent their scores to four colleges. In 1998, the ACT rule changed for about half the students, and it changed for all students after 1998. The new rule allowed students to send free score reports to four colleges. The new rule caused most students to send reports to four colleges. The more colleges that students from low-income families apply to, the more they reach for quality schools. Some were accepted by the more prestigious schools and attended them. The new rule increased the lifetime expected earnings of students from low-income families by an estimated $10,000 (Pallais, forthcoming).

The change in the ACT decision format turned out to be a powerful means of improving the number and quality of colleges to which high school students applied. The change in the decision format affected the number of score reports sent out by children in high-income families as well as in low-income families, which is consistent with the view that the choice did not reflect actual deliberation. The change in the ACT decision format for sending score reports changed the rule-of-thumb that students latched onto to decide how many colleges to apply to. The change would make virtually no difference under a rational actor model.

8
TM@ Three score reports @ Four score reports <!-- Start of picture text --> gL<br>wo 0.6 °° oeee ee eee oeee a ei oe<br>a<br><<br>o<br>ic:<br>0 1991 1992 1994 1996 1998 2000 2004<br>High school graduation year<br><!-- End of picture text -->
# **Table 1.  Policies that work by changing automatic thinking**

|Problem|Solution|
|---|---|
|Too little adherence to<br>antiretroviral treatment by<br>AIDS patients in Kenya|Send patients a weekly_reminder_stating “This is your reminder,”<br>through a low-cost message service on cell phones. Patients<br>who received a weekly reminder increased adherence to the drug<br>regime by13percentagepoints.|
|Too little enrollment in<br>post-secondary schools in<br>Colombia|Reduce the bimonthly conditional cash transfer that rewards<br>parents of students with good school attendance, and distribute<br>the funds lump sum at the time of the students’ high school<br>graduation. This policy increased enrollment in post-secondary<br>institutions by 49 percentage points. The_change in timing_<br>meant parents did not need to think about saving the money and<br>could instead use it shortly after receipt to make enrollment<br>payments.|
|Too little teacher effort in<br>the Chicago public schools|Pay teachers a bonus at the_beginning_of the school year, which<br>they will lose if their students do not meet a threshold<br>achievement level at the end of the school year. This policy<br>increased teacher effort and student performance, whereas a<br>policy of paying teachers the bonus at the_end_of the school year<br>conditional on student performance did not increase effort or<br>performance. The psychological_aversion to loss_made the<br>bonus in the former case more salient than in the latter case.|
|Too much borrowing in the<br>United States from high-<br>cost “payday lenders” by<br>those who cannot obtain a<br>credit card|<br>_Anchor_the costs of borrowing funds_._An anchor can be<br>provided on the envelope in which individuals receive borrowed<br>funds. The envelope can show the dollar costs of the payday<br>loan compared with the dollar cost of borrowing that amount on<br>a credit card. Borrowers who received envelopes with the<br>anchor were 11 percent less likely to borrow from payday<br>lenders in the next four months compared to the group that did<br>not.|

_Source_ : Pop-Eleches and others 2011; Barrera-Osoria and others 2011; Fryer and others 2012; Bertrand and Morse 2011.

10
# **Principle 2.  Thinking socially**

The fundamental tenet of ‘thinking socially’ is that individuals are rarely as independent of others in their decision making as the standard economic model assumes. The neoclassical actor determines his interests on his own and is generally assumed to be selfish. His preferences remain fixed across social settings. However, real humans are deeply social animals. They think and act as members of communities, imitate others, and may favor social patterns of reciprocity, fairness, and norm adherence even when following the patterns lowers their monetary payoffs. Recent evidence shows that many people are more altruistic and cooperative than the standard economic model assumes, as long as other people are behaving fairly and cooperatively (Fehr and Gachter 2000 and WDR chapter 2).

# _Social identities and identity dynamics_

A key goal of the WDR is to showcase novel interventions that have had demonstrable impact in the developing world. One consequence of this focus is that some concepts did not receive the attention they would deserve in a behavioral approach to development economics. _Social identity_ is one such concept. While the chapters briefly discussed identities, the WDR gave short shrift to the _dynamics_ of identity processes and the role that psychologists, sociologists, and anthropologists believe the dynamics play in social and economic outcomes.

Identities are the “senses of self” that individuals derive from perceived group memberships. They are categories that carry social meanings and are closely linked with particular sets of behavioral norms. Everyone possesses multiple social identities –a person might take on the social roles of parent, child, employee, and member of a religious or ethnic group at different times. The context at a given time influences which identities are salient to an individual. In part because people are automatic thinkers with limited cognitive bandwidth (principle 1), and in part because people are social animals with an innate tendency to adjust to their social environment (principle 2), people do not process all details of a situation and all possible courses of action. Instead, they tend to see only those details and courses of action that — automatic and social thinking suggests are relevant and this can depend on which identity is activated.

11
The chameleon-like ability to shift identities helps people adapt to the diverse roles they play in life. But a consequence is that when an identity of an individual that is associated with a stigmatized gender, class, caste, race, ethnicity, or profession is activated, he may fail to recognize and seize opportunities that would benefit him. He may engage in individually or socially harmful actions, or become the target of others’ prejudice and exclusionary behaviors. Social identities influence how an individual views a situation and also how others regard and treat him; the concept of social identity helps anchor the reciprocal influences between self and society that can generate self-reinforcing and vicious feedback cycles. In the terminology of economics, social identities can trap people in negative equilibria.

Individual identity acts are micro-phenomena. In the examples provided below, a banker over-reports his earnings; a judge misjudges the validity of a co-ethnic’s legal claim in the wake of conflict; and a student scales back effort when reminded of a marginal social group she belongs to. When such acts occur by enough people or over a long enough period of time or repeatedly over an educational career, the cumulative effect may be a macro-phenomenon: a dishonest business culture, persistent ethnic tensions, and poor educational outcomes for students from particular social groups.

# _Professional identities and organizational cultures_

A compelling example of the influence of identity on behavior comes from the financial industry. Drawing on concerns that a banking culture that tolerates dishonest behavior is to blame for recent scandals, researchers hypothesized that reminding bank employees of their professional identity would cause them to act more dishonestly than they otherwise would (Cohn and others 2014). Some 128 employees from a large international bank were recruited to perform a coin-tossing task with real earnings. Subjects were randomly assigned to either a treatment condition that made their professional identity salient, or a control condition that did not. Before beginning the coin-tossing task, subjects completed a short online survey. Those in the treatment group answered questions that “primed” or “cued” their professional identity (such as “What is your function at this bank?”), while those in the control group answered questions unrelated to their profession. Then everyone was asked to toss a coin 10 times and report the results online. Subjects were told in advance whether heads or tails was the “winning” result for 12
each toss, and that each winning toss could be worth $20. Individuals therefore had the potential to earn $200. Subjects were also told that they would be paid only if the number of their winning tosses was at least as great as the number for a random player from the pilot study. In this way, researchers aimed to mimic the competitive environment of the banking industry. The structure of the game provided anonymity to the subjects, but enabled researchers to measure dishonesty by comparing the fraction of “winning” tosses that the subjects claimed to the expected distribution of winning tosses under honest reporting.

What happened? Employees were significantly more dishonest when their professional identity of bank employee was made salient. A subsequent task provided additional evidence by showing that primed subjects were thinking differently than their unprimed peers: When asked to turn word fragments into meaningful words, primed subjects were more likely to generate — bank-related words for instance, turning the word fragment “_ _ oker” into “broker” as opposed — to “smoker” than those whose professional identities were not made salient. The results suggest that the professional identity of banker is associated with norms of dishonesty, and that dishonest behavior across many employees can create an environment in which fraud becomes part of the taken-for-granted banking culture. The culture reinforces the acceptability of dishonest behavior, making individuals more likely to commit fraud, and so on, in a selfreinforcing cycle.

# _Ethnic identities and ethnic conflict_

Social identities affect not only how individuals see a situation, but also how others treat them. Social psychologists theorize that humans have an intrinsic need to maintain positive selfesteem, and that this need can cause people to favor in-group members and denigrate out-group members (Tajfel and others, 1971). The resulting identity dynamics can contribute to prejudice, exclusion, and conflict.

Consider an example from the legal system. Judges are often thought (and trained) to be among the most neutral of arbiters. Yet in small claims courts in Israel, where cases are – randomly assigned to Arab or Jewish judges, judges were 17 20 percent more likely to uphold a claim when the judge and plaintiff shared a social identity (Arab or Jewish) (Shayo and Zussman 2011). Judicial bias increased with ethnic conflict: the greater the intensity of terrorism in the 13
<!-- Start of picture text --> GO -- ste et te te ee<br>3 ee<br>£<br>@Q<br>oO<br>£<br>rs)<br>79% | 72% 65% | 75%<br>6<br>Jewish plaintiff Arab plaintiff<br>{Jewish judge<br>i Arab judge<br><!-- End of picture text -->

{Jewish judge i Arab judge
# _Racial, social class, and caste identities and educational achievement_

Why do some social groups exhibit persistent underachievement in education? Economists generally focus on unequal resources and lower expected wages to explain education gaps between groups in society. However, sociologists and some economists have proposed that identities are a key determinant of the demand for education (Coleman 1961; Akerlof and Kranton 2010). Humans want to feel in most social situations that they ‘fit in.’ As a result, students who feel they do not belong in school may reduce their effort and participation, irrespective of the opportunities to participate and the expected monetary benefits of doing so.

The effects of identity on performance in school may reflect not choices but instead selfconfidence. When African American students were asked to answer a demographic question about their race before beginning a test, their performance declined relative to peers who were not reminded of their identity (Steele and Aronson 1995). And like the bankers discussed above, students “primed” with a racial question were more likely to complete word fragments in ways relevant to an African American identity, providing evidence that the priming question activated race-related mental constructs. Primed students were also more likely to create words reflecting self-doubt about competence and ability: for instance, by turning the fragment “_ _ unk” into “flunk.” Hoff and Pandey (2006, 2014) produced similar results in India, showing that although high-caste and low-caste schoolboys performed equally well in a maze-solving task when caste was not salient, publicly revealing their castes in mixed groups created a significant caste gap in performance.

Students’ social identities may also affect how others, including teachers, treat them. In a classic study, university students watched a short video of a fourth-grade student named Hannah portrayed either as a poor child living in an urban area (low socioeconomic class) or a wealthy child in a suburban setting (high socioeconomic class) (Darley and Gross 1983). The evaluators judged Hannah’s academic abilities similarly regardless of whether they saw her portrayed as a low- or high-class child. However, when students watched one of the “class” videos followed by a second video showing Hannah’s performance on an oral test in which she answered some questions correctly and others incorrectly, things changed: those who had first seen Hannah in the wealthy setting believed her to have high ability and recalled that she got most questions correct, whereas those who had first seen her in the poor setting believed her to have low ability 15
and recalled that she answered many questions incorrectly. Researchers explained this result by suggesting that the university students formed initial hypotheses about students’ abilities upon watching the “class video” but were able to ‘overcome’ them when no performance information was available. In contrast, even objectively ambiguous performance data about Hannah’s ability caused the subjects to falsely confirm their initial hypotheses, resulting in biased assessments of Hannah’s ability. The study shows how subconscious processes (using automatic thinking— principle 1) may play into unequal schooling experiences for student from different social backgrounds.

A modern means of measuring bias is the Implicit Association Test (IAT), which assesses the speeds at which subjects match attributes (such as “good” and “bad”) to concepts or identities (such as “female” and “male”). Response times are faster for pairings between concepts and attributes that are closely associated in subjects’ minds. Differences in matching speeds are thought to reveal “implicit biases” that underlie automatic thinking. Researchers used IATs to examine the bias of Dutch teachers. They found that although teachers’ self-reported measures of prejudiced attitudes were unrelated to their students’ achievement, the implicit measures of — — teacher prejudice thought to predict behavior arising from automatic thinking (principle 1) explained differing ethnic achievement gaps across classrooms (van den Bergh and others 2010). This finding supports the idea that teacher expectations can enlarge social inequalities in educational attainment.<sup>2</sup> Two distinct identity dynamics may impair the educational outcomes of marginalized groups. In the first, students aware of a stigmatized identity exhibit lower performance, possibly as a result of (1) anxiety that taxes their cognitive functioning, (2) disengagement stemming from a lack of belonging, or both. The resulting poor performance reinforces the perception of inadequacy, and this in turn further increases anxiety and withdrawal, which in turn further reduces performance, creating a vicious downward cycle of decreasing performance and disengagement (Cohen et al. 2009). In the second identity dynamic, teachers respond to students’ negative social identities with low expectations and prejudice that may lead them to supply the students with fewer resources – both material (such as textbooks) and nonmaterial (such as encouragement). If both identity dynamics are operating, stigmatized identities may be

> 2 More generally, biased perceptions can change behavior in ways that sustain the biases as “equilibrium fictions” (Hoff and Stiglitz 2010).

16
a more important aspect of educational underachievement than is commonly acknowledged. _Interventions based on social identities_ Can interventions based on an awareness of social identity effects shift behavior? Several studies suggest that they can.<sup>3</sup> “Self-affirmation” exercises in which people with stigmatized identities focus briefly on their personal values or experiences can have surprising effects. For instance, in a randomized, double-blind experiment, students in the United States completed a few 10-minute writing assignments over the course of a year in which they wrote a brief paragraph about values that they selected as being most important to them (the intervention condition) or values that were less important to them but might be important to someone else (the control condition) (Cohen and others 2006, 2009). African Americans who completed the values affirmation earned higher GPAs than their non-affirmed peers and continued to do so even two years after the intervention. Students who had the lowest performance at the beginning of the experiment benefitted the most. Researchers argued that the intervention interrupted the recursive cycle in which anxiety, disengagement and poor performance reinforce one another.

In-class value affirmations have also helped students with low socioeconomic backgrounds. First-generation college undergraduates who, like the minority students above, wrote about values that they selected as most important to them as opposed to values that they selected as important to others improved their course grades and were more likely to continue taking a sequence of biology classes than non-affirmed peers. The intervention cut the achievement gap between the first-generation students and their advantaged peers by 50% (Harackiewicz et al. 2014). Other intriguing evidence for the trajectory-changing effects of affirmation interventions comes from a study conducted at an inner-city soup kitchen that found that low-income individuals who completed an oral affirmation exhibited better executive control and more interest in social benefits programs than non-affirmed individuals (Hall, Zhao, and Shafir 2014). These studies suggest that brief interventions targeting key psychological processes may have large, long-term effects if they interrupt a damaging self-reinforcing cycle or set in motion a beneficial one.

Interventions can also shift identities related to crime. In Liberia, a group-based

> 3 See also the review in Hoff (2015).

17
cognitive behavioral program helped poor young men with criminal histories adopt new “socially aligned” identities. The program was rooted in the idea that the men were social outcasts who understood norms of appropriate behavior but did not consider themselves “subject to these norms, or worthy of inclusion into the larger social group” (Blattman, Jamison and Sheridan 2014). In daily sessions for eight weeks, facilitators encouraged men to consider themselves as a member of the group subject to the norms -- to see that behaviors associated with one set of circumstances (such as war-time) were unacceptable under another (such as peace-time). They encouraged the men in a number of ways: first, to adopt behaviors (such as cleanliness and managing anger without violence) that signaled to themselves and others that they were operating within societal norms; and second, to develop skills associated with planning and goalsetting. The therapy program was more effective than a cash transfer at changing behavior.

Interventions can also attempt to shift the norms associated with existing identities. For instance, some experts and regulators have proposed that the financial industry would benefit from the development of a professional oath, analogous to the Hippocratic Oath for physicians, that encourages honest banking practices. Ethics training and reminders at key decision points during work routines may also help bring bankers’ decision making and the banking business culture in line with social obligations (Cohn and others 2014).

The Hippocratic Oath is by no means a panacea for good outcomes in the medical profession. However, enlisting social pressure may be an effective means of increasing compliance with existing norms. When doctors are visited by other doctors who remind them of best practices and encourage them to improve their performance, the doctors who are visited do so (Jamtvedt and others 2007; Brock, Lange, and Leonard, forthcoming). Since most people wish to adhere to the norms of their group, giving people more insight into how others are behaving and what others expect from them can be an effective means of changing behavior. In other words, “marketing” socially desirable norms is a means of harnessing social motivations to improve development outcomes (see WDR, chapter 2).

Finally, identity acts can occur outside of conscious awareness and despite good intentions. Since biases are often widespread and go unrecognized by even self-reflective individuals, some believe they may be more pernicious than overt forms of prejudice. In Silicon Valley, where concern for women’s participation and equality runs high, Google is aiming to fight the “deep-set cultural biases...that pervade the tech business” (Manjoo, 2014). A tool that 18
they are employing are Implicit Association Tests, described earlier, to illuminate hidden biases. The hope is that increasing individuals’ awareness of their own “automatic biases” may help them avoid prejudiced behaviors. Such tools might also help development practitioners recognize and attend to hidden biases regarding the populations they seek to help.

# **Principle 3.  Thinking with mental models**

Rational actor models assume that individuals respond objectively to stimuli. But in thinking automatically, individuals draw uncritically on mental models to construct mental representations. “Thinking with mental models” is the third principle of decision-making emphasized in the WDR. It may lead individuals to ignore information that violates their assumptions and to automatically fill in missing information based on prior beliefs. People may “see” things that are not actually there and apply causal thinking to situations that have no inherent causal meaning.

A classic experiment by the psychologists Heider and Simmel (1944) demonstrates the tendency of humans to assign motive and intention in situations when they are unwarranted. Viewers are shown a brief film in which there is a large triangle, a small triangle, and a circle moving around a shape that looks like a house with an open door. Viewers see an aggressive large triangle bullying a smaller triangle, a terrified circle, and the circle and the small triangle joining forces to defeat the bully. The perception of intention and emotion is irresistible; only people afflicted by autism do not experience it. _All this is entirely in your mind, of course_ (Kahneman 2011, – 76 77, italics added).

The triangles and the circle are not really agents, but are perceived as agents because of the mental models that people use to interpret their experiences.

# _Power creates legitimacy_

Mental models help explain societal rigidity and social change. A powerful cause of development traps are weak constraints on a ruling group. Why do such constraints tend to persist over time? In the rational choice framework, the dominant explanation is that high 19
inequality of wealth leads to the adoption of rules that preserve the initial inequality of wealth.<sup>4</sup> In this explanation, institutions matter only to the degree that they establish and enforce rules. However, sociologists and anthropologists argue that institutions also play a “schematizing role.” They shape intuitions and what people believe to be the natural order of things. In this sense, institutions are a way of seeing the world (Douglas 1986; Fourcade 2011).

A study of clientelism in the Indian state of Maharashtra suggests that a mental model may play a role in making oppressive institutions legitimate (Anderson, François, and Kotwal forthcoming). All villages in this state have formal democratic structures but differ, by historical accident, in the extent of the land owned by the traditional elite caste. In villages where the traditional elite owns the majority of land, village leaders manage to control village governance and use it against the interests of the poor majority. Pro-poor programs offered by the national – government of India are 75 100 percent less available in villages in which the traditional elite owns the majority of land than in those in which it does not. However, surveys indicate that the poor in the elite-dominated villages view the situation as acceptable and even quite satisfactory. They are 14 percent more likely to trust the large landholders in villages in which the government is dominated by the traditional elite than in villages not dominated by the traditional elite. It seems that in the villages dominated by the traditional elite, individuals expect little from the dominant class as a whole, get more or less what they expect, and so consider themselves fairly treated. “Legitimacy follows power” in part because power shapes the way people see the world.<sup>5</sup>

# _The culture of honor affects the efficiency of coordination_

Coordination problems occur in every society. Consider the well-known example discussed by Schelling (1960): Two individuals independently decide where to try to meet in New York City when no meeting point has been established in advance. The players gain utility only if they choose the same location. Multiple equilibria exist since all that matters is that players make the same choice. It is necessary to bring in sociological and psychological

> 4 T he dominant contributors are Engerman and Sokoloff and Acemoglu and colleagues.  References and a review are in Hoff 2003.

> 5 See Acemoglu, Reed, and Robinson (2013) for a related example.

20
Player's choice Go Try to it alone cooperate i - 17%gaini | 50% loss Partner's it alone the loser’s payo choice Try to . ; cooperate 17%gain | 70%gain
Will players establish a convention of cooperation and thereby obtain the 70% return each period? High-caste pairs usually did not, but the low-caste pairs usually did. 73 percent of low caste pairs played the efficient equilibrium in the final (fifth) period of a partnership, compared to 50 percent of mixed (low-high) caste pairs, and only 32 percent of high caste pairs.

Caste status is correlated with many individual characteristics, and one might suspect that it is covariates of caste rather than caste culture that is driving the divergence in outcomes. However, the study observes measures of the subjects' wealth and education. Once caste status is controlled for in regression analysis, the covariates are statistically insignificant.

Why do the high-caste pairs fail to form the Pareto efficient convention? The evidence from the game and from surveys of attitudes to vignettes points to the high caste’s culture of honor as the cause. The culture may have given the loser’s payoff the meaning of an insult. In the culture of honor, any slight to one’s well-being tends to be viewed as an insult that must be avenged, regardless of whether the insult was intended or not: _cross me and I’ll punish you_ . Under this view, the loser’s payoff would be interpreted as a wrong to be punished.<sup>6</sup> The only means a player has to punish the wrong is not to cooperate in the next period. Figure 6 shows that high-caste players with high-caste partners are much less likely than low-caste players with low-caste partners to continue to take the cooperative action after obtaining the loser’s payoff. “Punishing” – withdrawing cooperation in one period—can insult high-caste partners and cause even low-caste players to try less often for cooperation. Thus any expectation that each player will try to cooperate can unravel.

> 6 A similar culture of honor is held by men in the US South, but not by men in the US North.   Nisbett and Cohen (1996) expose Northern and Southern men to the same insult and find significantly more aggressive responses from the Southerners. On average, the Southern but not the Northern subjects experienced surges in levels of cortisol and testosterone.

22
<!-- Start of picture text --> 2 0<br>£e<br>o@®<br>23<br>ne<br>Qo<br>aa<br>ae<br>se fe) In high-caste pairs — In low-caste pairs<br><!-- End of picture text -->
Marlboro cigarettes. Development practitioners change mental models, too. For example, in India, the government decreed through a constitutional amendment that one-third of the village governments in each state of India must have a female leader. The villages were selected by lottery. An impact evaluation in one Indian state, West Bengal, found that exposure to women leaders ended males’ prejudice against women in leadership roles and increased parents’ aspirations for their daughters (Beaman and others 2009, 2012). Even after the reservations ended in a village, more women in the village ran for office and won elections. The mandated legal change spurred changes in villagers’ mental models regarding the social role and capabilities of women, and thereby increased their opportunities and aspirations (see WDR, chapter 3).

The exposure to female political leaders in Indian villages produced another change: it greatly increased both the reporting of crimes against women and police responsiveness to such crimes in India (Iyer, Mishra, and Topalova 2012). The increases occurred even though female village leaders had no legal jurisdiction on these matters. The new responsiveness to women’s concerns appears, instead, to reflect a cultural shift that changed women’s perceptions of the costs—psychic and otherwise—of reporting crimes committed against them and police officers’ perceptions of the appropriateness of acting on crimes against women.

A similar chain of events occurred in Pakistan. The government uses a lottery to allocate visas to applicants who seek to participate in the Hajj. At the Hajj, Muslims from over 100 countries gather in Mecca, communally performing rituals. Men and women interact relatively freely, and whites and blacks interact on relatively equal terms. Malcolm X wrote after his pilgrimage, “What I have seen, and experienced, has forced me to rearrange much of my thought-patterns” (X 1965, 346). Utilizing the random choice of Pakistani lottery winners, Clingingsmith, Khwaja, and Kremer (2009) show that participation in the Hajj changed attitudes. Despite the fact that pilgrims’ social roles did not change when they returned home, the experience led them to express greater acceptance of female education and employment, a more positive view of women’s abilities, and greater concern about crimes against women in Pakistan. The effects were larger for those travelling in smaller groups, as predicted by the theory that the effects depend on psychological engagement, which the smaller-sized groups facilitated.

24
The two previous studies are about exposure to real people who are exemplars of a different ‘ways of being’ —women leaders or liberal Muslims. But exposure even to fictional characters can change mental models. Exposure to soap operas that depicted urban families in which women had greater autonomy than actual village women reduced the acceptability of wife-beating, reduced son preference, and increased women’s autonomy in India (Jensen and Oster 2009). Exposure to soap operas that depicted women with few or no children led to a decline in fertility in Brazil (La Ferrara, Chong, and Duryea 2012). The effect was stronger if the respondent was within four years of the age of the leading female character in at least one soap opera that aired, consistent with the idea that the mechanism through which the change occurred was psychological engagement that led individuals to reconsider taken-for-granted fertility behaviors. The decline was comparable to an increase of two years in women's – education. For women aged 35 44, the decline was an 11 percent decrease in the mean probability of giving birth.

# **Conclusion**

A criticism of behavioral economics is that its insights have remained scattered and are often summarized by a list of errors, biases and ‘nots’ about behavior – humans do not have unlimited information-processing powers, they do not have unlimited attention, and they do not have the willpower to act on all their intentions. The WDR untethers behavioral insights from the standard economic model by organizing insights from across disciplines into a coherent framework, building up a new edifice for understanding decision making. It lays out three broad principles of human thinking: most human thinking is automatic rather than deliberative; it is socially conditioned; and it is shaped by socially constructed mental models drawn from limited sets of experiences and surroundings. The broad policy implication is that widening the tools of development practitioners can help them achieve many development objectives. Practitioners should focus not only on correcting distorted incentives and fixing problems of information (the implication of traditional economic models), but also on improving the quality of individuals’ judgments and decisions (the implication of behavioral economics).

25
All frameworks lead individuals to ask some questions, while steering them away from others. The WDR aims to help the development community ask new questions about the causes of underdevelopment and to reconceptualize (and broaden) the menu of policy responses. The nature of human thinking has been investigated in behavioral economics, psychology, sociology, cognitive science, anthropology, and neuroscience. Drawing on these fields, the WDR provides a new framework for the subfield of _behavioral development economics_ , with the hope of advancing the design of interventions capable of producing both small and large miracles.

26