Aspirations and Real Estate Investment in Rural Myanmar — New Working Paper

Aspirations, or future-oriented goals, influence how we make choices in the present. In recent years, development economists have developed a particular interest in the way aspirations influence human behavior. The figure below plots my calculation of the number of published articles that mention “aspirations” cataloged in the EconLit database from 1956 through 2016.

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Links I Like [8.16]

Myanmar’s Religious Problem

What the Red Sox – Yankees Rivalry Can Teach Us About Political Polarization Quote: “I can hate the Yankees, feel wronged that Tom Brady is benched for a few games, and make the absurd claim that I would be very upset if my sons married Yankees fans. In sports, irrational partisan feelings are permissible because the stakes are so low. Irrational partisan emotions clearly exist in politics, too, but in politics we should be ashamed of them.”

Bruce Wydick reviews “Misbehaving” by Richard Thaler

Can We Measure Poverty from Outer Space?

How the Most Dangerous Place on Earth Got Safer

Top Posts from 2015

Another year has gone by and I’m still blogging. Here are a list of the top posts from the past year, listed in order of popularity.

1. 7 Thoughts on Syrian Refugees

2. Poor Behavior: 3 Myths about Behavioral Economics

3. [Book Review] Africa: Why Economists Get it Wrong

4. The Economics of Climate Change and Water in Kenya

5. Scarcity, Hope, and the Psychology of Poverty

Measuring Hope: Lessons from Rural Myanmar [Post-Op Notes]

For those who don’t know, a great new blog about applied development economics was launched last academic year. Managed by some folks over in Cornell’s Dyson School of Applied Economics and Management the “Economics That Really Matters” blog references Theodore Schultz’s 1979 Nobel Lecture when he said the following:

Most of the people in the world are poor, so if we knew the economics of being poor, we would know much of the economics that really matters. Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture, we would know much of the economics of being poor.

I like this quote by Dr. Schultz and I love this new blog.

The blog is typically reserved for graduate students in Cornell’s Applied Economics program (more accurately the folks who make up Chris Barrett’s research group), but this summer the blog was opened up for graduate students from outside of Cornell to write about their research. I took them up on the offer and yesterday they published a piece in which I talk about my recent trip to Myanmar trying to study the economics of hope.

Here’s the article:

As behavioral economics has become the mainstream of economic science, there has been a growing recognition that economic behavior is often influenced by historical experience, social observation, and individual aspirations. A recent demonstration of this can be found in a widely discussed article published last May in Science. Banerjee et al. (2015) speculate about the specific mechanisms driving the results of their evaluation of a multi-dimensional program aiming to ‘graduate’ participants from poverty, saying:

Perhaps this program worked by making beneficiaries feel that they mattered, that the rest of society cared about them, that with this initial help they now had some control over their future well-being, and therefore, the future could become better. (p. 14)

Several other studies have aimed to measure the formation of aspirations in India,Pakistan, Ethiopia, Indonesia, Kenya, and Peru. They all demonstrate something fundamental about human behavior, particularly when surrounded by life-stealing poverty.

Psychologists (see Snyder, 2002 for a summary) say hope is comprised of three elements: aspirations (or some specific goal), avenues (or a visualized pathway toward aspired outcomes), and agency (or a feeling one can attain aspired outcomes). In aworking paper, Travis Lybbert and Bruce Wydick (2015) draw a distinction between wishful hope, which they call “Hope 1,” and aspirational hope, which they call “Hope 2,” Of primary interest to development economists then is “Hope 2,” as aspirations without sufficient agency or avenues could become wishful and relatively inconsequential in economic decision making.

I’ve been part of a team of researchers trying to contextualize this research to Myanmar. The Myanmar Development Resource Institute (MDRI) is a think-tank established to provide independent policy analysis and research related to economic reform, poverty reduction, and improved governance. Michigan State University’s Food Security Groupand IFPRI have partnered with MDRI to provide technical support on an agricultural and livelihood household survey of Mon State (a coastal region close to Thailand in Southern Myanmar).

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Poor Behavior: 3 Myths about Behavioral Economics

The [World Bank’s 2015 World Development] report states in all earnestness that poverty “shapes mindsets”. From here, it is a hop, skip, and jump to holding, as the leading behavioural economists of the day do, that the poor are poor because their poverty prevents them from thinking and acting in ways that can take them out of poverty.

Thus the focus as well as the burden/responsibility of poverty-alleviation would shift from the state — from macroeconomic policy, from having to provide employment, health and education — to changing the behaviour of the poor. The structural causes of poverty — rising inequality and unemployment — as well as the behaviour of the owners of capital are evicted from the poverty debate, and no longer need be the focus of public policy.

Behavioural economics, insofar as it is concerned with the behaviour of people in poverty is simply the latest addition to the neo-liberal toolkit of political management.

This is just part of a blistering critique of behavioral economics broadly speaking and the World Bank’s 2015 World Development Report “Mind, Society, and Behavior” in particular. While the article seems to present an unfair and slightly antagonistic survey of the literature of behavioral economics and poverty, this presents a unique opportunity to discuss some common misunderstandings about how behavioral economists view poverty and global development. I will present three myths that were implied by the critique and discuss (my understanding) of what the literature actually says. 

Myth 1: The Poor are Less Intelligent than the Rich

This is a subtle point of the behavioral economics literature. As the author correctly points out, psychologists and behavioral economists will typically say (indeed I have written) something like: the context of poverty creates stress, similar to the type of stress an important deadline at work creates. To cope with this stress humans allocate increased mental energy on this stressor and this taxes a person’s mental ‘bandwidth’ – the mental resources necessary to think properly. Other studies have found that “living in poverty” (broadly, and perhaps poorly, defined) creates a cognitive tax similar to skipping a night of sleep or becoming addicted to alcohol. Poverty is a unique stressor of life, however, as one really can’t take a vacation from poverty the way one can take a vacation from work. Neither can one escape poverty by sleeping in on a Saturday morning or going to an Alcoholic’s Anonymous class. As a result those in poverty behave in ways that (a) do not align with the typical economic model of the rational actor and (b) are often thought to perpetuate their poverty.

The nuance here is that while “the poor” may score lower on IQ tests than “the rich” or “the middle-class”, this difference in intelligence is not due to some character flaw of the poor themselves. Rather this reduction in cognitive ability is caused by the added complexities of living a life with small amounts of money.

Understanding this distinction is critical (in my view) as it informs how we think about helping the poor. This leads us to the second myth.

Myth 2: The Poor Must be Taught How to Behave

If the reality is that the poor are less intelligent than the rich due to some unique character flaw then the correct policy response would be to teach the poor to behave better. I’ve just discussed how this understating of the literature really isn’t the most complete. As I’ve already stated, the experience of poverty makes it difficult to behave in a way that (a) is understood by classical economic models of behavior and (b) allows for the poor to escape poverty.

Behavioral economics provides new insights on why the poor stay poor. The broad point of Sendal Mullainathan and Eldar Shafir’s research is not to ignore the structural causes of poverty it is rather to more completely (and accurately) study the nature, causes, effects, psychology, politics, economics, sociology (… aka, structure) of poverty so that public policy can be more effective.

A recent article by The Economist illustrates this point well:

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-enrollment 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 enrollment 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.

The goal of behavioral economics is not to teach the poor how to behave, for how am I (a nerdy-white-twenty-something-male-graduate-student) supposed to know how to behave in Bogota, Colombia. Perhaps the schools are so bad that parents know that sending their kids to school is not worth the cost. Perhaps families don’t have access to the correct information regarding the economic returns to education. Perhaps families who have lived at a subsistence level for generations and who didn’t complete formal education themselves have formed mental models and psychological biases that tell them that school isn’t worth the costs. The fact is we don’t know.

Myth 3: Behavioral Economics is the Newest Tool of the Neo-liberal agenda

Let’s break down the individual aspects of the behavioral approach described above, try to keep track of the political ideologies at play.

The program gives a hand-out. A cash transfer to the poor in Columbia on the condition that they send their children to school. Neolibralism is classically against government hand-outs for many ideological reasons (i.e. austerity, laissez-faire economics, and free trade). However, this program does uphold people’s ability to be free to choose, a characteristic neoliberalism classically supports for many ideological reasons (i.e. austerity, laissez-faire economics, and free trade).

The behavioral tweak is that timing matters. The success of the program hinged on when the families received the cash transfer. Humans (you may be familiar with the breed) are historically famous for struggling with self-control. Even when we know what we want to do, we have trouble staying committed to that preference.

(A great example of this is in Richard Thaler’s new book, “Misbehaving” in which he tells the story of having a dinner party at his house. He could set out a bowl of nuts for his guests to munch on while they wait for the delicious dinner, however, many may eat too many nuts and either ruin their appetite for the more delicious main meal or over-eat and ruin their diet. In either case his guests may actually prefer not to eat a bowl of nuts before the main course, but will be unable to resist eating them if they are readily available. Traditional neo-liberal economic thought stresses the importance of choices. More choices are always good, the argument concludes.)

So, what is the political ideology of behavioral economics? I’d say one does not actually exist. The rise in the popularity of behavioral economics has coincided with the rise in the popularity of data and evidenced based management (see Moneyball for an example). The political ideology of behavioral economics is mixed. Behavioral economics recognizes the complexity of the world. Instead of knowing what works, behavioral economics is a bit more humble. More testing, gathering feedback, iteration, and collecting data. It is only through this process of guess and check, of adaptation, that we will be able to find what works in a complex world.

Scarcity, Hope, and the Psychology of Poverty

A psychologist walked around a room while teaching stress management to an audience. As she raised a glass of water, everyone expected they’d be asked the “half empty or half full” question. Instead, with a smile on her face, she inquired: “How heavy is this glass of water?”

Answers called out ranged from 8 oz. to 20 oz.

She replied, “The absolute weight doesn’t matter. It depends on how long I hold it. If I hold it for a minute, it’s not a problem. If I hold it for an hour, I’ll have an ache in my arm. If I hold it for a day, my arm will feel numb and paralyzed. In each case, the weight of the glass doesn’t change, but the longer I hold it, the heavier it becomes.”

She continued, “The stresses and worries in life are like that glass of water. Think about them for a while and nothing happens. Think about them a bit longer and they begin to hurt. And if you think about them all day long, you will feel paralyzed – incapable of doing anything.”

Remember to put the glass down.

This is good advice for many people. For many of us, the stresses and worries in life are similar to a glass of water. We can put glass-of-waterthe glass down when we need a break. We can take vacations from work, relax during and ‘evening in’, and forget about whatever is stressing or worrying us for a little while. This sort of behavior is healthy for us to practice and provides us with the rest we need to succeed in life.

For other people, however, ‘putting the glass down’ may not be possible. For some, it may be practically impossible to take a break or a vacation from the stresses and worries in their life. These people are the global poor all over the world. The people who, in local currency equivalents, consume less than $2 per day – that includes every major dimension of consumption: food, housing, education, health, security, transportation, etc.

This is the broad point of Sendhil Mullainathan and Eldar Shafir’s book Scarcity: Why Having So Little Means So Much. Sendhil (a behavioral economist at Harvard) and Eldar (a psychologist at Princeton) demonstrate through lab and field experiments how the mind is taxed by stresses and worries in our life. When humans are busy, or sleep deprived, or poor we focus extra mental “bandwidth” toward whatever is stressing us. This allows us to do amazing things on a deadline or despite a lack of sleep but it takes attention away from other important aspects of life as our minds only have so much bandwidth. The kicker is the busy and the sleep deprived can take a vacation or sleep in on a Saturday morning; the poor however, can’t take a vacation from their poverty. They can’t put the glass down.

This is an important understanding in itself, but there is increasing evidence that there is an added (perhaps secondary) effect of poverty on human cognition.

Although is is not a standard view in economics, many development economists are coming to the understanding that individual desires and economic behavior are often influenced by historical experience and social observation. Rather than existing in isolation, so-called consumer preferences are conditioned by memorable experiences or are formed by comparison with others. In this vein, for many of the poor around the world the environment in which they life (i.e. multi-generational life-stealing poverty) may influence their behavior specifically as it concerns decisions to invest in the future.

In short, the most devastating aspect of global poverty may the critical lack of aspirations, or more broadly hope in the future.

There is a growing literature on the economics of hope (see herehere, here, and here). This literature can be briefly summarized in the conclusion of an important series of lectures given in 2012 by Esther Duflo, an economist at MIT:

A little bit of hope and some reassurance that an individual’s objectives are within reach can act as a powerful incentive. On the contrary, hopelessness, pessimism, and stress put tremendous pressure both on the will to try something, and on the resources available to do so.

I am currently in Myanmar (a place where George Orwell’s grandmother lived and where he himself spent several years working for the Imperial Police). I am here working to implement a field experiment to measure the psychological and economic effects of hope. The study is still in preliminary stages and I’ve spent the last several days in open ended interviews with small-holder farmers and landless villagers in the rural areas of Mon State.

Myanmar is unique and fascinating place to study the formation of hope at the present time. In 2011 democratic elections led to political and economic reforms. While opportunity abounds in many places as prices of important goods and services (i.e. vehicles, electricity, 3G mobile connectivity, health care, ect.) become more affordable due to the opening of the country to global trade, some areas of the country are still constrained and lack access to this opportunity.

I met with a family yesterday that expresses these challenges all too well. The family is Christian in a country and village that is predominately Buddhist. They live on the grounds of their local church for free and, in return, maintain the church property. They own no land and rent no land. Both the mother and father are day laborers and both are currently unable to find work. The mother forages in the forest for bamboo shoots and mushrooms. They have six children, two of which have migrated to Thailand to find work. None of their children have completed formal education and the chances aren’t great for the younger children, according to the father.

When I asked when the last time the family was happy the father responded, “When we are able to have a good meal”. When I asked how often that happened, he responded, “About twice a week”.

I asked what would make their family happy in the future, the father responded, “Last year the church gave each family $100, we’d be happy if that happened again”.

Psychologists say hope is comprised of three elements: goals, agency, and pathways. This family, at least anecdotally, lacks each of these elements. Their aspirations for the future are low and their goals rely heavily on other people.

George Orwell once wrote, “Within certain limits the less money you have the less you worry”. As I sit in the setting of his classics Burmese Days and Shooting an Elephant I have come to realize, he was wrong. The global poor are subject to incredible levels of stress: diseases, expectantly for children, are more likely to be life-threatening; crop failure can lead to starvation. And as shown by the work of Sendhil and Eldar stress makes good decision-making harder.

Perhaps most importantly, the poor lack the institutional environment which fosters good decisions. People, everywhere, underestimate the benefits of education, struggle to save their income, and spend on health care. In rich countries, however, kids going to school is a common social norm; direct deposit and pension systems make personal finance and saving for retirement something many don’t even think about most days; clean and drinkable water comes out of every tap and childhood immunization appointments are automatically set up. Poor countries provide few such prompts and many poor people around the world don’t experience these luxuries.

David Brooks (I know, I know. He’s a polarizing figure) recently wrote: “The world is waiting for a thinker who can describe poverty through the lens of social psychology”. I think the wait is over, the thinkers are here. It’s the folks working on the economics of hope and the psychology of poverty.

 

Human Behavior for Economic Development

There are three general sections in the part of the report, each covering a different aspect of the proposed framework for understanding the recent findings in human decision making.

1. Thinking Automatically

Anyone who is has read or is familiar with Danny Kahneman’s book “Thinking Fast and Slow” will immediately understand this point. Human brains have two systems (a deliberative system and a automatic system). Kahneman calls these system 1, which is fast, instinctive, and emotional; and system 2 which is slower, more calculative, and logical. The deliberative system thinks it’s the star of the show, but it is really simply a supporting actor, as the automatic system is responsible for most decision humans make.

Some of you may be thinking right now, “Umm no kidding, why is this just catching on in policy, development, and economics now?” Surely, the idea of automatic thinking is not new. What is new are the implications:

  • Framing: For example, assume 600 people are affected with a deadly disease. There are two proposed treatments, each can be presented in a positive or negative frame. Positive: Treatment A “Saves 200 lives” and Treatment B “Has a 33% chance of saving all 600 people, and a 66% possibility of saving no one”. Negative: Treatment A “400 people will die” and Treatment B “Has a 33% chance no one will die, and a 66% possibility that all 600 will die”. Which do you favor in each framing? Treatment A was choses 72% of the time under the positive framing, while under the negative framing, it was only chosen 22% of the time.
  • Confirmation Bias: People fail to recognize that they do not know what they claim to know, and they may fail to learn from new information. For example: I’ve spent considerable time (in Ghana and Kenya) working with entrepreneurship training programs. Often times on the pre-test class attendees report accounting, marketing, and management skills at a 4 out of 5 level. These are the people who actually came to class, mind you. In my eyes the class is “successful” if the attendee reports accounting, marketing, and management skills at a lower level than before the test. This is contrary to the way one may expect success to be interpreted from a pre-post evaluation.
  • Anchoring: Sometimes the last thing to come to mind has a disproportionate influence on decision making. For example a group of Judges and experienced lawyers were given a case to read. At the end they were to asked how long of a jail sentence they would prescribe. Before they made their decision, however, a dice was rolled which was rigged to land on either 3 or 9. Those who saw a 3 prescribed shorter sentences than those who saw a 9.
  • Loss Aversion: People hate losses more than we like gains. For example: instead of giving teachers a performance bonus at the end of the year, one school in Chicago gave the bonus at the beginning of the year and told teachers they would loose the bonus if their performance did not reach a certain threshold.

So why is this so interesting? Perhaps those in the loan industry should simplify their loan products, making it clear the implications of taking the loan. Thinking about confirmation bias and overconfidence is instructive when a poor farmer in a rural area is calculating the risk of taking a loan. Perhaps careful thought should be included in what we set our defaults to be. Humans often are biased toward the default, meaning even if the default isn’t what we want, we often choose it anyway. This has implications into how we frame organ donations, retirement funds, college admissions, and many many other areas of policy.

If you are interested in the “so what” of automatic thinking, I highly recommend, “Nudge” by Richard Thaler and Cass Sunstein.

2. Thinking Socially

Humans are deeply social beings. Our beliefs, desires, and behaviors are affected by social preferences, our relationships, and the social contexts in which we live and make decisions. “Humans are not purely selfish and wealth-maximizing actors, we value reciprocity and fairness, we are willing to cooperate in the attainment of shared goals, and we have a tendency to develop and adhere to common understandings and rules of behavior”.

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A key consequence of sociality for development is that groups and even entire societies can get stuck in collective patterns of behavior–such as corruption, segregation, and civil war–that arguably serve the interests of no one. Yet by the same token, temporary interventions can have large and lasting positive effects on the community by shifting a pattern of social interactions from one suboptimal self-reinforcing arrangement (or “equilibrium”) to another arrangement that better promotes well-being and becomes self-sustaining. Sociality is also a lever for new types of development interventions that harness the tendencies of individuals to seek social status, to build and maintain social identities, and to cooperate with others under certain conditions.

I spent the end of 2013 and the beginning of 2014 working and researching in Western Kenya. A colleague of mine had an idea to improve the way entrepreneurship interventions are run worldwide. Traditionally, a microfinance institution (MFI) will have a loan product and also provide a business training class. The client will attend the training with other people from the area (whom may not necessarily be from the same social network) and receive the loan product. That’s pretty much it. Extension agents are common, but mostly for the purpose of the MFI ensuring they will collect their money at the end of the loan period. My colleague had the idea of placing this type of entrepreneurship intervention in local churches. Effectively embedding the intervention in an existing social context and potentially creating new social norms and social network learning effects. I hope I’m not guilty of confirmation bias (see above) but I think this is an excellent example of a development program taking into consideration human’s innate disposition toward social thinking.

For an excellent book written all about this sort of thing see “The Social Animal” by David Brooks. Seriously, even if you don’t enjoy Brooksian Op-Eds, you’ll enjoy this book. Also, in the WDR itself there is an excellent short (two page) “spotlight” on When Corruption is the Normpage 60-61.

3. Thinking with Mental Models

When humans ‘think automatically’ and ‘think socially’ at the same time mental models (or heuristics or rules of thumb) are developed. These mental models simplify the complexities of the world so that we are able to function effectively in it. Designing development programs, policies, and theories while keeping mental models in mind is important. Often people who have been entrapped in poverty develop mental models that may hinder their own escape. For example, in Ethiopia disenfranchised people sometimes report feelings of low psychological agency. I.e. “We have neither a dream nor an imagination” or “We live only for today”.

People develop mental models of how the world works based on their own experiences. This truth pervades much of the miss-understandings we see in our world today. A rural farmer in Western Kenya (almost certainly) has a different understanding of how the world works than an executive with a Tech start-up in Northern California. The world is an incredibly complex place and without mental models, humans would be unable to act, work, or live at all.

There is an important, and very fine point, that must be made clear when thinking about how this sort of theory effects development theory and practice. There is a very important distinction to be made between institutions (broadly speaking) and culture. A couple decades ago there was a destructive and ethnocentric theory that was very unproductive. The idea of a culture of poverty led to policies which (probably) created more harm than good. If you believe in a culture of poverty than (one) logical solution is for others, presumably from outside of that culture, to change the culture. It is important to note here, that mental models are not necessarily driven by culture. More specifically mental models are driven by institutions. Institutions (broadly speaking) include social norms but also include other aspects of life such as political systems, police structures, path dependency, individual beliefs, climate patterns, business practices, and religious traditions. I’ll go out on a limb and say that any time there seems to be something that is caused by (so-called) culture, there is an institution hiding in the weeds in the background which plays a much larger role.

For example when I lived in Kenya I often found myself waiting for my Kenyan colleagues to show up for a meeting as they were often late. Much is made of this Kenya (or even more ignorantly) Africa time. I noticed something interesting, however, after several months living and working on a seminary campus. The same Kenyan colleagues who routinely arrived late for our meetings would arrive exactly on time when they had to catch a class at the seminary. Why? (as I previously blogged) time is not a concept that is driven primarily by culture, it is most fundamentally driven by institutions. It is true many institutions in Kenya (and other places of the world) do not punish people for showing up late, the Africa Theological Seminary, however, did and people showed up on time.

A Behavioral Economics Approach to Development

This is an exciting time to be applying behavioral economics to development practice and policy. In fact, much of what is discussed in this video is what I am applying to my work in Kenya with churches. This video explains why designing programs and policies is just as important, if not more important, than what the program or policy ultimately targets. Of course you could just read Thinking Fast and Slow, Poor Economics, Scarcity, Nudge, and a forthcoming essay written by yours truly, but this video will take much less time.

The “New” Science of Scarcity

The puzzle with the “development puzzle” is we’ve been asking the wrong questions. Or rather, asking questions in the wrong way. One of the largest innovations in engineering in the last century has been “fault tolerant engineering”; the idea of designing machines and products to minimize the potential mistakes humans may make. This innovation has been HUGE! Surprisingly this innovation has yet to take hold in policy making. We humans are incredibly apt to make mistakes. It is time we designed policies that anticipate the potential mistakes humans make, so that when people make these mistakes, it doesn’t hurt them (or kill them).

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