Economics has always been concerned with the motivations behind human behaviour. It is believed that human behaviour is mandated by nothing but rationality. In its most broad definition, rational behaviour is sensible, planned and consistent over time. Governed by self-interest, human behaviour is inadvertently routed to rationality by the ‘invisible hands’ of the market which punishes foolish behaviour without fail.
However, experiments and real world episodes have provided evidence to the contrary. It has been found that individuals benefit themselves less than expected in employment and health programmes, partake less than predicted in market opportunities, and forego long-term welfare in their short-run decisions. Toilets built after incurring great expenses remain unused. Rash driving kills thousands every year. Parents don’t enrol their children in free schools or immunize them when it doesn’t cost them a rupee.
There are innumerable instances of behavioural oddities causing policy failures. These revelations have been recognized by economists belonging to the behavioural school. Acknowledging the fluidity and unpredictability of human behaviour, behaviourists accept that people do not act always act in their long-term self-interest. They do not necessarily and effectively weigh up all the costs and benefits before taking a decision.
Knowledge of such a behavioural uncertainty is of great importance to policymakers. Most development policies and programmes around the world are premised on a traditional model of rationality to determine how individuals will respond to changes in incentives. Despite the stress of these programmes on poverty reduction, governments and economists regularly fail to reasonably account for the real decisions made by the poor, especially over time and under insecurity.
The Behavioural revolution in Development Economics
The Traditional approach to development concentrates on creating resources and allocating them, efficiently, via the market. It argues that people are poor because they lack resources: money, food, clinics, irrigation canals and schools. Development, therefore, is to concern itself with the creation of these goods for those who can’t create it themselves. For efficiency to be preserved in the market, prices of these resources should be properly determined.
A behavioural approach to development is different. It focuses on the stakeholders and their decision making to reach at effective solutions. As a necessary pre-condition, this approach requires active and constant participation of policymakers in the preparatory and review stages of a policy. Sufficient information is to be collected to come up with policies which take into account how the perceived beneficiaries will react and do actually react to them. This unwaveringly leads to cheaper and effective policies.
For example, in Bogotá there was a conditional cash transfer programme which paid mothers a monthly stipend to encourage them to send their children to school. Attendance rate during the school year was good but re-enrolment rates were sufficiently low. The government reacted by changing the timing of the handout: a part of the regular payment was withheld until just before the start of the school year. This boosted enrolment. Conventional economic thought provides for no understanding for this anomaly: Education is viewed as beneficial by all and the need to provide additional incentives should not arise. But, as this episode evidences, it did arise. And where the hands of the traditional approach were tied, a behavioural understanding provided a real-world effective solution.
The behavioural approach – based on viewing decision makers more completely and identifying that several social and psychological forces affect their behaviours, decisions and opinions – is being increasingly used by American and European scholars to analyse and suggest changes in existing policies. It recommends that behavioural tweaks and nudges may sometimes provide cost-cutting solutions. The World Bank in its flagship Annual Report of 2015 titled “World Development Report 2015: Mind, Society, and Behaviour” has advocated for the incorporation of various behavioural aspects in development policies to surge their efficiency.
NITI Aayog’s “Nudge Unit”
This shift in analysis and review of development policies has recently been recognized by the Indian government through the establishment of a ‘nudge unit’ in NITI Aayog, in association with the Bill & Melinda Gates Foundation, to recommend policy corrections based on behavioural evidences. Several other countries such as the UK, US, Singapore and Australia have set up similar units. Obama noted that “Adopting the insights of behavioural science will help bring our government into the 21st century with a wide range of ways to deliver services more efficiently and effectively.”
Several behavioural studies and experiences have already noted the import of behavioural tweaks in surging efficiency of government policies. A recent study demonstrated that recipients of National Rural Employment Guarantee Act (NREGA) wage payments through bank accounts spend significantly less than the cash payment recipients on education of their children. When talking about open-defecation, World Bank Economist Nidhi Khurana suggested that government programmes and communications should focus on how open defection will cause harm to us as a society rather than how defecation-in-our-house would benefit us. That should be so because people are more sensitive to losses than gains as argued by Daniel Kahneman and other behavioural economists.
The establishment of the Nudge Unit is a move rewarding appreciation. It has long been the case that development policies, advanced and implemented by the Indian Government, lack an understanding of the decision-making process of the poor and rural households. As more and more policies are being adopted by our welfare State, there is a compelling need to choose all weapons from the regulatory-economics artillery to surge efficiency in the multitudinous situations Indian policy making has to deal with. In lieu of the same, there needs to be a detailed policy, mandate and structure of the nudge unit established in the NITI Aayog.
Keeping in mind the technological and infrastructural costs in collection of such information along with the ever-enhancing diversity in the Indian population, an institutional framework has to be developed to ensure that the nudge unit serves its purpose of creation. As behaviour can only be collected and accounted in small units, a possible model for State-Centre cooperation on this subject is also necessary.
On a global level, there is a growing belief that the behavioural approach that could ultimately change the dynamics of development economics and boost the efficiency of development interventions and policies. However, it can be said with definite ease that the behavioural approach is challenging the traditional ways of policy-making, as well as complementing them. Whether it keeps on supplementing it or eventually supplants it, remains to be seen.
 Poor behaviour: Behavioural economics meets development policy (The Economist, December 06, 2014) http://www.economist.com/news/finance-and-economics/21635477-behavioural-economics-meets-development-policy-poor-behaviour
 NITI Aayog plans ‘nudge unit’ to help push government’s flagship schemes (Economic Times, September 07, 2016) http://m.economictimes.com/news/economy/policy/niti-aayog-plans-nudge-unit-to-help-push-governments-flagship-schemes/articleshow/54041144.cms
 How does payment through bank help the poor?: An investigation with instrumental variables (Sankar De and Gitanjali Sen, September, 2015) http://www.isid.ac.in/~epu/acegd2015/papers/GitanjaliSen.pdf
 Beyond Brooms and toilets (Mint, November 07, 2014) http://www.livemint.com/Opinion/P8JhlRqdOFdv2lyUZeSTql/Beyond-brooms-and-toilets.html
 Narendra Modi needs a Nudge Unit (Mint, August 19, 2014) http://www.livemint.com/Opinion/DSPrFAsXv1HJ3G4iydU1sk/Narendra-Modi-needs-a-nudge-unit.html
 India’s Behavioral Science Policy Unit – Challenges and Way Forward (FinalMile, September 15, 2016) http://finalmile.in/behaviourarchitecture/indias-nudge-unit