Can behavioral economics provide solutions to global poverty?
Can behavioral economics provide solutions to global poverty?
by Maximilian 10:34am Feb 04, 2025

Behavioral economics has the potential to offer valuable solutions to global poverty by addressing the psychological and cognitive factors that influence individuals’ financial decisions. While it may not be a complete fix on its own, the insights derived from behavioral economics can help design more effective policies and interventions that encourage better decision-making, improved financial habits, and, ultimately, poverty alleviation. Here’s how behavioral economics can provide solutions to global poverty:
1. Encouraging Saving through Behavioral Insights
The Problem: Many people in poverty live paycheck to paycheck, lacking savings for emergencies or long-term goals, which can leave them vulnerable to financial shocks.
Behavioral Economics Solution: Interventions like automatic savings (e.g., “Save More Tomorrow” programs) use behavioral principles to help people save without requiring significant changes in behavior. By automatically enrolling individuals in savings programs and allowing them to commit to saving a portion of future income, these programs exploit people's tendency to procrastinate or prefer immediate consumption. People are less likely to opt out once they are enrolled, and the gradual increase in savings over time helps build financial security.
Example: The Save More Tomorrow program, developed by Richard Thaler and Shlomo Benartzi, encourages workers to increase their savings rate automatically as their income rises, helping them to save more without feeling deprived.
2. Improving Access to Credit
The Problem: Many people in poverty lack access to formal financial services, and those who do often struggle to manage credit due to high interest rates and poor financial literacy.
Behavioral Economics Solution: Understanding that people often overestimate their ability to manage money or underestimate the long-term consequences of debt can lead to better-designed credit products. Commitment savings accounts (where a portion of an individual's income is locked away and can only be accessed under specific conditions) or microfinance loans with built-in behavioral nudges can provide access to credit in ways that encourage responsible borrowing and repayment.
Example: Programs like Kiva (a microfinance platform) combine behavioral insights with small loans to help entrepreneurs in impoverished regions build businesses, while nudging them toward sound financial practices through education and support.
3. Reducing Decision Fatigue and Overload
The Problem: People living in poverty often face a constant series of decisions, many of which are complex, stressful, and have high stakes. This decision fatigue can lead to poor choices, such as taking on high-interest debt, missing out on beneficial programs, or failing to plan for the future.
Behavioral Economics Solution: Simplifying decision-making processes by providing clear, easy-to-understand options and removing barriers to beneficial choices can have a significant impact. For instance, policies that automatically enroll individuals in welfare programs or retirement savings (with the option to opt out) reduce the cognitive load on individuals, making it easier for them to access the support they need.
Example: In Kenya, a government-backed mobile banking initiative called M-Pesa allows individuals to send and receive money through their phones, reducing the complexity and barriers to accessing banking services. This has helped millions of people, particularly in rural areas, access financial services that they might not have otherwise.
4. Nudging Better Health and Education Choices
The Problem: Poor health and low levels of education are key drivers of poverty. People in poverty may face barriers to seeking healthcare or education, not due to a lack of desire but because of psychological factors like present bias (preference for immediate gratification) or availability bias (relying on immediate or anecdotal information).
Behavioral Economics Solution: By using nudges—small, subtle changes in how choices are presented—governments and NGOs can encourage people to make better choices without restricting their freedom. For example, health campaigns can use default options (e.g., automatic enrollment in vaccination programs) or reminders (e.g., text messages reminding people to take medication) to encourage healthier behaviors.
Example: Conditional Cash Transfers (CCTs), such as those implemented in Brazil’s Bolsa Família program or Mexico’s Prospera, provide financial incentives for families to make choices that can improve their long-term welfare (e.g., sending children to school or attending regular health checkups).
5. Addressing Social Norms and Peer Influence
The Problem: In many impoverished communities, social norms may discourage saving, entrepreneurship, or taking risks that could lead to economic mobility. Peer pressure can discourage positive behaviors, and people may lack role models who show the benefits of investing in education or health.
Behavioral Economics Solution: Behavioral economics recognizes the powerful influence of social norms. By leveraging social norms and peer influence, interventions can be designed to promote positive behaviors. For instance, social comparison and public commitments can encourage people to save more or invest in their education.
Example: In Uganda, the Government’s Savings Program included a feature where people could see how much others were saving, which helped create a sense of collective responsibility and encouraged more people to participate in savings programs.
6. Using Mental Accounting to Promote Long-Term Investment
The Problem: People in poverty often prioritize immediate needs over long-term goals due to limited resources, and this can hinder investment in areas like education, healthcare, or business development.
Behavioral Economics Solution: Understanding mental accounting—where people treat money differently depending on the source or purpose—can be used to design interventions that help people allocate resources for long-term benefits. For example, segregating savings into different “accounts” for health, education, and emergencies can encourage people to think more strategically about future expenses and avoid using these funds for immediate consumption.
Example: The Ghanaian government has used a "goal-based" savings approach in which people are encouraged to save specifically for different goals like children’s education or health emergencies, which helps ensure long-term stability.
7. Building Financial Literacy and Capacity
The Problem: Many people in poverty lack financial literacy, which can lead to poor money management and inefficient use of resources.
Behavioral Economics Solution: Financial education programs, designed with behavioral insights, can improve financial literacy in a way that resonates with people’s lived experiences. This involves using simplified language, real-life examples, and interactive tools to help individuals understand the consequences of their financial decisions and the importance of managing money.
Example: Financial literacy programs tailored to individuals in low-income areas, such as community-based workshops or mobile apps, can teach budgeting, saving, and debt management in a way that is directly applicable to their daily lives.
Conclusion
Behavioral economics offers innovative ways to design policies and interventions that account for the psychological and emotional factors that shape individuals' decisions. By understanding biases such as present bias, loss aversion, and mental accounting, policymakers can create strategies that nudge people toward better financial behaviors, enhance access to resources, and improve decision-making in ways that reduce poverty. While these solutions alone will not eradicate global poverty, they provide powerful tools to complement traditional economic policies and drive more sustainable, long-term change.
