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A collection of posts relevant to agricultural and environmental matters such as farming, agribusiness, water, sanitation, natural resource management, and sustainability.

Tuesday, July 19, 2011

Applying Behavioral Economics to the Developing World

By Christopher Cuellar

Editor's Note: This post originally appeared in Rising Pyramid. 

Speaking from an engineering and (hopefully) entrepreneurial perspective, one of the reasons why work in the developing world is fascinating is the challenge it poses. Complex design requirements, non-existent supply chain routes, extreme poverty - these are all unique issues that entrepreneurs have to combat when developing or producing products/services for the Bottom of the Pyramid.

But what happens when the your client base acts irrationally or doesn't follow the 'model' you've based your business on? Enter Behavioral Economics. The title of Dan Ariely's book sums up the behavior: "Predictably Irrational".

Questioning economic models is nothing new. Tying these hypotheses with cognitive psychology has been around for some time. Yet, what makes Behavioral Economics exciting is the acceptance and adoption of BE models in economic or business policy.  (A lengthy read, but a great primer on Behavior Economics can be found here).

Recent examples in the developed world are abound in the financial services and health care industries particularly. Automatic enrollment in 401k programs and incentivizing preventative care with discounts are two classics. If we can start to understand the drivers behind a consumer's economic decision making, the hope is that policies can be adapted to account for this behavior. But does this sexy economic topic only work in the developed world?

Check again.

Rachel Glennerster and Michael Kremer's article in this month's Boston Review highlights the application of BE studies in the developing world. Behavior that seemingly doesn't "fit" the expected model is observed; all of this data is extremely beneficial to implementation and adoption of policies ranging from fiscal to healthcare to education.

study put together by Nava Ashraf details how specialized savings products (with behavioral economics data supporting these products) can actually help to increase the amount of savings by the poorest of the poor. This was accomplished by studying the behaviors of the BoP with different marketing options and incentives.

These two examples highlight what exactly is needed at the BoP. Under the guise of BE, a greater understanding about the behaviors and decision-making processes of the BoP is becoming known. The benefit here is that no longer will policies or models thought up in an ivory tower be the dominant background research for the development and implementation of new products or services. On the ground research and a desire for a more realistic understanding of behaviors is critical to rapidly driving adoption and achieving success.

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