Irrationality and Heuristics: What can international development learn from behavioural economics?

In a perfectly rational world, Ted the taxi driver works long hours on days with many customers and goes home early on bad days to save money on driving. On the other side of the world, Mexican farming couple Carlos and Verónica send their children to the new school built in the next town, because they know that education will lead to a job that will make up for the time not spent on the farm. Ted, Carlos and Verónica demonstrate what is a central tenet of classical economic theory : the belief in homo economicus, the rational economic man—a being that makes fully calculated decisions in a rational manner to achieve the best possible outcome for himself.

As elegant as this postulation is, since the 1950s, critics have been discovering that humans are not as rational as they appear to be in economic theoretical assumption. Political scientist and Nobel Prize winner Herbert Simon, for example, observed that we do not have unlimited brainpower, nor do we have the free time to scrutinise every one of our decisions. In short, he suggested that our problem-solving abilities are limited by “bounded rationality”. This leads us to come up with a set of basic rules of thumb that we apply when making decisions called heuristics, which are shaped by experiences and cultural bias. One example is the availability heuristic that Daniel Kahneman and Amos Tversky—the first psychologists to win a Nobel Prize for Economics in 2002—demonstrated in a famous 1973 experiment. Participants were given a list of names of 19 famous women and a list of names of 20 less famous men. The researchers argued that the fact that 80 percent of people thought the list of women’s names was longer showed that most people make decisions not based on calculated rationality, but on the ease with which examples come to mind (availability). The experiment has been replicated many times since and subsequent research has identified dozens more heuristics and biases that affect human decision making that are seen as inherently irrational.

There are many examples of seemingly irrational economic behaviour that is in part caused by heuristics and biases. We often lack self-control and overspend on things we don’t need. We are also occasionally altruistic, which conflicts with the standard economic assumption of human self-interest. And one of the most commonly observed behaviours is that people prefer to avoid losses than to acquire gains; they experience disappointment and panic following loss to a much greater extent than they feel happiness after making a profit.

These behavioural factors predictably affect how humans make decisions, and recognition of these determinants has thus become increasingly important in the work of economists, finance professionals and even computer scientists. So, can this knowledge also be applied to practical international development projects?

People who live in poverty are emotional, socially influenced human beings with tastes and preferences just like the rest of us, which might not always be the most ‘economically rational’. In addition, they have basic survival to worry about and a myriad of cultural customs that affect their response to aid.

Expecting rational outcomes, whilst failing to sufficiently take into account their own cultural biases, can lead economists and development workers astray and their projects to fail. This became quite apparent in the 1965 Chicken Improvement Project in Morocco organized by the United States Agency for International Development (USAID). Aid worker Thomas Dichter recounts his experience in his 2005 policy briefing Time to Stop Fooling Ourselves About Foreign Aid, recalling that Morocco, at the time, produced chickens that were scrawny and relatively expensive. Production experts working on the ground believed that they could improve both production and nutrition with better breeding. They brought in the Rhode Island Red chickens and the project went smoothly until the Moroccans had stopped buying the new chickens. Dichter recalls that the “Rhode Island Reds stewed for four hours tasted and looked like mush” and were therefore ill-suited to Moroccan cooking methods, which were based on scrawny tough birds. In retrospect, “rather than attribute this failure to problems inherent in the aid process, a field perspective might enable one to believe that if local taste and culture had been taken into account, the project could have worked,” he said.

A recent micro-finance project that took place in Ghana was testament to how accounting for social biases and seeming irrationality can yield more fruitful outcomes. Saving for the future may seem like a rational thing to do, yet many poor people—whose needs for basic survival are greater and who are less able to make long-term plans—do not, instead taking take out loans that trap them in debt. This was a central issue for a group of students from the School of Oriental and African Studies (SOAS), who worked in the southern village of Abuakwa, as Victoria von Waldersee, one of the students, explained:

“We were trying to change a mindset. Everyone’s reaction when we first asked whether they save money was, “I don’t have any money to save.” Telling people who live on far, far less than we do that they should save money was an incredibly difficult thing to do, but all we were trying to transmit was the idea that if you put aside a few cedhis a week, at the end of the month you’ll have a significant amount to spend. […] in Abuakwa, people spent as soon as they earned, seemingly for fear of losing the money in some way. That’s where the bank account we set up came in as a safe place to store money for later in life.

Victoria spent her time making lists of household expenses and earnings over a certain period of time with a female tomato seller she was working with. It was so simple, yet such an important step towards financial literacy. These skills would be helpful in the future for repaying loans, or even showing the family that they don’t need a loan and are capable of saving money themselves. By making an effort to explain long-term benefits and incentivise smart economic behaviour the SOAS team was able to encourage more people to save for the future. These measures helped the Ghanaian villagers conquer the seeming irrationality that behavioural economists suggest is deeply rooted within all humans, both in advanced and developing countries.

As the hypothesis of homo economicus continues to be discredited in the real world and in research findings emerging from such fields as psychology and behavioural economics, economists, development workers, and other individuals involved in aid and general social and economic programming, would do well to remember that they too are laden with their own biases, assumptions and heuristics. Designing projects with local cultural and social contexts in mind are much more likely to lead to positive outcomes.

Do you know of any ways that development projects could compensate for seemingly irrational human nature? Leave your reply below.

Carolynn Look is a research and communications intern with the Institute of Advanced Development Studies (INESAD).

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Dichter T. (2005). Time to Stop Fooling Ourselves about Foreign Aid, A Practitioner’s View. Foreign Policy Briefing, No 86, September 12, 2005

Tversky, A., & Kahneman, D. (1973). Availability: A heuristic for judging frequency and probability. Cognitive Psychology, 5, 207-232.



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  1. Permaculture would most likely be a better fit than agriculture as well.

    Focus on practical skills rather than materialism, we could use more of that ourselves.

  2. For starters the basics should be covered by using low tech methods that can be repaired using local resources rather than some of the higher tech solutions that I have seen that require continued outside intervention.

    For example there are effective water purification methods that use natural materials that are locally available & natural processes that are going to be alot easier for them to build & repair than other methods, in other words keep it simple & available.

    The methods in Bushcraft & Survival manuals may not be the lastest & greatest, but they work & work with what is available.

  3. This is an excellent and timely article. The word ‘rational’ at it’s most fundamental definition means something that can be described as a ratio, a mathematical equation. I am reminded of the Kodak camera commercial years ago where the woman says “that doesn’t make sense” and the man responds “you mean you don’t understand it”. Because something appears irrationtal to me, it can still be perfectly rational to you. Like simmering a chicken for 4 hours. A friend told me of a story of a woman who every time she prepared a baked ham for a family holiday dinner, would lop about a quarter of the meata off and cook it on a different day. After a few years of this, her husband asked her why she did that and she replied, “because that’s what I always saw my Mom do.” She became curious about the practice and called her Mom to ask her why she did that all those year. The mother’s response? “because I only had a small roast pan”I would suggest learning something of the culture and it’s inherent heuristics is the only way to implement developmental aid that works. The heuristics might be perfectly rational to the culture

  4. If you send me your email at I will send you pdfs of a few research papers where we have indeed succeeded. Yes it is developing country work and we dissociated with much of the Western work and developed the theory and analyses on our own. We now have a poverty index without an arbitrary poverty line, which my colleagues named it after me..sitaramam index. When income is limiting, decisions are very deterministic. This can be obtained from consumption data by fully algorized methods.

    • Hi V. Sitaramam
      I will highly appreciate if you can send me as well through my inbox Obviously it is now opportune time to refute earlier economic or any other theories. This is what research aspires, reflecting on past events and developing new learning. People have tended to stick to what the orthodox authorities said for the purposes of making ease to come up with a publication without due regard to its impact on human cognitive functions. I have always asked my self whether when talking am fully conscious of what I am syaing and what influences me to say what communicate (the referent). I think the dilema with economic theories they tend to be hinged of formal systems while overlooking the contribution of informal systems. We need to climp down from our hunches that popularity is ensconced in academic adavancement. Has anyone studied why those said to be in developing countries have managed to raise herd of cattle (be it goats or sheep I am not sure), and successfully sustained their livelihoods needs? Why is it that, in countries defined as devoping or poor who live in demmed unhygienic conditions, we have people who live up to beyond 100 years but are not plausible material for the encyclopaedia? Rationality is strongly predicated on self satisfaction and not valued extrinsically!

  5. Most of the development aid seeking societies are agrarian, and agrarian societies, culturally, induced fatalism as food supplies depended on weather, health depended on the attack or absence of invisible forces of diseases etc. and as a result, majority were powerless in most areas of their lives. Over centuries, this fatalism and powerlessness evolved into a culture. This culture based behaviour of humans in these societies is still potently prevalent even today.

    THE LEARNING TO BE DONE: Learn to understand the cultural bases of the community, as to why they think what they think, and what is the base of their perceptions and behavior.

  6. The topic is very interesting and it could generate a wide debate. However I believe you are focusing to much on the developing countries and poor people when this example is well present in the developed countries as well. This is not a development issue, it is a human behavioral issue that affects economy and economic theory. No need to focus on Morocco or Ghana, US, UK and Japan suffer from it.

    Careless irrational behavior represented by consumption is the perfect example. How else would you explain hordes of people storming apples stores to upgrade their perfectly functional iphone 4 to the “newly improved” iphone 4s. The marginal “advantages” of the newer model are usually imperceptible to the average user, yet millions of people worldwide act irrationally and seek a more expensive new model. It is worth remembering that most of these population are well educated, middle class, “rational” acting individuals, well informed and involved in the economic and industry updates, no outsiders influence.

    I use that example not because I am again the brand, but because many of us know or can familiarize with it. Just as the iphone example, the same can be said by cars, computers, tvs and many other goods. People act irrationally, and familiarizing with the local context (real conditions) allows us to acknowledge, not necessarily understand, certain irrational behaviors of the area we are working on. Economic development is a field work not a desk job.

  7. I read this article and it immediately brought to mind the piece I heard on American National Public Radio (Lynn Neary Correspondent for All Thing’s Considered). She noted that with one month to go before the 2012 election, statisticians have proven that the vast number of undecided voters are likely to make up their minds based on completely irrational factors. In other words, with a month left in the election, those folks who intended to use rational thinking in making their choice have already reached a decision. Those who remain undecided are likely to make their decisions based on factors completely unrelated to issues. In other words, they will employ heuristics–intuition, common sense, educated guess, best guess…. This behavior has little to do with economic class although the statistics do suggest better educated people tend to become familiar with the issues long before and election and make up their mind about voting over a period of months.

  8. When I was arguing for sociology/economics holding the promise or threat of determinism with the possibility of mathematical rules, my physicist colleague reminded of Pauli’s comment: “Models that are not based on realistic physical laws can at most serve as illustrations of mathematical theorems. These and theories whose predictions are only related to the basic principles through uncontrolled approximations can all be considered as wishful mathematics.” When we look at large ensembles and their behaviour, the choices that reflect their consumption behaviour is fairly deterministic in our experience. When subjected to largess (dole) as opposed to food for work in Indian developmental programmes, the former was mis-utilized and the latter was quite successful. The reason why disenchantment with economic theories is the disunite with happenstances in the macrorealm, like recessions and inflation.Axiomatic approach that they are fond of fails since it has no sound first principles. There is no reason to believe that econophysics will do any better. Which will do better, including heuristics, depends on who is willing to make predictions on the outcomes and measure/admit how far they are off. Or else any approach will remain anecdotal.

  9. This is an interesting post. While I agree that behaviour seems likely to depend on heuristics and so on rather than being strictly rational, I think it can be surprisingly hard to find good examples of this in observational (rather than experimental) developing country studies, once the real conditions have been taken into account. In the Moroccan example it was arguably the aid workers who were irrational, not the chicken farmers. In the Ghana example people’s refusal to save in the past was at least partly because there was no safe place to keep the money. That’s not irrational at all.

    In both cases, poor people actually based their decisions on better information than outsiders or economic theory. While recognising that people have limited information on which to base decisions, I would hypothesize that there are few cases where people make important decisions that fail to take full and rational account of what information they do have. Especially once we take account of (i) risk aversion and (ii) varying utility of equal sums of money (e.g. a potential loss of $10 for a household near starvation is quite rationally given more weight than a potential gain of $10).

    But maybe someone more up to date on the evidence than me can confirm or provide some counter-examples for this…?


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