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1、Better Choices to Reduce PovertySendhil MullainathanA recent theme of development economics is that institutions matter. Enforcing property rights promotes investment because people can reap the returns of what they sow (both literally and figuratively). Good courts, such as judges that make quick a

2、nd speedy decisions, allow people to write the complex contracts necessary to run complex businesses. A well-developed stock market, with regulation to protect minority shareholders and promote transparency, facilitates the transfer of capital to firms that might otherwise not get it. I could go on.

3、 Though there are subtle (and not so subtle) differences in why good institutions affect property rights there is a broad theme here. Good institutions help to smooth and facilitate the interactions between people. They prevent people from reneging on contracts. They prevent one person from taking t

4、he rightful property of others. They help people transfer resources to one another with the confidence that they can get it back. Surely anyone who has been in a country with poor institutions can sympathize with this viewpoint. A few summers ago I was in India, examining some exquisite furniture at

5、 very good prices. The seller, trying to get the sale, pointed out that he could easily ship it for me anywhere. Boston? No problem. And he reassured me that hes been in business for quite some time and done this sort of thing for a long time. But I would have to pay in cash. He seemed enough but I

6、couldnt help thinking “Would I ever see this furniture once I returned to Boston?” The cynic in me that there was little I could do if the seller failed to satisfy his part of the bargain. Distance was not the only problem. My uncle lived nearby, but could he practically take the seller to court in

7、case of non-delivery? Perhaps but it likely would have done little good. The courts would have taken a year or more likely many years to review the case. And perhaps the judge might accept a bribe or be a friend of a friend of the furniture seller. To even the marginally honest seller, this could be

8、 a tempting situation. Surely if the furniture seller had been in Virginia, with much better enforcement, I would have worried a lot less. Now, in the end, I did buy the furniture (and actually received it). But who knows how many such transactions are hindered every day by these poorly functioning

9、institutions? While compelling, I think this picturethat good institutions help facilitate transactions between peopleis incomplete. I think good institutions also help to reduce the problems that arise within a person. This kind of statement is hard to make sense of with standard economic reasoning

10、. Individuals are rational, autonomous units with full self-control. This framework doesnt leave room for people to have problems with themselves so what could institutions help with?I am one of a growing set of researchers who studies how to integrate psychological insights into economic reasoning.

11、 In this perspective, people sometimes make bad choices, ones that they themselves would like to improve on. This perspective is opening up new ideas such as how good institutions, in some contexts, might help people improve their decisions. I will discuss these insights using a few choice examples.

12、 My goal here is not to tell you about concrete policies that might emerge. It is a bit early for that. Instead it is to give you a glimpse of how radically different our policy suggestions might be in ten or twenty years as the integration of psychology and economics deepens.Active versus Passive C

13、hoicesThe standard economic model assumes all choices are decisions. Individuals weigh the benefits and costs of one action versus another and then choose the one that fits them most. In many cases this makes sense. I end up on vacation in Bermuda, rather than Jamaica, through a series of explicit a

14、nd conscious actions designed to choose the locale that will give me the greatest pleasure. I read through various guidebooks and talk to friends. I try to examine the relative benefits of Bermuda (much closer) and costs (less to do), weigh them and come to a conclusion. Perhaps I over-weighted one

15、dimension or another but at least my decision was an active one. Economics assumes all choices occur in this conscious, active manner.Yet many of the choices we make, even big ones, are not active ones. Why does my email go unread for days (weeks! months!)? At no point did I decide this would be wha

16、t is best for me (surely it isnt). Instead it overflowed because there was never a point where I chose otherwise. In fact, it is because I never sat down to make this decision that I ended up with a mailbox too large. Part of the reason for this is procrastination and a lack of self-control. Part is

17、 that other things got in the way. This distinction is not just a philosophical one. A growing body of research suggests that this distinction may be very important for understanding various important decisions.The idea that many decisions may be passive ones draws on a large set of psychology exper

18、iments that we often process information automatically, without it every entering our conscious realm. Perhaps the most salient (and certainly most fun) demonstration of this principle is the Stroop test (Stroop 1935). Try and read the words in Figure 1. Do you find it difficult? Hopefully not. Now

19、try and read the words in Figure 2. Do you find that difficult? Unless you are color blind, you should. The reason is simple. Your brain is automatically processing the color of the ink before other parts (the slower ones presumably) engage in the task of reading what the letters actually say. This

20、interference makes it hard to read the word. One way to think about the Stroop task is attention. The color the words are written in draws attention away from the words themselves. In some sense, this is also the source of my problem with e-mail. Other tasks drew my attention away from dealing with

21、it. In the same sense that I do not choose to misread the word “Red”, I do not choose to let my email pile up. RedBlueGreenRedGreenBlueRedBlueGreenRedYellowBlueGreenBlueYellowYellowBlueRedRedBlueRedGreenRedGreenGreenYellowRedYellowRedBlueGreenRedGreenBlueRedBlueGreenRedYellowBlueGreenBlueYellowYello

22、wBlueRedRedBlueRedGreenRedGreenGreenYellowRedYellowFigure 1: Stroop TestPassive decision-making can even affect large decisions. Consider an economically important decision such as how much to save. How do people make this decision? In the traditional model, people trade-off consuming more today aga

23、inst consuming less in the future or when retired. They assess their assets, their future earnings (and the riskiness of those earnings), their projected Social Security payments and their expected lifespan and use these factors to decide how much they need to put away. But all this assumes that sav

24、ings is a calculated, active decisions. Is this really the case? Some evidence suggests otherwise. In one survey, 76 percent of Americans believed that they should be saving more for retirement. In fact, 55% felt they were behind in their savings and only 6% reported being ahead (Farkas and Johnson

25、1997). Though they want to save, many never get around to it. Perhaps they meant to save but an appealing purchase reared its head and they lacked the self-control to resist. Perhaps other tasks simply garnered their attention and they never got around to organizing their finances in such as a way a

26、s to actually accomplish their planned savings rate.Madrian and Shea (2003) conducted a particularly telling study along these lines. They studied the choice to participate in a 401(k) plan. People when they join the firm typically are given a form that they must fill out in order to participate. 40

27、1(k)s are very lucrative so people have very incentive to participate. Yet participation rates are quite low. Standard economic models might suggest that the subsidy ought to be raised. Many firms in fact do this. But still participation rates are low and the programs are quite expensive. Madrian an

28、d Shea (2003) study a firm who changed a very simple feature of its 401(k) program. Prior to the change, new employees received a form that said something to the effect of “Check this box if you would like to participate in a 401(k). Indicate how much youd like to contribute”. After the change, howe

29、ver, new employees received a form that said something to the effect of “Check this box if you would like to not to have 3% of your pay check put into a 401(k)”. By standard reasoning, this change should have little effect on contribution rates. How hard is it to check off one box? After all, thats

30、the only difference between the two conditions. In practice, however, Madrian et. al. find a large effect. When the default option is to not contribute, only 38% of those contributed. When the default option was contribution, 86% contributed. Moreover, even several years later those exposed to a con

31、tribution default still show much higher contribution rates. These results are consistent with (and motivated) the discussion above. While we cannot be sure from this data what people are thinking, I would speculate that some combination of procrastination and passivity played a role. Surely many lo

32、oked at this form and said, “well Ill decide this later”. But later never came. Perhaps they were tempted by more other than deciding on 401(k) contribution rates (hard to believe, but there are more interesting activities). Perhaps it simply slipped out of their attention because other factors came

33、 to occupy it. In either case, whatever the default on the form was, they ended up with. In fact, as other psychology tells us, as time went on they may well have justified their “decision” to themselves by saying “5% is what I wanted anyway” or “that 401(k) plan wasnt so attractive. In this way, th

34、eir passivity made their decision for them. By making the small active choice to choose later, they ended up making a large decision about thousands of dollars of money.These kind of passive choices occur in many aspects of savings. When I teach saving to my graduate students, I often tell them that

35、 “savings is simply what you dont spend”. Partly Im being facetious, but partly I am serious at this distinction. Some people sit down with a budget and decide how much theyre going to save (and some of them even stick to that decision! but more on this later). For the rest of us, savings is just wh

36、at is left over after weve made all our active decisions about what to buy. This is why many of the institutions that help us save do so by simply getting to the money before it ever enters our hands. As weve seen, firms automatically deduct money for 401(k) contributions. Another example is mortgag

37、es. I often suggest to friends to buy the biggest house they can. Most avoid doing this because they dont want to spend all their money on housing. Theyd like to save some of it in other means. While this is an eminently sensible plan, it is not what happens. Inevitably the money not put into housin

38、g finds some other way of being spent, rather than being saved. What makes the mortgage such a good savings device is that it is automatic. Each month, a payment must be made. These insights can also help us design whole new institutions. One example is Save More Tomorrow, a program created by Benar

39、tzi and Thaler. The basic idea of Save More Tomorrow is to get people to make one active choice. But to have them make it in such a way that if they remain passive afterwards they are still saving. Think of why housing is such a good savings device. You decide once to buy it and then forever more (w

40、ell, probably only 30 years but it certainly feels like forever), youre committed to keep putting money into it. Save More Tomorrow works on a similar principle though without such a strong commitment. Individuals are offered a chance to participate in this program. To participate, they decide on a

41、target savings level (and we know from before that people actually want to save). Once they decide on what theyd like to save, they agree to start 401(k) deductions at a small level from their paycheck next year. And then each year, as they receive a raise their deductions increase until they hit th

42、eir target savings level. They can opt out of the program at any time. But the genius is that if they do nothing and remain passive, they will continue to save (and even increase their savings rate).The results have been stunning. In one firm, for example, more than 75% of those offered the plan par

43、ticipated in it rather than simply trying to save on their own. Of these, interestingly few of them (less than 20%) opted out. As a result savings rates went up sharply. By the third pay rise (as the default increases cumulated), individuals had more than tripled their savings rates. But perhaps the

44、 greatest success has been the diffusion of this product. Many major firms and pension fund providers are thinking of adopting it and participation in the program will likely soon number in the millions.Save More Tomorrow is a trademark for what psychologically smart institutional design might look

45、like in the future. It does not solve a problem between people but instead helps solve a problem within the person: not saving as much as they would like. It does so by harnessing a variety of psychological tools. Besides the one Ive highlighted it also relies on two others. First, it asks people to

46、 save out of future raises. In that sense they are saving money that they dont have currently, money that isnt already budgeted for one thing or another. Its much easier to put future money to savings (a foregone gain) rather than bear a loss now by cutting back on some valued consumption. Second, i

47、t relies on the The insights Ive highlighted from this research can help speed up the process of development in many ways. One direct way is to recognize that many institutions in developing countries work well because they encourage good default behaviors. Some of these institutions can be transpla

48、nted. Automatic deduction of paychecks, for example, to a separate savings account could be a very powerful savings device. The highly regulated banks that populate developing countries are unlikely to implement innovations such as these on their own. But with effort and prodding they can be transpl

49、anted in my opinion. If transplanted, for some part of the population at least, these kinds of institutions might allow savings (rather than not saving) to become the default.Of course many in developing countries do not have bank accounts. For the unbanked, these insights serve to strengthen or rei

50、nforce an existing policy suggestion: increase the scope of banking services. In the existing view, increasing access to banking services is good because it increases the amount of capital in the banking system and perhaps raises the return on savings for some. In joint work with Marianne Bertrand a

51、nd Eldar Shafir, however, Ive argued that a more sophisticated view of human psychology reveals numerous other advantages of a bank account. First, it takes money further away from the individual. So in many cases the passive choice or procrastination leads to not spending. When money is around, act

52、ive effort is required to save it away. When money is in the bank account, active effort is required to go and get it in order to spend it. Second, and relatedly, it forces people to attend to what they are actually taking out and spending. What we want and what we doEven when we do sit down and act

53、ively make a decision, we may not always have the will power to carry through on that decision. I had decided actively to write this paper a year and a half ago and am only writing it now. I alluded earlier to procrastination and lack of self-control is one of the prime reasons for procrastination.

54、That we lack less than full self-control is a growing part of economic discourse. The savings example has once again been the center of this discussion. Recall the survey evidence on desired savings. Surely some of the reasons people do not meet their desired savings level is that they do not have t

55、he will-power to implement their plans. One way institutions can help solve these self-control problems is by committing them to a particular path of behavior. A common analogy here is with Ulysses, who has himself tied to his ships mast, so that he can listen to the song of the sirens but no be lur

56、ed out to sea by them. While not so dramatic, commitment devices exist in everyday life. Many refer to their gym membership as a commitment device (“Being forced to pay that much money every month really gets me to go to the gym lest I waste it”.). Christmas clubs, while less common than before, use

57、d to be a very powerful commitment tool for saving to buy Christmas gifts. Smokers not having cigarettes around or dieters not buying appealing snacks are all examples of commitment devices. Financially, pension plans, automatic drafts from checking to investment accounts, and direct debits from pay

58、checks all help at least partly to commit behavior.Commitment devices for savings also appear in developing countries. For example, Roscas might serve as a commitment device (Gugerty 2003). In a Rosca, a group of people meets together at regular intervals. At each meeting, members contribute a pre-s

59、pecified amount. The sum of those funds (the “pot” so to speak) is then given to one of the individuals. Eventually, each person in the rosca will get their turn and thus a return on their contributions. While roscas often pay little or no interest and the participants bear the risk that others may

60、drop out after getting the pot, they are immensely popular. One reason for their popularity may be that they offer a commitment device. They may help to save by providing pressure to put aside money regularly (Ardener and Burman 1995). As some rosca participants say, “you cant save alone”. The socia

61、l pressure to save may bind their hands and serve as an effective commitment device to put aside regularly. Commitment devices may also appear in the guise of durable goods. People may commit themselves by saving in kind rather than in cash, which is far too tempting to spend. People may hold their

62、wealth in items such as Jewelry, livestock, and grain because these items are harder to dip in to. What can policy do? They can provide cheaper and more efficient ones than what little exists now. After all, even if saving in grain provides commitment it is an expensive way to do so. Vermin may eat

63、the grain and the interest rate earned on the grain could be zero or even negative. Moreover, it is important to recognize, that even if people demand such commitment devices, the free market may not do enough to provide them. The highly regulated financial markets of developing countries may lead t

64、o too little innovation on these dimensions. Monopoly power may also lead to inefficient provision of these commitment devices depending on whether a monopolistic financial institution can extract more profits by catering to the desire for commitment or to the temptations themselves. In this context

65、, governments, NGOs and donor institutions can play a large role by promoting such commitment devices. Government policy can also be improved by understanding the power of temptation and the desire to avoid it. This understanding could turn some conventional logic on its head. For example, in designing saving policies, standard logic dictates that the more liquid an account the more valuable. After all, liquidity allows peo