3.

2 Immediate Barriers to Education

The decision to send a child to school might seem simple—parents weigh the benefits (like better jobs and a secure future) against the
costs (like school fees and lost wages if the child works instead). However, in reality, many obstacles make this decision difficult,
especially for poor families in developing countries.
Take the example of Suresh, a poor father in an Indian village. He wants to send his son, Laloo, to school so he can have a better future.
To afford school fees, books, and a uniform, Suresh starts saving money. But life brings unexpected challenges—his mother falls ill and
needs medicine. Suresh faces a tough choice: help his mother or save for Laloo’s education. Even though his mother insists that Laloo’s
future is more important, it’s hard for Suresh to let her suffer. Eventually, he manages to enroll Laloo in school. But soon, Laloo loses
interest. Like many kids, he finds school boring, especially when his friends are playing outside. Meanwhile, Suresh is exhausted from
work and everyday struggles. Does he have the energy to motivate Laloo, check if he’s attending school, or talk to teachers?
This example shows how, even when parents truly want their children to study, real-life hardships make it difficult. Poverty creates
constant stress, making it much harder to focus on long-term goals like education.
 People often struggle with decisions that involve both short-term and long-term consequences. Behavioral economists and
psychologists have studied this extensively, and one important idea that helps explain these struggles is hyperbolic discounting. This
theory suggests that people tend to be impatient in the short term but more patient in the long run. For example, Suresh knows
that saving money for his son’s education will be beneficial in the long run. However, when his mother falls ill and needs medicine,
the immediate need feels more urgent, even though skipping school expenses might hurt his son’s future. This is a classic case of
hyperbolic discounting—Suresh understands the long-term benefits of education but struggles to act on them because of short-term
pressures. This concept applies to many areas of life, such as procrastination, saving money, or even dieting. People often make plans
for the future but struggle to follow through when faced with immediate temptations or challenges.

 Many parents genuinely want their children to be educated, but they struggle to follow through because of immediate challenges like
financial pressures, daily responsibilities, and the effort needed to keep children motivated. Studies in India confirm this challenge.
According to the Public Report on Basic Education (PROBE), more than 85% of parents in even the poorest states believe
education is important. Yet, actual school attendance remains low.

 In many developing countries, school attendance often follows a sporadic pattern rather than a continuous, fixed path. Instead of
attending school consistently until reaching a certain grade, students may attend for a while, drop out, and then return later. This
pattern can be explained through the lens of hyperbolic discounting and dynamic inconsistency in decision-making.

As discussed earlier, parents may recognize the long-term value of education and decide to send their child to school. However,
when faced with immediate pressures, they may temporarily withdraw their child from school to address these urgent concerns.
Because dynamic inconsistency causes people to change their priorities over time, parents who have taken their child out of school
may later return to their original goal and re-enrol the child when circumstances improve. This cycle of dropping out and returning
can repeat multiple times.
One key insight from this behavioral framework is that school attendance is likely to be highest at the beginning of the academic
year. At this time, parents are often newly motivated, free from some immediate pressures, and ready to make a fresh start. However,
as the year progresses, daily hardships accumulate, and attendance gradually declines. This pattern of sporadic schooling
highlights the gap between intentions and actions.

 A key practical application of this behavioral perspective is designing programs that make school more attractive to children. If
children find school enjoyable or rewarding, it reduces the burden on parents to constantly monitor and encourage attendance.
 For example, school meal programs can serve a dual purpose:
1. Incentivizing attendance by giving children a reason to come to school.
2. Easing financial pressure on parents by reducing household food costs.
Other low-cost incentives like school sports, small rewards (such as candy), or engaging activities could also significantly boost
attendance. The benefit-to-cost ratio of such interventions may be much larger than just their monetary value, as they address
deeper behavioral barriers to education.

3.3 Demand for Commitment, Default Settings, and Savings

The savings dilemma that affects education in developing countries is part of a broader issue related to behavioral challenges in
financial decision-making. Just like parents struggle to keep their children in school due to immediate pressures, individuals also
struggle to stick to their savings plans when faced with urgent financial needs.

Standard Economic Model vs. Behavioral Reality

In the traditional economic model of savings, individuals are assumed to:
1. Rationally plan how much they need to save for the future.
2. Consider borrowing constraints and potential financial shocks while making these decisions.
3. Stick to their plan without difficulty.
However, in reality, especially for low-income individuals in developing countries, it is extremely challenging to implement
savings plans. Temptations and immediate financial needs—such as medical emergencies, social obligations, or day-to-day
survival—often derail long-term savings goals.
This struggle is similar to savings issues seen in developed countries, where individuals often fail to save adequately for retirement
or other long-term goals, despite knowing its importance. The key behavioral insight here is that short-term pressures often
override long-term intentions, making financial planning difficult to follow through in practice.

 Hyperbolic Discounting and Savings Behavior

A key distinction in this model is whether individuals are sophisticated or naive:
1. Sophisticated individuals recognize their tendency to procrastinate and adjust their behavior accordingly. They make realistic
plans that they can actually follow through.
2. Naive individuals do not recognize their time inconsistency and overestimate their ability to stick to plans. They intend to save
but abandon their plans when faced with immediate expenses.
 The Role of Commitment Devices
Since people struggle with self-control, they often turn to commitment devices—mechanisms that help them stick to their goals.
Institutions play a crucial role in providing these structures.
A classic metaphor is Ulysses and the Sirens—Ulysses knew he would be tempted by the Sirens' song, so he tied himself to the
ship’s mast to avoid giving in. Similarly, people use commitment devices in everyday life:
 Gym memberships: Some people prepay for a gym to force themselves to exercise.
 Christmas savings clubs: These accounts help people save throughout the year to ensure they have money for holiday
shopping.
In developing countries, commitment devices can help individuals save for education by creating structures that make it harder to
spend money on immediate needs. This behavioral insight is crucial for designing effective savings programs and educational
policies.
 The study by Gruber and Mullainathan (2002) shows that cigarette taxes act as a commitment device, helping smokers quit by
making smoking more expensive.
1. Rational Model: Smokers make informed choices, and higher taxes make them worse off by restricting consumption.
2. Behavioral Model: Smokers struggle with self-control and want to quit but fail due to time-inconsistent preferences. Higher
taxes help them quit, improving their well-being.
This shows that institutions (like taxes) can help people overcome self-control issues in areas like smoking, savings, and
education.

 There is also evidence on people actively choosing commitment devices.

1. Avoiding Temptation: Wertenbroch (1998) found that people intentionally avoid bulk purchases of tempting goods (e.g.,
cookies) to control overconsumption.
2. Imposing Penalties: Trope and Fischbach (2000) showed that people voluntarily accept penalties for missing small, unpleasant
medical procedures, ensuring they follow through.
3. Self-imposed Deadlines: Ariely and Wertenbroch (2002) found that students at MIT chose evenly spaced deadlines for their
papers, even when they could have submitted everything at the latest possible date. This suggests they used deadlines as a self-
control mechanism to avoid procrastination.

Rotating Savings and Credit Associations (ROSCAs) function as a commitment device to help people save in developing
countries. Unlike standard economic theory, which assumes more liquidity is always better, behavioral models show that too
much liquidity can hinder savings, leading the poor to intentionally choose illiquid assets as commitment devices.

 Traditional economic theory assumes that if people choose something (revealed preference), it must be beneficial to them. However,
behavioral economics challenges this assumption—people often make time-inconsistent or impulsive decisions that may not
improve their long-term well-being.
Traditional economic models assume that if people take loans and repay them, they must be beneficial. However, behavioral
economics suggests this isn't always true—some borrowers may use loans to satisfy short-term temptations rather than for productive
investment.

 A practical experiment by Ashraf et al. (2006) tested the effectiveness of commitment devices in savings behaviour through the
introduction of SEED accounts in the Philippines. These accounts restricted withdrawals until a specific savings goal was reached or
a predetermined date arrived. Despite offering no additional interest, over 30% of participants opted for these accounts. After six
months, those who used SEED accounts demonstrated significantly higher savings rates compared to those with regular accounts,
highlighting the positive impact of commitment devices on savings behaviour.
 In conclusion, behavioural economics provides valuable insights into the factors that influence saving decisions, including
hyperbolic discounting, the need for self-control, and the role of commitment devices. By understanding these behavioural factors
and incorporating mechanisms like ROSCAs, cigarette taxes, and SEED accounts, policymakers can help individuals achieve their
long-term financial goals. These interventions, when implemented effectively, can significantly improve savings behaviour and
contribute to better financial outcomes in both developing and developed economies.

3.4 Defaults and Financial Institutions

Financial institutions do more than just provide commitment tools—they also shape behavior through default choices.
Study by Madrian & Shea (2001)
 A company wanted its employees to save money for retirement using a 401(k) plan. But most employees weren’t signing up,
even though the plan was beneficial.
 Before, employees had to actively sign up by checking a box on a form. Since people tend to procrastinate or avoid extra effort,
only 38% signed up.
 Instead of making employees opt in, the company automatically enrolled them in the savings plan. If they didn’t want to
participate, they had to opt out by checking a box.
 With this simple change, participation jumped to 86%! Most people didn’t bother opting out and ended up saving money.
Why Do Defaults Matter in Decision-Making?
 People often avoid making decisions because they procrastinate or feel overwhelmed by choices. Instead of actively deciding,
they simply stick with whatever option is automatically selected for them—this is called the default effect. So years later, those
who were automatically enrolled kept saving more than those who had to opt in.

How Can We Use This to Help People Save More?

Economists Thaler and Benartzi (2004) used this insight to create the Save More Tomorrow (SMaRT) Program, designed to
help people increase savings gradually without feeling financial strain.
How the SMaRT Program Works:
1. Employees make one active choice—to join the program.
2. Instead of immediately contributing a high amount, savings start small and only increase when they get a raise.
3. The savings rate automatically increases over time unless the employee opts out.

The SMaRT Program’s Success

 In one company, over 75% of employees who were offered the Save More Tomorrow (SMaRT) Program participated.
 Less than 20% opted out, meaning the majority stayed in the program.
 Over time, as automatic increases in savings accumulated with pay raises, participants tripled their savings rates.
 The success of SMaRT has led to widespread adoption, with millions of participants expected in the future.

Why Is This Approach So Effective?

 The program does not force people to save but guides them toward better decisions.
 It works with human psychology, helping individuals overcome procrastination and short-term thinking without requiring
active effort.
 Instead of solving external financial constraints, it solves internal behavioral struggles—helping people save as much as they
actually want to.
This research highlights that institutions and policies can shape behavior in powerful ways.

How Default Behavior Can Improve Savings in Developing Countries

1. Learning from the U.S. Experience
 Direct deposit of paychecks into savings accounts has proven effective in increasing savings in the U.S.
 The same concept could be applied to developing countries to help middle-class individuals save more effortlessly.
 This low-cost banking innovation could have a large-scale impact on savings rates.
2. Expanding Banking Access to Rural Areas
 Simply introducing basic bank accounts in rural areas could significantly influence saving behavior.
 Why?
o Cash in hand makes spending easy—saving requires effort.
o Money in a bank account flips the process—saving becomes automatic, while spending requires action.
3. Psychological Impact of Bank Accounts
 Even though deposit accounts are not as powerful as direct deposit, they still act as a commitment device.
 The small barrier to accessing funds in a bank (compared to holding cash at home) can reduce impulsive spending.
Final Thought
 By leveraging simple banking innovations, policymakers and financial institutions can boost savings rates in developing
countries. Even a small shift in default behavior—such as making savings the easier option—can lead to meaningful
economic improvements.

3.5 Status Quo Bias and Diffusion of Innovations

Another broad area of significance to development is the diffusion of innovation. Diffusion of innovation refers to the process by
which new ideas, technologies, products, or behaviors spread through a population or society over time. It can happen through
various channels, such as word of mouth, social networks, media, or direct interventions.

Here are different diffusions that led to adoption of innovation.

1. The Puzzle of Slow Innovation Adoption in Developing Countries
 Innovations such as the Green Revolution, new medical technologies, and fertility practices often spread slowly in developing
countries.
 Researchers have long studied why people resist adopting new, beneficial technologies (Rogers, 2003).
2. How Innovations Spread: The S-Curve Pattern
 Most innovations follow an S-shaped diffusion pattern:
1. Slow Start – A few people adopt the innovation.
2. Tipping Point – Adoption suddenly accelerates as more people start using it.
3. Steady State – Growth slows down once most people have adopted the innovation.
3. Different Groups of Adopters
 Innovators: The first to adopt, but they are often socially isolated and have weak connections to the broader community.
 Early Adopters:
o Well-connected opinion leaders who influence others.
o Often have higher education, social status, and credibility.
 Laggards:
o The last to adopt innovations.
o Similar to innovators in being socially isolated, but instead of adopting early, they resist change for a long time.
4. Innovations Spread Through Social Networks
 Studies show that people adopt new technologies based on their social connections.
 Time-series data and qualitative surveys confirm that social influence plays a major role in adoption decisions.

Empirical Evidence: Family-Planning Experiment in Taiwan (1964)

 A randomized experiment targeted a specific group with a family-planning program (Palmore & Freedman, 1969).
 Key Findings:
o The targeted group adopted the innovation.
o Even those not directly exposed to the program but socially connected to the treatment group also changed their
behavior.
 This proves that social networks help spread innovations, even to people who were not part of the original intervention.

However, the slow adoption of innovations is not just due to a lack of information; psychological factors also play a significant
role. One important psychological factor is the status quo bias, which refers to people's preference for the current situation over
change. This bias can explain why many individuals resist adopting innovations, even when they would ultimately benefit from
them. An experiment demonstrating status quo bias involved individuals deciding how to invest a sum of money. When
participants inherited a portfolio mostly invested in a moderate-risk stock, they were much more likely to continue investing in
 that stock, even if better options were available. This shows that people often stick to the status quo rather than making a change,
even when change could bring better outcomes.

 Social pressure and conformity are other factors that influence the diffusion of innovations.

1. The Role of Conformity in Adoption: People have a natural tendency to conform to the behaviors of those around them,
often to fit in and avoid standing out.
A famous psychological experiment demonstrated this effect: Participants were placed in a group and asked to judge the length of
lines. Even when the correct answer was obvious, many conformed to the wrong answers given by others in the group. This
shows how social influence can override individual judgment.

2. How Social Pressure Slows Innovation

 Many diffusion models assume that the best ideas spread quickly, but in reality, psychological factors can create resistance to
change.
 People often fear negative outcomes more than they appreciate potential benefits.
o Example: A study on deworming pills found that even though they offered long-term health benefits, adoption was slowed
because people focused on minor short-term side effects like stomach cramps.
o This highlights a psychological tendency called "negativity bias", where people give more weight to potential risks than to
benefits.

 Even when people want to adopt a beneficial innovation, they may struggle with self-control or financial constraints. For
instance, farmers in Kenya were aware that using fertilizer could significantly increase crop yields. However, they often failed to
purchase it because they lacked the money at the right time. It wasn’t that they didn’t believe in its benefits—they simply couldn’t
afford it. To address this issue, researchers introduced a financial intervention that allowed farmers to save up money gradually.
This small change greatly increased adoption rates because it helped farmers overcome the initial financial hurdle.

3.6 Self-Serving Bias and Evaluation

Evaluation is one of the important issues facing development practice.
Evaluation is essential in development programs to assess their impact and effectiveness. However, self-serving bias—the
tendency to interpret information in ways that support one’s own interests or beliefs—can distort the evaluation process, leading to
misleading conclusions.
How Self-Serving Bias Affects Evaluations
When individuals or organizations assess the outcomes of a development program, they may unconsciously attribute successes to
their efforts while blaming external factors for failures. This bias can result in:
 Overestimation of program success (ignoring flaws in implementation)
 Resistance to acknowledging failures (blaming poor outcomes on external circumstances)
 Selective interpretation of data (highlighting positive results while downplaying negative ones)
Example: The Hastorf and Cantril (1954) Experiment
A classic example of self-serving bias comes from a 1954 study by Hastorf and Cantril, in which students from Princeton and
Dartmouth watched the same football game. Despite seeing the exact same footage, Princeton students perceived Dartmouth as
committing more fouls, while Dartmouth students believed Princeton was at fault. Their interpretations were shaped by their prior
loyalties, demonstrating how people process the same event differently based on their existing beliefs.
 In development practice, self-serving bias can lead to ineffective policies if evaluators fail to objectively assess what worked and
what didn’t. To minimize bias:
 Use independent evaluators to ensure neutrality.
 Rely on objective data and metrics rather than subjective assessments.
 Encourage critical feedback rather than seeking confirmation of success.
 The self-serving bias is particularly evident in bargaining, legal disputes, and development program evaluations.
In a study on bargaining behavior, Babcock and Loewenstein (1997) demonstrated how self-serving bias influences negotiation
outcomes. Participants were assigned roles as either plaintiffs or defendants in a tort case.
 Those who read the case before knowing their role were more neutral.
 Those who read the case after being assigned a role exaggerated the potential judgment in their favor.
This bias increased the likelihood of going to court, even when settling would have been financially smarter. The study shows
how individuals unconsciously interpret the same information in ways that benefit them, often to their own detriment.

Self-serving bias can distort the assessment of interventions, leading to overestimated success and resistance to acknowledging
failures.
Case Study: Cabot’s Intervention Program for Delinquent Youth
In a youth intervention program led by Cabot, workers believed the program was highly effective. However, when evaluated
using a randomized control trial, results showed little actual impact. The workers' positive perception was shaped by their
personal investment in the program, rather than objective outcomes.

Self-Serving Bias and the Importance of Randomization in Evaluations

Self-serving bias can distort research outcomes, particularly in fields like medicine, law, and development policy, where
personal beliefs or interests influence interpretations. One way to counter this bias is through randomized evaluations, which
provide more objective and reliable assessments.
Example: Portacaval Shunt Studies in Medicine
In medical research, self-serving bias has been observed in the study of portacaval shunts for cirrhosis treatment.
 Non-randomized studies reported overly positive results, possibly due to doctors’ optimism and expectations.
 Randomized studies, however, showed a more balanced and realistic assessment of the treatment’s effectiveness.
This highlights how bias can shape perceptions and why randomization is essential to ensure accurate evaluations.
Randomization as a Solution
Randomized trials help eliminate biases by ensuring that results are not influenced by researchers' expectations or participants’
personal characteristics. In development policy, randomized evaluations help measure the true impact of an intervention rather
than relying on subjective impressions of those involved.

Conclusion
Self-serving bias affects decision-making and research evaluations, often leading to overestimated success of policies or
treatments. Randomized evaluations serve as a crucial tool to minimize bias, improve accuracy, and ensure better policy
decisions.