It's all in the Mind: How Behavioral Science Presents a Golden Opportunity for Financial Inclusion

With the “golden age of behavioral research,” as New York Times columnist David Brooks recently described, comes a golden opportunity for the asset building and financial inclusion fields. Indeed, the latest breakthroughs in social science and behavioral research beg – or perhaps even force – us to think differently about poverty reduction and the policies and mechanisms that can enable it. Already, a deeper understanding of human behaviors born out of this research has inspired small tweaks in initiatives across various fields to create big changes – in health policy to increase HIV/AIDs testing, education policy to promote school attendance, and financial policies to increase savings behaviors. At the Global Assets Project, considerations of the complexities of human behaviors and their impact on social and economic lives of the poor are woven through the various threads of our work – on the psychology of poverty, conditional cash transfers, and youth savings – increasingly informing the global asset-building strategies we advocate around the globe.  

Most recently, on June 27^th we co-hosted an event with Innovations for Poverty Action (IPA) to release a new Global Assets Project paper, ”Accelerating Financial Capability among Youth: Nudging New Thinking” and to discuss Dean Karlan and Jacob Appel’s new book, More than Good Intentions. One of the major themes of the book is behavioral economics, which is beginning to shed light on how development initiatives that consider human irrationality or psychological barriers to positive financial behavior can improve the lives of the poor. Our paper extends this exploration of the human irrationality-financial behavior relationship, largely by emphasizing that psychological variables in the standard financial capability equation – financial education + access to financial services = sound financial decision-making — is grossly lacking. In actuality, temptations to consume, lack of self-control, and other psychological biases can prevent positive financial behaviors, such as saving regularly, even when a person has the ability (through financial education), opportunity (through access to financial services), and desire to do so, which should not be underestimated.

In fact, the financial choices that the poor have to make can be both emotionally and mentally draining. Click here to read more...