Behavioral Economics: A Review of the Literature

Behavioral economics exists at the intersection of psychology and economics, and gets at the heart of how people make decisions. The study of behavioral economics in microfinance has become increasingly important as economists, philanthropists, banks, non-profit organizations, and others seek to understand how the poor make choices that impact their financial health and well-being, as well as to understand how to serve them better. 

Many people have been introduced to behavioral economics through popular books like Jonah Lehrer’s “How We Decide," Malcolm Gladwell’s “Blink” and Thaler and Sunstein’s “Nudge” —books that examine how individuals make decisions ranging from what brand of ice-cream they buy, to which candidate they vote for.

Similarly, there have been a number of influential studies in microfinance that warrant a review. Not all of them are as accessible as the aforementioned books, but interspersed in this list of scholarly research papers are links to blogs and articles and framing notes–something for everyone. This is by no-means a complete inventory of all that is out there and worth perusing, it is simply an introduction from FAI's own archive and a reminder of the importance of understanding how people make decisions in order to develop products, policy and programs to alleviate poverty. Let us know what we are missing or give us your thoughts on the topic via comments.

  • Our own Sendhil Mullainathan, one of FAI’s co-founders and a professor of economics at Harvard University, wrote a nice introduction to the subject of behavioral economics and the poor in Seed Magazine: How Behavioral Economics Can Help Change the Fight Against Poverty. His TEDIndia presentation is also a good intro to the subject.
  • “Psychology and Economics: What it means for microfinance,” is a 2008 framing note by Mullainathan and Sudha Krishnan examining how the poor manage their money through a behavioral economics lens.
  • "Psychology of Savings: Evaluation of a Commitment Savings Program" is a framing note from Dean Karlan, Sendhil Mullainathan, and Jonathan Zinman.  Our partner at Innovations for Poverty Action (IPA), founded by Karlan (who is also one of FAI's co-founders), is conducting a series of experiments that test various savings product features to better understand the demand for savings products and identify the product features that could successfully mobilize savings among poor households.
  • MIT’s Abhijit Banerjee and Mullainathan delve into the “The Shape of Temptation: Implications for the Economic Lives of the Poor.” 
  • "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India" by Michal Bauer, Julie Chytilová, and Jonathan Morduch (co-founder and Managing Director of FAI) describes findings from an experiment in rural India that suggest that the structure of microcredit loan contracts can help people with self-discipline problems who lack suitable savings products. 
  • Borrowing to Save: Perspectives from Portfolios of the Poor” (a 2010 paper from Morduch)  examines the phenomena of families who often borrow even when they have savings sufficient to cover the loan.
  • Karlan, like Mullainathan, has written numerous papers and studies on the topic of behavioral economics (see a more complete list of Karlan's papers on this topic by visiting his own site)
  • "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," (by Nava Ashraf, Karlan and Wesley Yin) looks at commitment savings account product in the Philippines that helped people increase their average savings balances by 81 percentage points. 
  • In this 2010 article for the Stanford Social Innovation Review, "Helping the Poor Save More," Karlan shows how lessons from behavioral economics can be used to develop mechanisms to enable the poor to save more. 
  • Microfinance Games”  is a research paper by Xavier Giné, Pamela Jakiela, Karlan, and Morduch. This one evaluates the presence of market imperfections such as free-riding in group-based mechanisms.