A core insight of behavioral economics is that we are “fast thinkers”; very little human thinking resembles the rational, deliberate type that characterizes homo economicus. What is less well recognized is that our innate reliance on cognitive shortcuts means that mental models—categories, concepts, narratives, and worldviews—profoundly influence our decision making by unconsciously shaping what we perceive and the “toolbox” of strategies we draw on to respond. Many researchers have connected this idea to economic development, yet they rarely identify their work as “behavioral” economics. We use recent research to show how a second strand of behavioral economics illuminates the tight interlinkages between preferences, culture, and institutions and brings the discipline almost full circle back to eighteenth- and nineteenth-century perspectives. We caution against the strong reductionist tendencies that attempt to squeeze sociological influences on decision making into a rational-agent model.
Karla Hoff is an Adjunct Professor of Economics and International Affairs in the spring semester and a lead economist in the World Bank. She co-directed the Bank’s World Development Report 2015: Mind, Society, and Behavior, an early synthesis of applications of behavioral economics to development economics. Behavioral economics in the 20th century revealed universal cognitive biases with large economic consequences, and in the 21st century revealed that the social patterns to which individuals are exposed shape cognition and preferences. Karla is interested in how behavioral interventions can shift societies to better development paths. She has implemented lab-in-the field experiments in India to study stereotype threat, trust, third-party punishment, and the formation of conventions. She is currently evaluating a program of Theater of the Oppressed in West Bengal. She is an Associate Editor of The World Bank Economic Review and co-edited two books—The Economics of Rural Organization and Poverty Traps. She was a National Merit Scholar, majored in French at Wellesley College, served in the Peace Corps in the Ivory Coast, and earned a PhD in economics at Princeton University.