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 teaches Behavioral Development Economics at Columbia University and is working on a book, The Invisible Hand of Culture: New Understandings of Social Progress and Societal Rigidities for Columbia University Press. She was the Co-Director of the World Development Report 2015 and served in the World Bank's Development Research Group from 1999-2020. She has published papers in the American Economic Review that explain how segregation between renters and homeowners may deepen poverty, how cueing a stigmatized social identity depresses cognitive performance, and how Big Bang privatization in Russia impeded the emergence of a political demand for the rule of law. She co-edited two books, The Economics of Rural Organization and Poverty Traps. She was a National Merit Scholar at Wellesley College and a Peace Corps volunteer in Ivory Coast. She has a PhD in economics from Princeton University.