In neo-classical economics, people’s decisions are generally considered to be rationally based in a world of scarce resources affected by the law of supply and demand. Behavioral economics adds to the mix psychic resources such as attention, cognition, self-control, and understanding. Doing so can dramatically improve understanding of the behaviors that can make or break development efforts and can reveal why many conventional policies have failed.

In this paper, Saugato Datta and non-resident fellow Sendhil Mullainathan explore the implications of behavioral economics in policy areas as diverse as health, education, agricultural policy, and the design of cash-transfer programs. Drawing upon the latest research in these and other areas, they show how behavioral economics can provide policymakers with innovative solutions to important issues in development.