Abstract
Behavioral development economics promotes the nudge theory as a mechanism to incorporate people’s cognitive biases, steering their behavior in the desired direction through coercive state intervention. Cognitive biases become a reason to doubt the efficiency of decision-making psychology in the free market process. A fundamental assumption of this approach is that political decision-makers know the people’s means and ends in ways that protect them from cognitive biases. This article reviews and discusses the nudge theory, based on the boost theory developed by the Austrian School of Economics. The boost theory consists of a comparative institutional perspective to provide the empowerment people need to realize their errors and correct them “on the fly” to cultivate economic development. It is argued that the nudge theory overlooks the cognitive biases of political decision-makers, neglects the comparative perspective of the institutional environment in the face of such biases, and does not consider how construction of on-the-fly judgments works. After reviewing the principles of the nudge theory, its main criticisms from the boost theory are discussed, forming novel conclusions about and research avenues on behavioral development economics, according to the steering or empowering quality of the institutional environment.
Highlights
It is not difficult to find evidence that people often make decisions that harm their wellbeing or the well-being of others [1,2]
This review uses the economic theory of the Austrian School of Economics and some other fundamental principles of political economy and psychology of decision-making [19,20,21,22]
Behavioral development economics explains that poverty can directly affect cognitive function and economic behaviors, potentially exacerbating cognitive biases and deepening poverty
Summary
It is not difficult to find evidence that people often make decisions that harm their wellbeing or the well-being of others [1,2]. If poverty itself can degrade decision-making quality and reduce productivity, cognitive biases become a reason to doubt the dynamic efficiency of decision-making psychology in the free market process [14] In this sense, behavioral development economics promotes nudge theory to suggest several ways coercive state interventionism can steer people’s behavior towards abolishing cognitive biases in welfare-promoting directions. A fundamental assumption of nudge theory is that benevolent political decision-makers diligently structure nudges to steer ends consistent with the ultimate goals and people’s objective judgments as to the driving force of economic development [15,16,17,18] Is it reasonable to take at face value the assumption that political decision-makers know the people’s means and ends in ways that protect them from cognitive biases?. The fourth section addresses the broader question of market failures, and the state’s role in defining steering and empowering people’s judgment and behavior in economic development
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