2010–2011 New Perspectives in Social Policy Seminar
Economic Stability Precedes Economic Mobility: Psychic Consequences of Economic Instability
Professor of Economics, Harvard University
Tuesday, September 21, 2010
8417 Wm. Sewell Social Science Building
1180 Observatory Drive
This talk was cosponsored by the Department of Economics.
Sendhil Mullainathan, Professor of Economics at Harvard University, includes among his fields of interest corporate finance, development, economics and psychology, and labor economics. He is director of ideas42, a laboratory for applied behavioral economics at Harvard; a founding member of the Poverty Action Lab at the Massachusetts Institute of Technology; and a senior advisor on behavioral economics to the U.S. Treasury and Office of Management and Budget, 2010–11.
Professor Mullainathan’s September 21, 2010, lecture at IRP, “Economic Stability Precedes Economic Mobility: Psychic Consequences of Economic Instability” will explore the psychology of decision making by the poor, especially as it has direct application to poor persons in the United States.
In behavioral economics studies conducted at his ideas42 lab, Mullainathan begins every project by rethinking the underlying problem. An introduction to the lab notes that “the behavioral lens reveals more than potential policy levers—it works best when it suggests an entirely new perspective on the problem.”
Examples of this approach include design of low-income assistance programs, which tend to focus on mobility and often require training and education. Behavioral economics suggest an important and often overlooked impediment to mobility: when their finances are unstable, people may not have the psychic energy to think and invest in education and training. This suggests that providing stability first may be an important precondition to successful training and education programs.
Another example of the behavioral economics approach is one of Mullainathan’s ideas42 studies, “Providing Low-fee Bank Accounts” with colleagues Eldar Shafir and Marianne Bertrand, which found that making small changes in financial counseling make a big difference in facilitating positive financial habits.
The study recounts two similar scenarios with very different outcomes. In the first example, a financial counselor leads a workshop for people struggling to manage their finances. She introduces them to a low-fee bank account that will help them avoid check-cashing and other costs. After the presentation, some 90 percent of participants express their intention to open such a bank account. But in reality, less than half of them end up opening the account.
In the second scenario, the same financial counselor has a very different experience. She gives the same talk and is equally persuasive. This time, however, a bank representative is in the room. Instead of going to the bank to sign up for an account, participants can enroll then and there. This small change of approach made a huge difference: many more people opened and used the account.
See http://ideas42.iq.harvard.edu/ to learn more about the ideas42 lab.