Behavioral economists incorporate social, behavioral, and emotional factors into their models and stray from mainstream economics that simplify humans as only being rational decision makers. Characteristics that affect a person’s ability to make rational decisions are examined by Sendhil Mullainathan in his presentation “the Behavioral Economics of Extreme Poverty” at the Center for Global Development.

Mullainathan began by working us through a memorization test. He read us a list of words, after which we were asked to write down the ones we remembered. My list had the words male, woman, husband, son, strong, lady, and beard. Mullainathan asked how many of us wrote down the word man and some people raised their hands. It turned out that the word man was never on the list, although it would have been a natural fit. In similar experiments, the results show no difference between the rate at which poor people and people who are not poor choose the invisible word man.

However, when a similar list is presented with words such as bill and taxes, there is a significant difference between the poor and non-poor in the rate that they perceive the word money although the word is not on the list. Money shows up at a much greater rate among the poor. The poor are more preoccupied by issues of money. This then affects their ability to make rational decisions at crucial points in life. They are prone to more mistakes. These cognitive tests strive to show that the poor and non-poor do not have equal opportunities to make rational decisions.

We treat bandwidth as being free when it’s not. It is scarce. Mullainathan argues “you would not charge the poor a fee because it is regressive but we charge them in bandwidth all the time.”

To hear about the application of these tests on sugar cane farmers in India and policy lessons, watch Sendhil Mullainathan’s full talk at the CGD.