THE BEHAVIORAL DEVELOPMENT ECONOMICS OF POVERTY AND RISK
This dissertation explores the behavioral development economics of poverty and risk from three perspectives. Chapter one focuses on the first perspective concentrating on the psychology of poverty and risk preferences. The second perspective studied in chapter two looks at poverty from the lens of flood experiences, and at risk from the angle of belief, instead of risk preferences. The third perspective presented in chapter three approaches the issue of poverty and risk by applying traditional poverty measures intertwining with reference-dependent utility to a set of data. The first chapter, “Do Financial Worries Change Risk Preferences Under Prospect Theory?” focuses on the causal nexus of induced financial concerns on probability weighting and loss aversion. Contrary to the standard assumption treating risk preferences as traits, we have learned that risk preferences might be malleable in recent years. However, we have yet to know the specific role of the occupation of mind by financial strain on the alteration of risk preferences. The empirical tracing of corresponding causal path through cognition and emotion has been suggested. To fill these gaps in the literature, chapter one asks whether financial concerns make people more overweigh small probabilities, more underweigh large probabilities, and more loss averse. Additionally, whether possible mechanisms behind the effects, if exist, change in cognitive ability, and change in emotion is empirically tested. To answer the questions, the state of mind of 583 subjects was primed with scenarios aimed to induce financial worries or nonfinancial worries in an online experiment. Each type of primed concerns involves two levels of intended intensity: “hard” and “easy.” We found that financial hard priming makes subjects have a higher level of overweighting of probabilities than nonfinancial priming. Financial hard priming causes subjects to be more loss averse when compared to financial easy priming. Moreover, “poverty” status moderates the average treatment effect of priming on risk preferences. The “poor” have a higher level of overweighting than the “nonpoor.” Additionally, the “poverty”-moderated marginal effects of financial hard priming on the level of overweighting of probabilities is mediated by cognitive fatigue. The more cognitive fatigue is, the higher the level of the overweighting becomes. Given that it might be impossible to disentangle risk preferences from beliefs, the second chapter, “The Effect of the Salience of Flood Experiences on Subjective Probability of megaflood,” aims to understand how heuristics could play a role in forming belief concerning the likelihood of relatively rare event. Partaking in the attempt to better understand the psychology of small probability events, chapter two explores how Cambodian rice farmers, who have mixed experiences of floods with different levels of salience, form their observed beliefs over the probability of megaflood event. This should help better understand the role of availability heuristics(Tversky and Kahneman (1974)) in the over-or under-estimation of small probabilities in a real setting. Specifically, whether the salience of flood shocks encountered by rice farmers affects their subjective beliefs on the probability of extreme flood event; and whether flood shocks that are more salient to the farmers makes them have higher subjective probability on future extreme flood event are explored in this chapter. It is found that there is no recency effect of the occurrence of floods on the subjective belief of the occurrence of megaflood. However, shocks that are more salient, in terms of the extremeness of flood loss, make farmers have a higher subjective probability of megaflood event. This is indicative of the role of availability heuristics (Tversky and Kahneman (1974)) and the salience theory of choice under risk(Bordalo et al. (2012)). In the third chapter, “What More Can Reference-Dependent Poverty Measures Tell Us?: Application to Thai Economy Using Townsend-Thai Panel Data”, reference-dependent utility and loss aversion are instilled into traditional poverty measure. The objectives of chapter three are to apply the reference-dependent poverty measures proposed in Jäntti et al. (2014) to Thai data with further consideration on the design of reference point; and to compare the designs of two existing measures, of Günther and Maier (2014) and of Jäntti et al. (2014), both of which apply the reference-dependent utility from K_szegi and Rabin (2006). From Townsend-Thai household panel data over the year 2000 to 2011, It is found that Prospect-theory based poverty measures, based on ‘equivalent income’ as proposed by Jäntti et al. (2014), are mostly higher than conventional FGT measures, but are with similar trend. By building in loss aversion into the poverty measures, the economic insecurity of the vulnerable who have had income around the poverty line and have experienced income loss, with magnitude significant enough, is now reflected in the overall level of reference-dependent poverty. We can learn more from reflerence-dependent poverty measure the nature of “poverty” around the poverty line: the churning in income versus the persistency of poverty.
Behavioral development economics; Dual Process theory; Poverty; Priming; Prospect theory; Risk preferences
Berry, Jim; Just, David R.
Ph. D., Economics
Doctor of Philosophy
dissertation or thesis