two anonymous referees for valuable comments. A shorter version of this essay will appear in History of Political Economy 50 (2018) as part of a special issue on The political economy of development economics: A historical perspective, edited by M. Alacevich and M. Boianovsky.1 Throughout the 20 th century, prominent researchers directed attention to violations of rationality. Keynes discussed "animal spirits" and Simon detailed many aspects of "bounded rationality" (Keynes 1937; Simon 1957). However, this work was often marginalized or ignored because there was little interest in building on a behavioral perspective that lacked a unifying theoretical core.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Economics, like all behavioral sciences, incorporates premises about how people think. Behavioral economics emerged in reaction to the extreme assumption in neoclassical economics that agents have unbounded cognitive capacity and exogenous, fixed preferences. There have been two waves of behavioral economics, and both have enriched development economics. The first wave takes into account that cognitive capacity is bounded and that individuals in many situations act predictably irrationally: there are universal human biases. Behavioral development economics in this first wave has shown that low-cost interventions can be “small miracles” that increase productivity and well-being by making it easier for people to make the rational choice. The second wave of behavioral economics explicitly takes into account that humans are products of culture as well as nature. From their experience and exposure to communities, humans adopt beliefs that shape their perception, construals, and behavior. This second wave helps explain why long-run paths of economic development may diverge across countries with different histories. The second wave also suggests a new kind of intervention: Policies that give individuals new experiences or new role models may change their perceptions and preferences. New perceptions and preferences change behavior. This is a very different perspective than that of neoclassical economics, in which changing behavior requires ongoing interventions.

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