When Bias Shapes a Nation: How Does Human Psychology Distort Nicaragua’s Economy?
Diana Ha | Kevin Daniel
Economic trends are often described as science since they’re influenced by numbers, forecasts, and rational planning. However, is this designation really accurate? In reality, they’re shaped by human judgment, emotion, and politics. Having lived in Nicaragua my entire life, I’ve seen how these biases play out in real time where leaders often rely on instinct or political loyalty instead of evidence and analysis. That is the reason why policies tend to be reactive rather than strategic, where they are focused on short term gain instead of long term development. In Thinking, Fast and Slow, Daniel Kahneman shows that we depend far more on intuition than on deliberate reasoning, while in Why Nations Fail, Daron Acemoglu and James Robinson argue that the fate of nations is shaped by the strength of their political institutions. Analyzing how bias shapes Nicaragua’s policy failures is crucial since the country’s weak institutional checks and crisis led by decision making makes bias not an occasional flaw but a structural force in governance.
Daniel Kahneman’s theory of System 1 and System 2 thinking explains certain Nicaraguan policymakers’ decisions. System 1 is fast, emotional, and instinctive, while System 2 is slow, analytical, and deliberate. Specifically, in Nicaragua’s political environment, where leaders face pressure to appear like they’re in control, System 1 seems to dominate. Instead of relying on data, decisions are often made from instinct and political calculation. So, when inflation rises or public unrest grows, leaders rush to “fix” problems with quick, visible actions like subsidies, new infrastructure projects, or short term wage hikes. For example, Nicaragua’s government temporarily froze fuel prices through subsidies in 2022 to reduce inflation pressures. Even if the actions may seem to calm the public, in reality, they often deepen fiscal deficits and inflation later in the long term. This reflects cognitive biases that Kahneman describes. One of them is the availability heuristic, which is when policymakers react to what’s most visible and not to what’s most important. If food prices suddenly rise, they impose price controls instead of addressing structural causes like poor productivity or logistics. Another is confirmation bias, which is when the government sticks to its preferred narrative, saying that foreign investment alone can lead to growth, but in reality, the country itself faces corruption and weak legal protections, keeping investors away. In the end, policymaking becomes performative. The truth is that leaders reward themselves for acting quickly, not necessarily wisely and people are built to tell stories and not interpret statistics. Therefore, in Nicaragua, policy is often shaped by the story leaders and those in power where they tell what they want even when the numbers suggest otherwise.
If cognitive bias explains how decisions go wrong, institutional bias explains why they stay that way. As Daron Acemoglu and James Robinson argue in Why Nations Fail, the difference between prosperity and stagnation depends on the kind of institutions a nation builds. Inclusive systems share power, encourage accountability, and reward innovation. Extractive systems focus their authority in the hands of a few who use it to protect their own interests. Nicaragua’s reality fits right in the latter category, where decision making is guided less by evidence than by loyalty. Economic programs that are meant to attract investors may work well for those close to those in power but not really for the broader population. In this sense, corruption is not only a moral failure, instead it’s institutionalized psychology. Officials justify favoritism as loyalty, and the system rewards compliance over competence, which leads to a cycle of policy short-termism where governments borrow heavily to fund public works before elections, manipulate the currency to show “growth,” or distribute subsidies that momentarily satisfy the public. Even if it looks politically convenient, these choices are led by Daniel Kahneman’s theory: System 1 thinking. Rational decisions like cutting spending or reforming institutions are politically risky. In Nicaragua, logic can be dangerous, while emotion becomes strategy.
The evidence is clear from the World Bank: slow growth, persistent inequality, an economy maintained by remittances (≈26.6 % of GDP in 2024), and a narrow set of commodities. This gives the illusion of stability but lacks real substance. On paper, Nicaragua looks steady but in reality, it’s paused in a permanent vulnerability. Cognitive bias explains much of this gap. Policymakers prioritize what is visible and immediate: like roads, short term construction spurts instead of long term investments in education, agriculture, or innovation. On the other hand, status quo bias discourages deep reform, where overconfidence ends up convincing leaders they can manage debt or inflation better than they actually can. The result is an economic mirage: cities expand and GDP rises momentarily upward, while rural poverty barely moves. This is where each stagnated project, each unmet promise quietly weakens public
trust and these patterns shape the rhythm of daily life. After elections, momentum fades, and half finished projects are forgotten, showing how policy is often used more as performance than strategy. Over time, this causes resignation, where citizens stop demanding accountability because they no longer believe it can exist.
The younger generation of Nicaraguans are starting to recognize bias not as personal failure but as a system of incentives and habits. They see that policymaking fails not because individuals are irrational but because the irrational behaviors are recognized by institutions. This understanding that is spreading through classrooms and civic spaces seems small but it’s very powerful as it transforms frustration into curiosity, turning it into the first spark of reform.
However, acknowledging bias is only the start because the real challenge is building institutions that can carry it. Behavioral economics shows that bias can’t be erased, but it can be limited by systems that slow decisions and force deliberation. For Nicaragua, this would mean establishing real safeguards, like forming independent oversight bodies with the authority to look at major policies, along with mandatory “cooling-off” periods for big spending or regulatory changes. These reforms wouldn’t eliminate bias, but they would make instinct driven decisions harder to push through unchecked.
Transparency is also very important. By simply releasing data on debt, spending, or growth, it does not guarantee that citizens will understand it correctly, especially in a context where information and statistics can be distorted or manipulated. Effective transparency requires a supporting ecosystem, with independent media capable of turning technical reports into accessible language, civil society groups trained in data analysis, and civic education programs that teach people to evaluate competing claims. Only when information is available and understandable, all at once, citizens, journalists, and researchers can act as a collective System 2, challenging political narratives rather than incorporating them.
Education is equally important. A population that understands how cognitive bias works is harder to convince with emotional populism. Teaching young voters to question, compare, and verify policy claims slowly shifts the national mindset from being reactive to reflective. And finally, true institutional resilience depends on inclusion. When policy decisions incorporate voices across class, gender, and region, competing biases collide and cancel out. Acemoglu and Robinson remind us that inclusive institutions encourage prosperity specifically because they turn reaction into deliberation and impulse into analysis.
Bias is an inseparable factor from human nature, but becomes dangerous when it governs a nation’s future. Nicaragua’s instability is not simply poor management but it’s the win of System 1 over System 2, of instinct over analysis.
To move forward, Nicaragua must learn to think slowly. Rationality takes effort and fairness requires structure. That is why, good governance isn’t about being bias free, but about being bias aware. Eventually, progress will show when leaders and citizens both learn to pause before they act, to question what feels right, and consider what is right. True development will not begin with slogans or sudden projects, but with a shared commitment to reflection and honesty. For Nicaragua, thinking slower may be the fastest way to grow.
Diana is a freshman at Columbia College and she is planning to major in Economics. She is from South Korea but lived her entire life in Managua, Nicaragua. Diana enjoys playing volleyball and writing in her free time, specifically about economics in the real world.