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Behavioral economics’ explanation for the ineffectiveness of most efforts to train microfinance clients is that their experience of scarcity gives them limited bandwidth to absorb and apply new information.On the other hand, behavioral economics challenges another aspect of the “borrower knows best” school – the part that argues that the poor can properly weigh short and long-term considerations, since people who are tunneling often fail to do this. In a section dealing with how to apply behavioral economics to organizations, the authors describe and explain why workers, in many contexts, get more done in 40 hours a week than in 60.I find this a strong endorsement of Grameen Foundation’s rejection of simplistic technology solutions to meeting the diverse financial needs of the world’s poor, while strongly supporting technology solutions that involve human networks.
Now and then, it prompts us to consider readopting a practice that has fallen out of favor.
(For an introduction to the thesis put forward in the book , visit Part One of this blog.) Now, I will comment on the specific insights and implications I see for microfinance and international development when looked at through a behavioral economics lens. The analysis of scarcity helps explain the power of, and the tendency to use, group mechanisms in microfinance.
But behavioral economics arrives at this conclusion for a different reason.
The advocates of “borrower knows best” often claim that the poor are best suited to leverage their existing “survival skills” and those can be pathways out of poverty if complemented by responsive financial services.
Just as increasing use of a “gender lens” has transformed thinking about and the practice of international development in recent decades, so too can behavioral economics in the near future.
In some cases, this discipline explains and reaffirms current practice.
Basically, “working overtime” can pay short-term productivity dividends, but those dividends are usually short-lived.
The cumulative impact on workers’ mental bandwidth is one way of explaining why this is so.
(The reduction in “sin expenses” in families taking a microloan has been confirmed in at least one randomized controlled trial.) also gives a new explanation for the importance of frequent loan payments, as the authors say that having “frequent interim deadlines” is a proven way of penetrating the tunnel that a single deadline months off in the future usually cannot.
It also raises questions about the wisdom of building in grace periods into loan contracts with low-income people. This analysis has some interesting implications for the use of technology in microfinance.