Despite economists’ frequent assumption that humans are rational economic agents, let’s admit it, we have limitations; we may be weak, altruistic, easily manipulated or scatter-brained among many other things. Thus, results based on, say field experiments relying on one-off interviews may tend to miss a lot of that important human behavior.
Last month’s Annual FinNet Conference aimed to bring some of this real-world understanding of human behavior to a World Bank Group audience. The underlying theme of the conference was the use and importance of including behavioral economics in our development work. Tuesday’s events were headlined by Jonathan Morduch and Daryl Collins. They returned to the World Bank to talk about their recent publication Portfolios of the Poor and also discuss how they expanded the use of financial diaries to study small businesses (see Brian’s recent post). Morduch and Collins reiterated that even the base of the pyramid has the potential discipline to save, and in the end it’s important for practitioners to get to know the users of their financial products, be they micro-entrepreneurs or small business owners.
The two-day event came to a close with a talk given by one of the founders of ideas42, Sendhil Mullainathan. He challenged the conference attendees to ask and test the right questions and design financial products along those lines. When asked by an audience member about the worth of financial literacy initiatives, he responded (only half jokingly) to the classic comparison of the Mac vs. the PC. Even your pre-schooler can use a Mac but the PC well that’s another story. In other words, it’s incumbent on providers of financial services to design financial products that are easy to understand, rather than requiring people to understand the convoluted terms of a too-sophisticated financial product.
Mullainathan also emphasized that understanding entrepreneurs is important for an institution like IFC. He gave a rousing talk on using better designing, branding and even advertising in our financial products (the right wording and choices will matter to the end-user), so that we as practitioners walk away knowing we’ve created something scalable and sustainable and in turn have promoted responsible lending. He referred at one point to the scenario of an experiment in Africa where one bank was able to increase interest rates on a cash loan product (by almost 4.5 percentage points) just by changing photos (from that of a man to a woman) on a brochure advertising the product, targeting males. By advertising promotional items (free mobiles, bags etc.), the bank was able to increase the interest rate by 4 percentage points.
Of course banks the world over have for a long time been using knowledge gleaned from behavioral economics to expand their customer base. The task remains to figure out how to use these same insights to deliver a better product to the clients that are most in need of financial services.