Would Ulysses have taken out a microfinance loan?

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Ulysses Before facing the temptation of the song of the Sirens, Ulysses famously had his crew tie him to the mast of his boat. He commanded his crew members not to untie him until he had passed the certain death that would have awaited him if he had been allowed to give in to temptation. It turns out this ancient morality tale has a modern equivalent in the form of microfinance self help groups.

A recent paper by Jonathan Morduch of the Financial Access Initiative and coauthors Michal Bauer and Julie Chytilova takes a look at the behavioral underpinnings of microfinance. The authors find that women with hyperbolic discount preferences -- i.e., individuals who have a tendency to give in to the temptation of consumption in the moment -- turn to microfinance as a way to force themselves to save. Morduch et al. explain

The finding that present-biased women favor borrowing from microcredit institutions can be partly explained by their general difficulty saving: the present-biased group is more likely to need to borrow than otherwise similar people undertaking comparable investments. But we find that when members of the present-biased group borrow, they are more likely than other (otherwise similar) borrowers to do so through microcredit institutions specifically. The finding is consistent with the notion that the structure of microcredit loans and the harnessing of social pressure provides a way to convert income flows into large sums through a device that—for the present-biased group—is more effective than the alternative of saving up on one’s own. 

Of course, economists and sociologists have praised the social pressures of microfinance self help groups in the past. But these groups were typically seen as effective ways to deal with problems of adverse selection and information asymmetry. The empirical finding that these groups also help to overcome problems of hyperbolic discounting is quite new.  

So would Ulysses have taken out a micofinance loan as a way to overcome the temptation of current consumption? Probably not. Morduch et al. find that men who are present-biased aren't particularly likely to take out loans through self help groups but at the same time don't have lower savings levels than men without this bias. Why this difference between men and women? In a sentence that cries out for further explanation, the authors note that "we didn’t find lower saving levels for present-biased men as we did for women, which suggests that, unlike women, they have access to other ways to cope with self-discipline problems."

What might these 'other ways' be, and why don't women have access to them? The paper doesn't speculate on the answer. But this sounds like an avenue for future research that is screaming for attention.

(H/t: The Financial Access Initiative via Twitter.)
(Photo credit: Wikimedia Commons.)


Ryan Hahn

Operations Officer

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