Another manifestation of time inconsistency is to buy what we want today (alcohol, sugary or fatty foods, trinkets) but to plan on spending money in more responsible ways tomorrow (school fees, bed nets, roof repairs). In other words, the things we take pride or pleasure in imagining buying in the future are not always what we end up buying today. Knowing that we will have one drink too many again tomorrow gives most of us no pleasure—indeed, it probably makes us unhappy—yet when tomorrow comes along many of us cannot resist it. Alcohol, in this sense, is a temptation good for many people, something that makes immediate claims on us without giving us anticipatory pleasure. In contrast, a television is probably not a temptation good: Many poor people plan and save for months or even years to buy one.
A group of economists, psychologists, and neuroscientists worked together to establish that there is in fact a physical basis for such disjunction in decisionmaking.7 They gave participants a choice of various rewards that would be enjoyed at different points in time, using time-dated gift cards. Each participant thus had a set of decisions to make. For example: receive $20 now or $30 in two weeks (present vs. future); receive $20 in two weeks or $30 in four weeks (future vs. more distant future); or receive $20 in four weeks or $30 in six weeks (more distant future vs. even more distant future). The twist was that the subjects made these decisions inside an fMRI scanner, so the researchers could look at what zones of their brains were activated. They found that the parts of the brain corresponding to the limbic system (thought to respond only to more visceral, immediate rewards) were activated only when the decision involved comparing a reward today with one in the future. In contrast, the lateral prefrontal cortex (a more “calculating” part of the brain) responded with a similar intensity to all decisions, regardless of the timing of the options.
Brains that work like this would produce a lot of failed good intentions. And indeed, we do see a lot of those, from New Year’s resolutions to gym memberships that lie unused. However, many people, such as the Modimbas or Wycliffe Otieno, seem fully aware of such inconsistency. They talked about freezing their money in the form of fertilizer as a way to get around it. They also seemed to be convinced that some of the “emergencies” they faced were in effect a kind of temptation good, because it was easier in the moment to spend money rather than just “suspend the issue” (Michael Modimba’s phrase), or to stay at home rather than go out to earn something extra.
In Hyderabad, we explicitly asked slum dwellers to tell us whether there were any goods they would like to cut back on. They readily came up with tea, snacks, alcohol, and tobacco. And indeed it was clear from what they told us and from the data we collected that significant parts of their budgets ended up getting spent on these items. The same self-knowledge was apparent when Esther, Kremer, and Robinson asked a group of participants in the Kenyan fertilizer program, in advance of the harvest, to choose the day when they would come to sell the vouchers. A large fraction asked them to come early. The farmers knew that right after harvest was when they would have money available, but that it would soon disappear.
Given this self-awareness, it is no surprise that many of the ways the poor save seem to be not only intended to keep the money safe from others, but also to guard it from themselves. For example, if you want to reach a goal (buy a cow, a refrigerator, a roof), joining a ROSCA where the total pot size is exactly enough to achieve that goal is a great option, because once you join, you are committed to contributing a certain amount every week or month, and when you get the pot, you have just enough to buy that thing you have been looking forward to buying, and you can do it right away before the money slips through your fingers. Building a house brick by brick may be another way to make sure your savings remain focused toward a concrete goal.
Indeed, if the lack of self-control is sufficiently serious, it would be worth paying someone to force us to save. For example, we might prefer to run the risk that the mortar on our freshly built walls might get washed away by the rain so that we wouldn’t have to keep the cash on hand and risk that we might, on a whim, use it all for a party. And somewhat paradoxically, some MFI clients may borrow in order to save. A woman we met in a slum in Hyderabad told us that she had borrowed 10,000 rupees ($621 USD PPP) from Spandana and had immediately deposited the proceeds of the loan in a savings account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account. When we asked her why this made sense, she explained that her daughter, now sixteen, would need to get married in about two years. That 10,000 rupees was the beginning of her dowry. When we asked her why she had not opted to simply put the money she was paying to Spandana for the loan into her savings account directly every week, she explained that it was simply not possible: Other things kept coming up.
We were still a bit bothered by this rather unusual arrangement and kept asking questions. This attracted a group of other women, who were patently amused by our ignorance. Didn’t we know that this was a perfectly normal thing to do? The point, as we eventually figured out, is that the obligation to pay what you owe to Spandana—which is well enforced—imposes a discipline that the borrowers might not manage on their own.
However, it is clear that people should not have to pay 20 percent or more per year in order to save. Designing financial products that share the commitment features of the microfinance contracts, without the interest that comes with them, could clearly be of great help to many people. A group of researchers teamed up with a bank that works with poor people in the Philippines to design such a product,8 a new kind of account that would be tied to each client’s own savings targets. This target could be either an amount (the client would commit not to withdraw the funds until the amount was reached) or a date (the client would commit to leave the money in the account until that date). The client chose the type of commitment and the specific target. However, once those targets were set, they were binding, and the bank would enforce them. The interest rate was no higher than on a regular account. These accounts were proposed to a randomly selected set of clients. Of the clients they approached, about one in four agreed to open such an account. Out of those takers, a little over two-thirds chose the date goal, and the remaining one-third, the amount goal. After a year, the balances in the savings accounts of those who were offered the account were on average 81 percent higher than those of a comparable group of people who were not offered the account, despite the fact that only one in four of the clients who had been offered the account actually signed on. And the effects were probably smaller than they could have been, because even though there was a commitment not to withdraw any money, there was no positive force pushing the client to actually save, and many of the accounts that were opened remained dormant.
Yet most people preferred not to take up the offer of such an account. They were clearly worried about committing themselves to not withdrawing until the goal was reached. Dupas and Robinson ran into the same problem in Kenya—many people did not end up using the accounts they were offering, some of them because the withdrawal fees were too high and they did not want to have their money tied up in the account. This highlights an interesting paradox: There are ways to get around self-control problems, but to make use of them usually requires an initial act of self-control. Pascaline Dupas and Jonathan Robinson demonstrated this nicely in another study with the vendors of Bumala market, in Kenya.9 They had noticed that many small businesses lose sales when their owner (or someone in his family) gets sick and has to buy medicine. So they thought of helping people earmark some of their savings specifically for such contingencies, or for buying preventive health products (such as chlorine or a bed net). They contacted members of ROSCAs and offered them a lockbox, which could be used to save specifically for health contingencies. Some people (randomly selected) were given the key to the box, whereas for others, the NGO field officer kept the key: She would come and open the box when the people needed the money because of a health problem. Giving people a health box did help them to sp
end more on preventive health. But giving them a locked health box, to Dupas and Robinson’s surprise, did not: They simply did not put much money in it. People reported not using it, or using it only for very small amounts, for fear that they would need the money for something else and would not be able to access it.
Awareness of our problems thus does not necessarily mean that they get solved. It may just mean that we are able to perfectly anticipate where we will fail.
POVERTY AND THE LOGIC OF SELF-CONTROL
Because self-control is hard to buy, self-aware decisionmakers take other defensive actions against the possibility of being tempted in the future. An obvious strategy is not to save as much, because we know that we will just waste the money tomorrow: We might as well give in to the temptation today, if all we are going to do is give in to it tomorrow. This perverse logic of temptations operates in the same way for the poor as it does for the rich, but there are good reasons that the consequences may be much more serious for the poor than for the rich.
Temptations tend to be an expression of visceral needs (things like sex, sugar, fatty foods, cigarettes, not necessarily in that order). In that case, it is much easier for the rich to be at the point where they have already satiated their “tempted selves.” When deciding whether to save or not, they can assume that any extra money that is allocated for the future will be used for long-term purposes. So if sugary tea is the archetype of a temptation good, as it seemed to be for the women in Hyderabad, then the rich are unlikely to be troubled by it—not because they are not tempted but because they can already afford so much tea (or other substitutes for tea) that they do not have to worry about their hard-earned savings being frittered away on extra cups of tea.
This effect is reinforced by the fact that a lot of the goods that the poor might really look forward to having, such as a refrigerator or bicycle or admission to a better school for their child, are relatively expensive, with the result that when they have a little bit of money in hand, the temptation goods are in an excellent position to stake their claim (You’ll never really save enough for that refrigerator, the voice in your ear insists. Have a cup of tea instead . . .). The result is a vicious circle: Saving is less attractive for the poor, because for them the goal tends to be very far away, and they know that there will be lots of temptations along the way. But of course, if they do not save they remain poor.10
Self-control may also be more difficult for the poor for another reason: Decisions about how much should be saved are difficult decisions for anyone, rich and poor alike. These decisions require thinking about the future (a future probably unpleasant to contemplate, for many of the poor), carefully laying out a number of contingencies, negotiating with a spouse or a child. The richer we are, the more these decisions are made for us. Salaried workers contribute to Social Security, and their employers often contribute something more to a provident fund or a pension plan. If they want to save more, they have to decide just once, and the money is then automatically deducted from their bank accounts. The poor have access to none of these props: Even the savings accounts that are supposed to make it easier for them to commit to a goal still require an active step of depositing money. To be able to save every week or every month, they have to surmount self-control problems over and over again. The problem is that self-control is like a muscle: It gets tired as we use it, and therefore it would not be a surprise if the poor find it harder to save.11 This is compounded by the fact, which we discussed in Chapter 6 on risk, that the poor live under considerable stress, and stress-induced cortisol makes us choose more impulsive decisions. The poor thus have to do a harder job on fewer resources.
For both reasons, we would expect the rich to save a higher fraction of their current net worth (think of wealth plus income). And because saving today is one ingredient of net worth tomorrow, this will have the tendency to create an S-shaped relationship between net worth today and net worth tomorrow. The poor save relatively little and therefore their future resources tend to be low. Then as people get richer, they start saving a higher fraction of their resources, which means that they will have, relatively, a lot more resources in the future than the poor. Finally, when people get rich enough, they don’t have to save as much of their wealth to meet their aspirations for the future, unlike middle-class people (for whom this may be the only way, for example, to buy a house).
We do see this S-shape between net worth today and net worth in the future in the real world. Figure 1 plots the relationship between resources the households had in 1999 and what they had five years later in Thailand.12 The curve has a flat, elongated S-shape (admittedly, we are torturing the S a little bit). People who are richer today (more resources) are, on average, richer tomorrow, which is of course not surprising. What is more distinctive is the way in which the relation is fairly flat at very low levels of resources but then turns up sharply before flattening off.
This S-shape, as we saw before, generates a poverty trap. Those who start just to the left of the point where the wealth curve just touches the 45° line will not get richer than that point: They won’t accumulate more—they are in the trap. Those just to the right of this point, P, on the other hand, are saving more than they need to stay in the same place and are getting richer. The poor stay poor here because they do not save enough.
Figure 1: Wealth in 1999 and wealth in 2005, Thailand
Getting out of the Trap
Saving behavior crucially depends on what people expect will happen in the future. Poor people who feel that they will have opportunities to realize their aspirations will have strong reasons to cut down on their “frivolous” consumption and invest in that future. Those who feel that they have nothing to lose, by contrast, will tend to make decisions that reflect that desperation. This may explain not only the differences between rich and poor but also the differences among different poor people.
The fruit vendors are a good illustration. Dean Karlan and Sendhil Mullainathan fully repaid the loans of a random subset of these vendors (in India, and in the Philippines).13 For a while, many of the vendors managed to stay debt-free: After ten weeks, 40 percent were still debt-free in the Philippines. So these fruit vendors seem to have enough patience to stay out of debt for a while. On the other hand, almost all of them eventually fell back into debt. It was usually a shock (an illness, an emergency need) that pushed them back into debt, and once that happened, they did not manage to pay the debt back on their own. This asymmetry between managing to stay free of debt and not managing to get out of debt shows the role of discouragement in making it harder to impose self-discipline.
Conversely, optimism and hope can make all the difference. Hope can be as simple as knowing that you will be able to buy the television you are looking forward to having. When we were working on the evaluation of Spandana’s microfinance program, Padmaja Reddy once took us on a tour to meet her clients in the slums of Guntur, the birthplace of the organization. It was about 10:30 AM when we walked into a small clearing in the slum, where a dozen or so women were assembled. When Padmaja, whom they evidently knew, asked them what they were up to, they giggled. There was an awkward moment when we could see the women nudging each other, but then it came out—tea was being made. Padmaja joined in laughing with the women, but then, still smiling, went into a brief harangue about how they could improve their futures by cutting back on tea and snacks.
Most microcredit institutions disapprove of borrowing to buy consumption goods—some actually put a lot of effort into making sure that their money gets spent on some income-earning asset. Padmaja, on the other hand, is happy as long as the clients use the money to realize any of their long-term goals. Thinking about long-term goals and getting used to making short-term sacrifices in order to get there are the first steps, she thinks, toward liberation from one of the most frustrating aspects of poverty.
It was because of Padmaja’s insistence on the ill effects of wanton tea drinking that, as reported above, we actually asked the women what th
ings they would want to spend less money on, before our evaluation of Spandana’s program. When we started the study, Padmaja confidently predicted that once people knew that there was a way to turn their tea money into stuff that really matters to them, they would have little trouble cutting back on these “wasteful expenditures.” We saw no point in reminding her that this went diametrically against the view that we heard from so many people, that the worst thing about easy credit for the poor is precisely that it makes it too easy for them to indulge their momentary whims, but it was clearly on our minds when we started to look at the data, some eighteen months after the first round of loans. We needn’t have worried. Padmaja, as she often says, knows how her clients think. As we saw in Chapter 7 on credit, one of the clearest impacts of getting access to microcredit was to reduce exactly the items that the women had told us they would like to give up—tea, snacks, cigarettes, alcohol. Total monthly spending on these goods went down by about 100 rupees ($5 USD PPP) per family for those that took an extra microcredit loan as a result of the program, or about 85 percent of what the average household spends. By itself, the cut in this kind of spending could pay for about one-tenth of the monthly repayment on a 10,000 rupee ($450 USD PPP) loan with a 20 percent interest rate. Later, we found very similar results for the clients of the MFI Al Amana in rural Morocco: They cut on social expenditures (and for some of them, on all expenditures), and built up their savings.14
Microcredit, of course, is just one of many ways in which we can help the poor think in terms of a future where some of their long-term goals can become attainable. Better education for their children would probably have the same effect. So would a steady and secure job, a theme to which we will return in the next chapter. Or insurance against health or weather disasters, so that they don’t worry that any nest egg that they manage to accumulate will just get wiped out. Or even a social safety net: a minimum income support that people would be entitled to if their income fell below a certain range that would free them from having to worry about finding money to survive. The sense of security that any of these would provide would encourage savings for two reasons: by creating a sense that the future holds promises, and by lowering the stress level, which directly impedes decisionmaking ability.
Poor Economics Page 23