Saturday, March 14, 2009

Decision making of the poor

Sendhil Mullainathan of Seed Magazine has an interesting article on the difficulties the poor face in making economic decisions. Like all people, the poor suffer from shortsightedness. Unlike most of us in the U.S., this can translate into very serious consequences:

In the south of India, for example, sugarcane is a remarkable cash crop. However, in many areas of the region, the very poor farmers use none or very little of their land to plant sugarcane. One of the reasons they cite relates to self-control.

Sugarcane is harvested once a year and paid for in one lump sum. Planting sugarcane, although it’s more profitable monetarily, raises an unappealing psychological challenge. Imagine receiving your entire annual salary all at once, at the beginning of the year, and having to dole it out carefully over the course of 12 months. Meanwhile, many who own cows cite the daily income that milk provides as a primary benefit, even though cows are not as profitable as other investments. This is the far more consequential equivalent of someone purchasing the more expensive (per unit) but smaller bag of cookies to avoid the temptation of eating all of them at once. Uncertainty figures in as well: A small-business owner who does not know what she’ll earn must have the willpower to save in good weeks to ride out the lean weeks, while a salaried worker knows exactly what is coming, and when.

I'm reminded of how many people in Uganda hate to have cash savings for fear of family members asking for school fees or loans that will never be repaid. But a better understanding of the problems of finance and savings could be important for people in developing countries for a variety of reasons, including the response of sex workers to health shocks.

The message for development specialists is that understanding these limitations is incredibly important. "We are accustomed to ensuring that the poor have environments full of opportunities — such as education or access to clean health. But we also need to reconceptualize these environments in terms of how they help the poor to overcome decision challenges".

1 comment:

Kent said...

Interesting. It reminds me of powerball lottery winners who take the lump-sum payment over a stream of annuities and end up in financial ruin. There was a guy from West Virginia who, although he was rich before winning $250 M in the lottery, squandered all his wealth and is now highly indebted to casinos in Vegas.