Heuristics: A Behavioral Approach to Financial Literacy Training
By Microfinace Barometer estimates, over half of microfinance institutions around the world offer non-financial services. The most frequently offered service? Financial literacy training. Despite its popularity, there is little evidence whether such trainings improve microentrepreneurs’ decision-making or the actual performance of their businesses. In this post, ideas42 shares findings on what an effective financial literacy program could look like, based on insights about human psychology and decision-making.
To begin with, imagine for a moment that you’re a cash-strapped Indian microentrepreneur trying to decide whether to purchase extra inventory or buy a new fridge for the home. What do you do? One option is to use your finance and accounting skills to compare current sales projections against the expected returns of a better functioning fridge. The other option is to simply check your home and business funds to see if you can afford the fridge, and potentially borrow if necessary. If you were a salaried worker, you couldn’t just take funds from your workplace. Similarly, if microentrepreneurs paid themselves a salary, these types of trade-offs would not risk damaging the health of the business. The second option also has the benefit of being much easier to do and to teach.
Traditional financial literacy programs fail to support microentrepreneurs in complex business decisions because the solution they offer is itself quite complex. Implicit in those programs is the assumption that, with the right classroom-based training in accounting and business planning, people could come close to making the perfect decisions. The problem is increased knowledge alone doesn’t always translate into improved decisions or behaviors. Psychologists have found that simple information is more easily absorbed and recalled. This insight points to alternative ways to deliver financial literacy training. Reducing content complexity, and replacing classroom-based delivery with a lighter-touch method offers fresh promise for improving business decisions and outcomes.
At ideas42, we are working on two ways to achieve this – developing simplified content and a more cost-effective and direct delivery channel for financial literacy trainings.
Heuristics Content: ideas42 founder Antoinette Schoar together with co-authors Alejandro Drexler and Greg Fischer developed a simplified financial management training that uses effective rules of thumb, or “heuristics”, to improve microentrepreneurs’ financial management skills. This is where behavioral science comes in: As described by Schoar and Datta, such heuristics are shortcuts or decision-making aids that enable business owners to make “reasonably good” decisions without needing to understand all the complex nuances of accounting or business planning.
Based on months of observations and interviews with microfinance lending clients, the team distilled complex business concepts and decisions into easy-to-implement action steps. For example, one heuristic informed entrepreneurs to physically separate the money for their business and household by placing it in two separate drawers. At the end of each month they could then count the money in the business drawer and effectively “calculate” profit without having to use (and thus remember) any accounting techniques.
Results from the pilot showed that microentrepreneurs given a heuristics-based training were as much as 10 percentage points more likely to keep accounting records, calculate monthly revenues, and separate their home and business incomes than the control group, which was given a traditional classroom-based training. Overall, it appears that the microentrepreneurs in the heuristics group were more likely to implement what they learned in the rules of thumb training.
Delivery Channel: ideas42 in partnership with the Small Enterprise Finance Center based in Chennai is designing an effective way to deliver the financial heuristics training. The limits of attention in a classroom setting, and the high time and opportunity costs of attending classroom trainings, point to the promise of a lighter-touch intervention that reduces the cognitive resources required to adopt and practice best management behaviors. With the support of CGAP’s Client at the Center Research Fund, we are exploring the feasibility of delivering financial heuristics via a mobile phone platform. The mobile phone delivery, besides being beneficial to microentrepreneurs, is attractive to microfinance providers as well, due to its customizability and the low marginal cost per additional user.
In 2015, we will conduct user testing and interviews with 100 customers of microfinance institutions in India and the Philippines to explore the feasibility of using a mobile phone-based platform for the financial heuristics training. This research aims to answer the following questions:
- How can financial heuristics training effectively be delivered via mobile phones?
- What is the optimal format, length and frequency of the messaging?
- To what extent do we need to adapt financial heuristics messaging across countries?
The customer interviews, to be completed in December 2015, will provide deep insights about adapting the financial heuristics training for the mobile platform. Following the qualitative research, we will conduct two randomized controlled trials to test the effectiveness and scalability of mobile financial heuristics with USAID Stage 2 funding.
This is great! Makes proper sense too. Ensure your learning materials and pamphlets are easy to read to and look up already conducted science on brochure design (widely known and advertised on in the developed and developing world) to deliver training that will stick easily in loan takers' minds.
Perhaps in some cases teaching them with brochures will increase revenues; though it's not applicable and viable for all businesses, microfranchises/microfranchisees, as well as people running fashion businesses and the like could benefit from that, though it may be too complex and rely on other services like a mass printer nearby, and can be quite complex. Is advertising/basic marketing a part of their training.
Thank you for your comment Nikhil. ideas42 puts great care in the design of client-facing materials. As part of the design process, we perform consultations with world-renowned academics and use our proprietary Communications Audit tool. We also do user testing with customers before we finalize the layout of any print materials.
The Financial Heuristics training which was the subject of this blog actually doesn't contain a lot of print materials since the majority of the training is actually delivered over the mobile phone. We are delivering a marketing module as part of the training.
Thanks for your input.
The reference to "over half of microfinance institutions around the world offer non-financial services" was taken from the Microfinace Barometer, also taken from the Overview of the Microcredit Sector in the European Union, European Microfinance Network (EMN), 2012 and the 2010-2011 European Microfinance Network survey Focus on products, right? This is a survey that takes into account only the Microfinance Institutions in Europe, but not other regions. If other sources taken into account, would love to have them. Non-ﬁnancial services oﬀered by Microﬁnance Institutions and their impact on clients is a subject that definitely needs further attention and that requires research, as well as updated data.
The reference comes from the Microfinance Barometer 2013 for developing countries (link: http://www.citi.com/citi/microfinance/data/2013a_barometer.pdf). The number is 54% to be precise, and is compiled by MIX market, survey 1,400 MFIs. I definitely agree with you that non-financial services offered by MFIs need more attention. I would like to see targeted evaluations of the impact of NFS on key client outcomes. That's what we're planning to do as we evaluate the impact of the Financial Heuristics training in India and the Philippines
The mobile phone is an even better idea! More personalised, and ensures no knowledge that could save time/deliver extra income is missed. Great to hear about that, and great to see that you guys consider a lot of aspects through this. Publishing it on a forum like this is pretty good - you're sharing the knowledge which is necessary in this field - it reduces waste. Which only leads to less poverty which is great!
I wonder though - are there more ways you can spread this knowledge? I know your purpose is to provide services, often directly to the poor, or through research. But do many key organisations take the advice/recommendations you give to heart and apply it in their delivery models? Do you actively outreach and try and get them to take your messages on board? Do you find some charities are stuck and inefficient in their practices, yet somewhat unwilling to change? I've heard that from a few ex directors of charities such as MSF. Have you encountered the same?
Adoption of the Financial Heuristics training: Thank you for your comment Nikhil. The ideas42 team uses conference presentations, guest lectures, blog posts and outreach to key players in the microfinance industry as a way to publicize the Financial Heuristics training product. As a next step after the current pilots, we are working on a wide-based marketing strategy focused on the adoption of the Financial Heuristics training by major institutions in the microfinance industry.