Self-control problems can be consequential for the well-off; examples include failures to eat or live healthy, or save enough for retirement. But they can be far more consequential for the poor. Being in poverty means that, compared to those with more steady and productive income streams, the stakes are much greater (and the consequences are weighted more heavily) for every financial decision. While managing a household with limited financial resources demands a high degree of financial consideration, paradoxically the poor may be the most strapped for cognitive resources given the anxiety and uncertainty inherent in such an existence. Rather than continue to exhaust investigations into the myriad correlates of poverty, our study attempts to delve into something more central to an impoverished life—cognitive depletion and the cyclical effects it may have in perpetuating poverty.

In order to study this effect in a natural setting, the Centre for Innovative Financial Design of IFMR Research, has partnered with ideas42, Harvard University’s Social Science Research and Development laboratory, to look at the emotional experience of stress and its impact on decision making behavior of small sugarcane farmers. Unique from other crops, such as paddy, sesame or cereals, sugarcane is harvested once a year and paid for in one batch. Farmers receive a loan for farm investments at the time of planting and receive payment for their harvest 12-15 months after planting.

This creates a long gap between two payments that does not exist in any other crop. Planting sugar cane, while more profitable in a monetary sense, 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 through the year. This situation generates a difficult problem for many poor farmers in terms of planning their households’ expenses: they must make the resources from each harvest last until the next one. Our study on the psychology of harvests aims at addressing an array of questions based on the stressors and conditions of farmers during times of scarcity and bounty.

The study was conceived to understand whether sugarcane farmers experience the psychological phenomenon known as ego (or cognitive) depletion during the pre-harvest period due to a scarcity of finances. If they do experience this mental exhaustion, how does the depletion affect their decision making processes? Could the stress of managing finances through lean periods result in what appears to be very poor financial and other investment decisions?

For example, the overload of anxiety during lean periods may contribute to farmers compromising on farm investments resulting in diminished quality and yields of their crop; selling or pawning their lands and jewels often at devalued rates; and, engaging in unfavorable loan and moneylending activity, such as incurring exorbitant interest rates, facing harsh penalties for failing to make repayments or defaulting on loans, and taking out new loans to repay outstanding ones, all of which perpetuate the cycle of debt.

The survey uses a pre-post survey design of 600 households in the Villupuram district of Tamil Nadu to determine how financial stress affects decision-making behavior during times of scarcity (pre-harvest) and bounty (post-harvest). The pre-survey is further divided into two groups—pre-harvest and pre-payment—in order to isolate financial anxiety from the stress that surrounds the harvest itself. The post survey is administered only once a given household has received payment from the sugar mill. Our sample consists of those respondents who are harvesting between 1.5-3 acres of sugar cane in the current crop cycle with no more than 1 acre of supplementary crops. Moreover, at least 60% of their total household annual income must derive from sugar cane to meet the survey requirements.

The survey explores how small-scale sugar cane farming households manage their income and expenditure through the 12-15 month cycle. Assuming that the periods before harvesting the crop are low income periods, do they exhibit differences in cognitive ability, time preferences, household consumption, child schooling and health, farm investments and management of loans and savings? The differences in cognitive ability would be assessed using three common psychological tasks, all of which are comparatively culturally unbiased and suitable for low-literacy respondents : Raven’s Progressive Matrices, Number Stroop Task, and Digit Span Test.

The study has both academic and applied applications. At an academic level it aims to understand how financial anxiety and ego depletion impact spending decisions and livelihood of those in poverty. At a practical level, by understanding the financial difficulties of sugar cane farmers at distinct points in the crop cycle, recommendations can be offered for improvements in financial products and how NGOs and the state can better serve this population.

Ever signed up for the gym but failed to go regularly? You are not alone. There are numerous occasions where we take a decision that is not always ‘optimal’. This phenomenon does not only apply to everyday life. It also applies to the financial behaviour of all of us and can easily have a huge impact on how we manage our money. There has been a lot of innovation in the delivery channels for financial products. Bank channels have been liberalised and thanks to technology, cost of transactions have been reduced by 90% over the past two decades. Despite these developments, research shows that people do not always take the “best” financial decision from a rational point of view. Far too often people simply over spend, for instance, or meet their working capital requirements through borrowing rather than savings. Why do we so often make ‘sub-optimal’ choices and how can financial products be better designed by understanding such behaviour?

IFMR Finance Foundation and ideas42, in collaboration with the Center for Innovative Financial Design (CIFD), recently conducted a workshop on Behaviourally Informed Product Innovation. Professionals from product development teams of organisations such as banks, NBFCs, microfinance institutions and others offering financial services took part in the workshop that also had academicians, researchers and practitioners from the IFMR Ecosystem. They were introduced to the financial behaviour aspect of customers and its implications for financial product design.

The workshop focused on understanding customer behaviour in order to deliver the right financial products through the right channels because, the need of the hour is to graduate from supply led design to demand led design. “Instead of deciding for the clients, financial service providers must focus on designing an architecture that offers choice”, said Suyash Rai of IFMR Finance Foundation.

Piyush Tantia, Research Director at ideas42, said that people don’t necessarily make use of the available technology or education in order to make the best decision. A case in point was the recent sub-prime crisis in the US where both were available in plenty and yet the decisions were far from being optimal. According to research, many factors decide human behaviour and there is no reason why financial behaviour should be excluded. Observations made by researchers conclude that people tend to focus on something immediate and that require attention. While financial savings is present at the back of the mind, people are generally pre-occupied with day-to-day activities that demand intense focus and hence the tendency to postpone.

Self-control also has a lot of impact on decision-making and people choose between an immediate reward and a perceived reward at a later point of time.

An interesting experiment revealed that people make an optimal choice when they are given solutions to potential problems that might arise in the course of an action. For example, people avoid opening a bank account because the documentation process could simply be overwhelming or, they may not possess the necessary documents. If they were given clear instructions on the documentation or if they were given a list of alternatives in case a specific document was not available, where it may be obtained etc. they might be more willing to go through the exercise.

Similarly, contrary to popular belief, people do not prefer an overwhelming number of choices. An experiment conducted in a supermarket revealed that when faced with a choice of only 6 types of jams, 30% of people ended up buying them but when the number of choices increased to 21 varieties, only 6 % ended up buying because, they simply over-whelmed by the number of choices available.

Financial product innovation must take into account these behavioural drivers of financial decision making, because innovation does not always lead to positive outcomes. In fact, they may end up in some unintended harm. For example, a very flexible savings mechanism would mean that there is no hard commitment device like a monthly meeting or savings collector. Electronic money, while undoubtedly has numerous advantages, takes away the power of physical real-time budget feedback which would otherwise be available if people had hard cash. 

The need to understand customer behaviour also has direct implications for the product innovation process. In addition to studying what people say they want, it is also essential to observe how they behave in the actual situation of decision making.

To illustrate a behaviourally informed product innovation process, Anil Kumar and Dominik Bulla from CIFD presented three case studies. The Pregnancy Financing product was designed to test the idea of exploiting a customer’s savings behaviour as a predictor of her repayment behaviour. Saving Cards intends to create an impulsive saving moment for individuals, which make them more likely to save money.  The Hand Loan product that has been launched in close collaboration with Dhanei KGFS in Orissa is an uncollateralized small ticket loan that helps individuals to cope with short term financial emergencies. All three case studies demonstrated that product innovation is no straightforward process. Often, translating behaviourally derived product ideas into feasible prototypes poses many challenges in reconciling the different requirements. This emphasises the need to repeat several round of field tests in order to determine what design works best not only behaviourally but also from a financial and operational perspective. In this respect, iterations of the product design must be based on reliable information on how product users actually behave on the ground, making a sound methodology of data collection for the product assessment an important aspect.

It is important that financial service providers understand the behaviour of people while rolling out products. More so while offering services to the poor because the irony of poverty is that, it demands higher quality decisions from the poor as the stakes are higher for them, with little or no room for error.

[With inputs from Preethi K, Inner Worlds and Dominik Bulla, CIFD]

The Centre for Innovative Financial Design (CIFD) recently entered the survey stage of a research project concentrating on the welfare of India’s sugarcane farmers.  Sugarcane is one of the biggest cash crops in India and, because it is supplied by a large number of small farmers, the efficiency of the market has important consequences for the country’s rural poor.  The focus of the study is on the relationship between these small farmers and the large sugar mills that purchase and process the raw sugarcane and, in particular, how this relationship is influenced by the ownership structure of the mills.  There are reasons to suspect that privately-owned mills might behave differently towards sugarcane farmers than publicly-owned or cooperative mills and that these differences may affect the financial well-being of the farmers.

It’s often assumed that, because they’re disciplined by market pressures, private firms will adapt to run businesses more effectively than publicly-operated firms.  Because it requires industrial investments in large mills and there exists a lag between the choice of quantity supplied at planting and quantity demanded at harvest, the sugarcane industry is a complex business in which mills must successfully coordinate supply with production capacity and harvest schedules with processing schedules.  Aside from operating its factory smoothly, a mill can also ensure itself a ready supply of raw cane by extending loans or providing seeds and fertilizer to its farmers.  Without exposure to competition and the incentive to maximize profits, public mills may not operate their factory smoothly or may not assist their farmers adequately, and either failure would cause sugarcane to be less profitable for India’s small farmers than it otherwise could be.

If this were the full story, one could readily conclude that private mills are preferable for the sugarcane industry.  However, as is often the case, the reality is more nuanced.  Like a poorly instituted public mill, a privately owned mill is not exposed to the competitive forces regularly assumed in introductory economics.  This arises because of the previously mentioned large fixed investments required for sugarcane processing and the lag between planting and harvest, and also because sugarcane dries quickly after harvest and so must be processed immediately.  Because of this structure, a private mill acts as a monopoly buyer at harvest and, theoretically, could “hold up” the small farmers by forcing them to sell at a price lower than what was expected at planting.  This works as follows.  When the cane is harvested, if the mill nearest a certain farmer demands a lower price, then there is little alternative for that farmer.  It can’t sell it’s cane to a distant mill because the cane will dry and lose its value during transport.  There are no other mills nearby because, in order for the investments in the large factories to be economical, mills cannot afford to share any nearby cane.  Obviously, because factory construction takes time, no new mills can immediately sprout up to offer the farmers a higher price and steal market share from the incumbent mill.  And so, since the cane has already been grown, and since there are many farmers with cane they’d rather sell cheap than leave to dry, our farmer is compelled to sell his cane at a discount.

However, this problem may never actually arise in practice; it may not be in the long-run best interest of a private mill to permanently sour its relationship with suppliers by holding them up in the short run.  If they’re fleeced in one year, farmers may react by cautiously undersupplying cane in the next, making it more difficult for mills to maximize profits in the future.

Including the cooperative mills – the third type of ownership structure – in the analysis doesn’t change the conclusion: based on theoretical speculation alone, it’s impossible to determine which form of ownership structure is ideal for India’s sugarcane farmers.  A case can be made for each, but a case can also be made against each.  Therefore, the matter can only be settled by carefully observing and comparing the actual relationship between farmers and their mills, and this is the purpose of the study.

The relationship between the farmer and the mill is a complex one

The study takes advantage of the unique legal structure of Tamil Nadu’s sugarcane industry: for each mill, a “command area” is designated, and any farm within a mill’s command area is legally obligated to sell their cane to that mill.  The study will focus on farm plots along the borders between private and public or cooperative mills, where factors such as climate and soil quality should be constant on both sides of the border, so any differences in output between plots should be traceable to differences between the mills themselves.  Such farm plots have recently been identified and a sample has been randomly selected.  Now, a survey team is being trained to question farmers about their sugarcane output and the relationship they have with their mills.

The project touches on a couple of economic questions and the project’s focus on rural Indian farmers introduces the chance to address an issue in line with the CIFD’s mission of helping India’s low-income households acquire access to financial services.  As mentioned above, mills may supply loans, seeds, and fertilizer to the farmers that supply them.  This is important, because these farmers may otherwise lack sufficient access to credit and so may be unable to make the necessary upfront investments required for cultivation.  Although banks may be reluctant to lend to the farmers, a mill’s firsthand knowledge of the industry and regular interactions with its farmers reduces its monitoring costs and may make lending more economical, while a mill’s dependance on adequate supplies of cane may make lending more compelling.  So while a productive mill will create the demand for a farmer’s sugarcane, financing from the mill may be necessary to create supply.  A portion of the survey is devoted to financial assistance farmers receive from their mills, and, from this, it may emerge that one type of mill more readily provides credit for the benefit of Tamil Nadu’s sugarcane farmers.

Childbirth ushers with it a ray of hope and joy for the family. Pregnancy, birth and motherhood, in an environment that respects women, can powerfully affirm women’s rights and social status without jeopardizing their health. The enabling environment for safe motherhood and childbirth depends on the care and attention provided to pregnant women and newborns. Despite various initiatives, the maternal mortality rate (MMR) and infant mortality rate (IMR) in India is alarmingly high at 450 deaths per one lakh live births and 55 deaths per 1000 live births respectively.

Access to finance to acquire improved health care, quality reproductive health services, emergency obstetric and neonatal care and nutrition for the mother and her child is pivotal to addressing the issues of high mortality rates in India.

Centre for Innovative Financial Design (CIFD), IFMR, has developed the ‘Pregnancy Financing’ product that allows poor pregnant women to meet expenses related to child delivery and ante and post-natal care. ‘Pregnancy Financing’ is centered on the premise of Behavioral Collateral; where a particular behavior is treated as collateral for providing financial service.

The rationale behind this is:

• Some women belong to the marginalized section of the society and hence would be unable to form groups that can underwrite each individual’s commitment.
• The women are too poor to possess tangible assets that could serve as physical collateral.

Women are encouraged to enroll in this product as early as possible during their pregnancy. Women who take-up the product, save regularly over the course of their pregnancy, with the amount of saving left open for the borrower to decide.

Two weeks prior to delivery, the savings accumulated by the woman is given back to her along with the loan since the savings behavior and not the amount of savings, works as collateral. The underlying principle behind this idea is that if a poor woman can forgo some of her current consumption for savings, then she can also forgo certain part of her consumption in future periods for repaying the loan.

CIFD has entered into collaboration with The Guntur District Cooperative Bank Limited in Andhra Pradesh and The Banswara District Central Cooperative Bank in Rajasthan for offering the pregnancy financing product. As part of the understanding, CIFD will design and develop the product and the associated processes for rolling it out. CIFD will also design the branding and marketing campaign to launch the product. The Bank from its end shall offer the necessary infrastructure and customers, also, it would extend the local level support required for the implementation. The product will be launched during the 2ndweek of August 2010.

What’s your take on the product?

CIFD’s Survey Supervisor Mr. Bipin Gena piloting the Endline Survey questionnaire

Some background info on the research project: often we tend to romanticize about life in rural India, particularly, the social aspects. A common perception is that villagers have lived together for generations and the social interactions they engage in are not marred by conflicts. Such a milieu would facilitate the initiation of informal contracts amongst villagers which unfortunately is not often the case given anecdotal evidence from our field research in the dusty Hindi heartland of rural Uttar Pradesh.

In our preliminary fieldwork on irrigation markets in villages that encompasses the buying and selling of water through engine rental for irrigation of fields, we found that farmers do not undertake additional irrigation that would result in a significant increment in their output.

Pictured above: Survey field team members familiarizing themselves with GPS meters during the survey training

This is due to the paucity of funds to pay for such irrigations before the monsoon when they are most needed. For our randomly created sample water buyer-water seller pairs, we define a water seller as a farmer who owns both an operational bore-well and an operational engine. The matched water buyer in the same village is a farmer without an engine who owns a plot capable of being irrigated with water bought from the seller. GPS devises help to locate all households in the sample.

From today, the survey rolls out

The pertinent question here is why water sellers are not allowing water buyers to pay for irrigation cost or at least a part of it after the harvest when they get lump-sum payments. In return they could charge an extra fee from water buyers for delayed payments. The existence of irrigation credit markets within water buyer-water seller pairs seems to be natural if we consider farmers to be economically motivated.

But this is not the way things are on the ground. One of the reasons could be the difficulty in contract enforcement in rural areas. The experiments we carried out last year aimed to introduce variation in enforcement institutions for farmers and look at effects on bargaining over water sales. By providing subsidies in some cases to the buyers and in other instances to the sellers, we intended to observe a difference in irrigation transactions between these two groups if at all there are enforcement constraints in water markets.

Stand by for our findings when we complete the endline survey by July 2010.
—
Sanchit Kumar, Project Manager at CIFD, contributed this post.