Microentrepreneurs in developing countries face complex financial management decisions. Still, many lack the knowledge or skills they need to manage such decisions for a small enterprise. Classroom-based financial education courses have traditionally been used as a way to fill the skills gap, but are shown to have little impact on key business outcomes such as sales and profits. Prevailing wisdom has held that with the right classroom-based training in accounting and business planning, people could come close to making the perfect decisions. Behavioral science tells us, however, that increased knowledge alone does not always translate into improved decisions or actions. Psychologists have found that simple information is more easily absorbed and recalled. This insight points to alternative ways to deliver needed financial management training in a much more effective way.
ideas42 co-founder Antoinette Schoar, together with Alejandro Drexler and Greg Fischer, first developed a simplified financial management training that uses effective rules of thumb, or “heuristics”, to improve microentrepreneurs’ financial management skills in the Dominican Republic. Overall, it appeared that microentrepreneurs given heuristics-based training were more likely to implement what they learned than the comparison group given traditional classroom-based training. Moreover, heuristics-based training led to a real, economically meaningful improvement in weekly revenues for microentrepreneurs. This initial success has paved the way for the next phase of our financial heuristics work – two new pilots, which focus on developing a more efficient delivery channel for the heuristics-based training.
Thanks to generous support from USAID and CGAP, we are currently working on developing a mobile phone-based financial management training product, in collaboration with IFMR LEAD in India, that is customer-centric and scalable to reach a large number of informal entrepreneurs across the developing world. We are working with technology firms to develop an Interactive Voice Response (IVR) solution utilizing a scalable off-the-shelf technology platform. We will pilot and test the effectiveness of our behavioral solution through randomized controlled trials with two microfinance institutions – Janalakshmi in India and Negros Women for Tomorrow Foundation (NWTF) in the Philippines.
Our mobile-based intervention, besides being beneficial to microentrepreneurs, is also attractive to financial institutions, due to its customizability and the low marginal cost per additional user. This makes the technology more likely to scale in the future. Reducing content complexity and replacing classroom-based delivery with a lighter-touch method offer fresh promise for improving financial and business decisions of microentrepreneurs, and for lifting them and their families out of poverty.