Poor Economics

Supported by Greenhaven Road Capital, finding value off the beaten path.

Abhijit Banerjee and Esther Duflo wrote an interesting book. It’s titled Poor Economics but that’s because an alternative title like People do stuff that appears stupid but is locally rationally and are influenced by their environment and wealth is important too is unwieldy. But that’s the thing, this book isn’t just about the poor or economics. Let’s see how.

Understand your stance.

“The position that most rich-country experts take on issues related to development aid or poverty tend to be colored by their specific worldview.”

“We have to abandon the habit of reducing the poor to cartoon characters.”

Right from the start Duflo and Banerjee write that they’re trying to find answers that work in the real world, not answers within party lines. Affiliative heuristics are helpful, but we should be aware that we’re using them.

To understand how accurate your worldview is you have to be there.

“This has taken us to the back alleys and villages where the poor live, asking questions, looking for answers.”

“Answering the (narrower) questions we get to understand what, if anything, is special about the poor.”

“This shift in perspective requires us to step out of the office.”

Duflo and Banerjee want to figure out – in Ray Dalio‘s words – “Basically everything is another one of those … the key to success is to identify which one of those it is.”

Being there lets you talk with your users. Jason Calacanis said this is a mistake founders make all the time. Marcus Lemonis said, “Customers are investors, they choose to give you revenue or not.” Matt Wallaert heard that kids weren’t curious enough to use Bing. Wait, thought Wallaert, kids are always curious. He went to the classroom to find the truth.

It also lets you see conditions, cultures, and context. One set of mothers Banerjee and Duflo interviewed wouldn’t take their children for vaccinations because they feared the Devil’s Eye. Huh? Those mothers believed that if their infants were exposed to the sun in the first year of their life they would suffer consequences.

Except that is, for food. Researchers were able to compensate the mothers with a small amount of food in exchange for bringing their kids for vaccinations. Cultural insights are peeling back the curtain in Oz.

“References to a certain old-fashioned sociological determinism, whether based on caste, class, or ethnicity are rife in conversations involving the poor.”

“The novelas, (Brazilian soap operas of the 1980’s) ended up projecting a very different vision of the good life than the one Brazilians were used to, with historic consequences.”

“The power of shame seems to be sufficient.”

Social norms influence people and lots of small experiments tell you how. These experiments show you small steps for big effects. This is why Rory Sutherland suggested this book. Sutherland loves the idea of doing a lot with a little. He learned this early in his direct mail days, and wrote:

“Very small changes in the design of things would suddenly have immense effects in the number of people who replied, or the nature of the response, or people’s readiness to pay—almost kind of butterfly effects.”

Get pregnant mothers and infants better food and there are huge effects. Get villagers to chlorinate their water and there are huge effects. Buy school uniforms for girls and there are huge effects. Duflo and Banerjee “…we have no magic bullets to eradicate poverty…” but they don’t need them! “Miracle drugs” like chlorine, salt, and sugar already exist. They just need to get people to use them.

Why didn’t people do things so obviously beneficial? Four  reasons:

1/ Cause and effect are difficult to link. The poor often saw “Bengali Doctors” – someone with any kind of education – who “tended to underdiagnose and over medicate.”  “They were cheap and at the very least gave the patient a sense of doing something.” Even the randomness of Voodoo has more immediate results than the effects of vaccinations which may take years.

2/ Time Inconsistency. Like all people, the “bottom billion” are hyperbolic discounters. One farmer, the duo talked to buys his seeds and fertilizer immediately after harvest. Why? “When there is money in the house, things always happen.”

3/ Complicated policies. Duflo and Banerjee like nudges (and so does the Nobel committee – Congrats Prof. Thaler!). While “governments have a way of making easy things much less easy than they should be.” Make things easy – nudge people – and they will do more of that thing.  One town did this by installing a chlorine dispenser at the town well with preportioned amounts.

4/ People aren’t  predictably irrational – they’re locally logical. “People make their choices based on what makes sense to them.” Some young girls explained to the researchers why it’s better to marry an older man while young. Rather than work in their parent’s home, they can work in their own. When those are the only two options that come to mind early marriage makes sense.

Stability is massively underrated.

“A good job is a steady, well-paid job, a job that allows a person the mental space needed to do all those things the middle class does well.”

It’s hard to appreciate this from “the view from our couch,” write Duflo and Banerjee. We have so many systems around us reduce our chances of cataclysmic events while “For the poor, every year feels like being in the middle of a colossal financial crisis.”  In our RWW podcast, we looked at the role of stability too.


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