> Posted by Sonja E. Kelly, Fellow, CFI

The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

Since Sendhil Mullainathan is speaking at our Financial Inclusion 2020 Global Forum in two weeks, we ordered a few copies of his new book with Eldar Shafir to pass around the office. As a result, the hypotheses of Scarcity are informing our thinking both on our own habits and on financial inclusion.

The title of the session in which Mullainathan, a Professor of Economics at Harvard University, is speaking is “Why Financial Inclusion Means More Than We Ever Knew.” A mouthful, yes, and a bit mysterious. To unravel the mystery, one has to start with Mullainathan’s hypothesis that scarcity of some kind of resource—money, time, even social relationships—brings about an intense focus on the scarce resource, a focus that has negative effects on the way we think and act in areas of our lives outside that of the scarce resource. If this is true, financial inclusion is a game-changer that both prevents scarcity and alleviates its effects.

On first reading, Mullainathan and Shafir’s book seems to apply immediately to my own life. In my case, a scarcity of time means that I often adopt a focus on time and resulting tunnel vision for the task at hand. This focus has some positive effects—I produce work much faster than I would if I had more time. And it has some negative effects—I forget special events like my closest friend’s birthday (I’m sorry, Sarah! Does mentioning you in this blog post make up for it?). In essence, the authors contend that the single-minded focus that severe scarcity creates absorbs so much psychic energy, mindspace, bandwith, or whatever you may call it, that rational decision-making suffers.

This tunneling—devoting a great deal of bandwidth to a single resource—produces intense focus on the scarce resource, but also catastrophic failure on the things that get neglected to make “space” for such a focus.

For those living in poverty, according to Mullainathan and Shafir, this can have dramatic effects. The data they present indicate that a scarcity mindset, caused by poverty, makes coping with poverty even harder. For the authors, this explains many of the behaviors we see at the base of the pyramid:

… if you want to understand the poor, imagine yourself with your mind elsewhere. You did not sleep much the night before. You find it hard to think clearly. Self-control feels like a challenge. You are distracted and easily perturbed. And this happens every day. On top of the other material challenges poverty brings, it also brings a mental one… The failures of the poor are part and parcel of the misfortune of being poor in the first place (161).

The authors deftly point out that in the wake of this scarcity mindset it is often the small economic shocks—the unexpected illness, the sudden change in income, the school fees that weren’t figured into the monthly budget—that perpetuate the scarcity mindset.

What Mullainathan and Shafir suggest is that financial services can both help keep people from falling into a scarcity mindset and can keep people from making poor decisions while in a scarcity mindset. They note that people need to have cash when they need it, and there are two ways to cultivate this. First, people who are living in poverty need financial services that help build savings slack. Loans with built-in savings requirements address this, as do commitment savings accounts. Second, people who are living in poverty need products that prevent the firefighting that comes from economic shocks. Building a product for farmers that helps to smooth out income between harvest payments works toward this end. Loans, savings, or insurance for special events—weddings or funerals, for example—allow funds to be available when they are most needed.

This is why financial inclusion is more important than we ever knew—providing financial services helps to both prevent and alleviate mental bandwidth issues. Financial services might have psychological benefits that help people to make good decisions for themselves and their families. If Mullainathan and Shafir’s conclusions are correct, financial inclusion becomes a game-changer with major implications for decision-making at the base of the pyramid.

Underlying the solutions offered in Scarcity is a fresh perspective on economic development. It acknowledges the role of understanding behavior when building products and encouraging financial capability—principles that emerged in our “Roadmap” to Financial Inclusion. It also calls for us to “zoom out” and understand the trends, like demographic and urbanization trends, that are working in the lives of those at the bottom of the pyramid—the premise for our Mapping the Invisible Market work.

The book’s conclusions are refreshingly wide-reaching amidst other financial inclusion literature that I’m reading, which are mostly small, randomized control trials whose conclusions are by definition limited. It could be that the book tries to explain a bit too much, however, applying the same concepts to everyone in the world and to nearly every kind of problem. Though the authors are self-aware of this weakness, and in response they complicate their primary hypothesis, adding a few bells and whistles to explain the behavior of those living in poverty and appropriate solutions to scarcity at the bottom of the pyramid.

Whether Scarcity is read to be too far reaching or appropriately ambitious, we are eagerly anticipating Mullainathan’s remarks at our Financial Inclusion 2020 Global Forum. We can’t wait to learn more about why financial inclusion is more important than we ever knew.

For more information on Financial Inclusion 2020, sign up for project updates.

Image credit: Macmillan

Have you read?

Towards Behaviorally-Informed Consumer Protection

FI2020 Global Forum: Gearing Up for the Homestretch

Launching the Roadmap to Financial Inclusion With a Focus on Greater Access, Quality, and Protection for Customers