Saraswati- an urban maid making Rs. 7,000/ month dreams of sending her children to college one day. Whenever asked why she is working, she proudly replies, “so that my children get better education”- yet- she fails to save a lump sum amount of Rs. 10,000 that she needs every year for her children’s tuition fees.
First thing first - Can Saraswati save Rs 10,000 per year for her children's education? Yes, she can. Then why does not she save and instead opts for expensive loans when she needs money? That is what I am trying to understand with the help of this paper written by Bertrand et al (2006). The paper suggests “poor’s weaknesses and biases are similar to those of others, except that in poverty, there are narrow margins of error”, which means Saraswati might face the same vulnerable situation as any one of us, however, we have a system to save (such as automatic salary deposits, savings reminders etc) that prevents us from such situations and she does not have that system. What stops her from creating that system of saving? Many things....! To begin with, let us try to understand the psychological obstacles that Saraswati faces that hinder her saving capacity.
“Behavior is directed not toward actual states of the world but toward mental representation of those states.”
Even though Saraswati understands that if she saves a small amount through the year, she can avoid taking expensive loans, she may be accustomed to the system of borrowing whenever she needs money. Costs of the loan might not be her main concern as long as she has an easy access. Her focus might be on finding moneylenders or employers who can lend when she needs money rather than saving so that she does not have to seek for loans. As a result of this, no matter how well-intentioned the concept of saving is, unless, Saraswati understands the value of it, she will not save.
“A truism about human behaviour is that it is a function of both the person and the situation.”
Even if Saraswati understands that she is paying high interest to moneylenders and she can overcome this by saving, perhaps, her monthly household expenditure does not allow her to save. It is also very much possible that her husband makes all financial decisions in her house. In addition, she might be facing other societal constraints such as sharing her money with her family, friends and relatives, spending money on festivals and functions, etc. Without the examination of all these situational factors, expecting Saraswati to save might not work.
“People’s tendency to focus on local decision contexts is related to familiar problems of procrastination, planning and self control.... People’s attitude towards risk tends to shift from risk aversion in the face of gains to risk seeking in the face of losses.”
Saraswati knows that she has to save; however, she might lack planning. She might be delaying her saving plan as she is busy with her day to day activities and in her mind, she believes that whatever she is earning is just adequate for her current needs (no matter how insignificant those needs are) and thus she does not have enough money to save. She and her household might be spending money on many avoidable items such as alcohol, tobacco, and festivals etc- however- till she is ready to renounce some of her current needs for her future needs- she will not save.
At this point, I am not sure what kind of saving product will work for Saraswati. Commitment savings, reminder savings, safe box, etc- options are many- solution none. No matter how well-designed our saving product is, if it is not appealing to Saraswati, it will not work. And the only way to make it appealing is to first understand her psychology and design a product that identifies with her specific needs.