He bears a striking resemblance to Tamil Nadu cricketer Lakshmipathy Balaji. But, that’s where the similarity ends.
“The thing I like most in the world is being correct,” Sendhil Mullainathan, professor of economics at the Harvard University, says.
A recipient of the prestigious MacArthur Foundation “genius grant,” Mullainathan conducts research in the area of behavioural economics, applying it to find solutions to social problems of everyday life. He is a co-founder of the MIT Poverty Action Lab and of the think-tank Ideas42.
He went to the United States at a young age of seven to join his father, who had gone to there for his PhD.
In this freewheeling interview with DNA at the Technology, Entertainment and Design (TED) India conference at the Infosys campus in Mysore, Mullainathan talks about the current financial crisis, why farmers don’t like to grow sugarcane in south India, launching a financial product for pregnant women and what happens when the debt of women who sell fruits and vegetables is paid off. Excerpts from the interview:
How do you view the current financial crisis from the behavioural economics angle?
There are many different lenses through which one can view the behavioural angle. One lense that I firmly believe in, but nobody ever believes when I tell them and they never will, is the ‘hindsight bias’. Frankly, nobody really saw this coming. Maybe a few people did, but by and large nobody saw it coming. And somehow, as time goes by more and more people feel like yes we saw it coming. That to me is just hindsight bias.
I even have this nagging suspicion that people who saw it coming saw it because they kept saying negative things about it. They are just pessimists. They are saying negative things about everything. It is useful to contrast the current crisis with the Internet bubble. In the Internet bubble a lot of people saw it coming. And one reason we know that is because there was smart money on the other side of the bubble, when the bubble was bursting. They rode it up on its way up and they just got onto the other side before it burst. So those guys obviously saw this coming.
My question is for all the people who saw this crisis coming. How come they did not make money out of it? That is the ultimate sign. If you are a con, if you are a pessimist all the time, you wouldn’t make money out of it. For example, right now, my best guess is that the Indian stock market is in a massive bubble. If I am right and the bubble bursts, people could fairly say that you just made that statement, but it was a bland statement. You are not putting any money behind it. And that’s true.
You have said in the past that in the south of India, sugarcane is a remarkable cash crop. However, in many areas of the region, the very poor farmers use none or very little of their land to plant sugarcane. One of the reasons they cite relates to self-control. Can you explain that?
Think of somebody who is thinking of planting sugarcane. Sugarcane is a 12-month crop. Even though you can get the financing to plant the seed, you need money to live through these 12 months. The funny thing is that it’s hard to take a lumpsum payment and use it wisely for twelve months. You and I have it easy, we have a salary. We don’t face a single self-control problem. A farmer rich or poor has a self-control problem. They got to take the lumpsum at the end of 12 months and make sure that they spend it smoothly as opposed to blowing it all at once. And the longer the crop, the more difficult the problem. If you have vegetables, which are a daily crop, you have no self-control problem. It is a little bit like having a daily salary.
The length of the crop makes it harder and harder to plant it. Sugarcane is like a very popular crop that is very difficult. And that is self-control problem of managing such a lumpsum over such a long period.
So many people think about financing the seed to encourage farmers to plant sugarcane. But what we really need to do is create something like a salary that goes with the crop. It can be paid out of the crop payment that is due at the end of the season when the sugarcane is sold. But it needs to look like a salary. It can’t be just that the farmer is allowed to borrow lumpsum against the future crop payments because that doesn’t solve the self-control problem. What you need is something that says that given that you will be making Rs 30,000 from this crop, why don’t we give you a Rs 2,000 a month salary, which is not really a salary, but a loan. At the end of it we will deduct the Rs 24,000 from the Rs 30,000 we expect you to make. So that would fundamentally transform sugarcane and turn it almost into a job.
Does that mean getting people to plant coconut trees should also be a very difficult thing given the time it takes to bear fruit?
Right. I picked sugarcane because it’s such a principal crop. We worked in Orissa for a while near a paper mill, and getting people to plant trees was exactly this. Trees are super profitable in this area. But you need 3 to 5 years for the trees to grow. And what do you do in the meanwhile?
In India, 69% of women deliver at home, a reason many experts cite as the source of the country’s high maternal mortality rate. Any behavioural aspects to this?
One of the things that we found in a survey that we did is that financing plays a really big role. It is expensive to go to hospitals. Government hospitals, which are meant to be free still charge bribes. So that is a lot of money to get. And this is what we thought was the behavioural puzzle.
Most women end up borrowing from a money lender at very high interest rate. And they even end up borrowing from the money lender when they are about to deliver. When they do this they get the money at a very high interest rates because they need the money right then and there.
The reason we think this is puzzling is this: people borrow from money lenders for health shocks, because after all it’s a shock. But delivery is not a shock, you have known about it for at least five or six months. Yet in those five months, people don’t save up. And you can’t say that they don’t have the money because here is what happens: you deliver, you borrow and then in the next five months you repay.
So if you had the money post delivery to repay, the woman isn’t working then, the woman wasn’t working in the previous five months, so obviously the money is there. It’s just a planning problem. We find many examples of that where people can prepay and save a lot on interest or post-pay and pay a lot of interest. Several health shocks are predictable yet people don’t save up for that. We have kind of worked out a financial product to facilitate this and we are now trying to launch it with the IFMR Trust, which is based in Chennai.
One interesting study that you carried out was on discrimination in job interviews on the basis of race and name. Can you tell us something about that?
Aha! In the US, this is a very big topic. There African-Americans are in a minority and many people feel that they are discriminated against. If you look at wages, you find that African-Americans earn less. But you never know what’s discrimination and what’s just difference in skill. So maybe they earn less because the employer looks at the resume and says well you just haven’t done as good as a job or you don’t have the same education or you don’t have the same skills. So is it the employer who is really discriminating? Or is it that employers are picking the best candidates and it just so happens that we have a system that the best candidates are not African-American?
That’s a hard theory to test. But we found a kind of cute way to test it. We sent out resumes that were made up in response to ‘help wanted’ ads. We just changed the name on the resume be it an African-American name or a white name. Then we set up phone lines, and we see who got called back. So we sent out five thousand fictional applicants, and we found that the African-Americans were much less likely to be called back. And what’s funny there is that the same resume sometimes gets sent out with an African-American name and sometimes with a white name. So we know that the skills were literally the same. But the gap was huge, the same resume got 50% more calls if it was white than if it was black. And that was just astonishing to us. We even redid a version of the study in India with Muslims and Hindus. We are awaiting the results.
You did a study partnering one of the big banks in South Africa and found that psychological cues go a long way influencing borrower behaviour…
We were looking at a bank giving out loans at very high rates to customers who had already borrowed from them. We sent out letters and we randomised what interest rates people got. So some people got a higher rate, some people got a lower rate and from that we could understand what is the demand curve; when interest rates change, how much does demand for the loan change. But at the same time we varied little features of the letter. So there was a photo in the corner that could be a man or a woman. What we were interested in was, let’s see how much do these psychological cues matter.
What were the results?
It turns out that the interest rate does matter. But quantitatively, it is not nearly as important as psychologically. So a photo of a woman on a letter sent to men raises a take-up of a loan by the equivalent of 5% of the interest rate. If I put a female photo in a letter sent to men and raise the interest rate by 5% I’d have have the same take-up as I would have if I were to offer a loan at 5% lower, without the female photo. There are a lot of subtle cues that drive demand a lot more than you might imagine.
You carried out a very interesting study on the entire process of getting a driving licence in Delhi...
What we did was we took people who were about to go and get the driver’s licence. We put them into different groups. One group we just followed. To another, we gave money if they got the licence fast. Between the temporary and the permanent licence, you have to wait 30 days. So we said if you do it in 31 days, we will give you a cash bonus.
What we found is kind of stark. The people in the bonus group —- they had an incredibly higher rate of getting a licence, without ever knowing how to drive. This kind of illustrates a deeper problem that people always forget about corruption. People focus on the bribe. That’s fine. That’s money. But that is not really the problem; what really is the problem is it that regulation gets distorted.
What the study told me was bribe-paying wasn’t the problem. It meant that we were no longer regulating who could drive and who couldn’t. So we were giving licences to people who had no ability to drive. So why even have the regulation to begin with. In our data, literally, the people who can drive had no difference in getting the licence vis a vis people who couldn’t. It turned out that a lot of people used agents. So we then hired a bunch of actors to go to the agents. So some of the actors said to the agent: “Oh I would like a licence, how much does it cost?”
“Rs 1,200.”
“But I don’t know how to drive and I don’t have the time to learn. How much would it cost?”
“Rs 1,200.”
Whether you knew how to drive or not is immaterial.
You were doing some work in the area of women who sell fruits and vegetables on the streets in developing countries. I am told they paid almost half of their profits as interest to the moneylender each day. You got them grants to pay off their debts and then tracked their behaviour.
Could you take us through the entire thing?
What was funny about this business model was that these women borrowed a thousand rupees every day at the rate of 5% per day, and their mark-up is only 10%. So this women might make Rs 100 a day. Of this, Rs 50 goes to servicing interest (5% of Rs 1,000) and Rs 50 is left for themselves.
Now imagine a project that could double your income. So here we have a great project that could double income just by getting rid of the debt load. For half the women we paid of their loans and for half we didn’t and we crossed that by giving half of them financial literacy. So 25% got both the loan pay off and financial literacy, 25% got just the loan pay off, 25% got just the financial literacy and the remaining 25% got nothing. And we found out that financial literacy doesn’t seem to do much, which is consistent in what we tend to find in lots of other places. The poor are pretty savvy, if anything, they are savvier than the middle-class because they have to actually manage their finances.
The middle-class never have to manage money. They get paid monthly. Have bills that are monthly. What is there to manage? If someone gets paid daily but she has some needs that are monthly, some needs that are weekly, and she actually is running a business, they are financially savvy.
We also find that if we look ahead a few weeks or few months out, they are still out of debt. So it’s not that they are so myopic. But a year out that they have fallen back into debt, and we conjecture that when they get hit by a financial shock.
In the group whose loans were paid off, they could just take the money that they were using to buy vegetables and use that to deal with that shock. And then they would borrow to buy vegetables. Now there is no one there forcing them to put the money back into the business and self control is very difficult. It’s a subtle problem with self control, the thing gets magnified because everyone gets hit by a shock at some point and then you are back into the debt cycle.
In India, the middle class doesn’t go out there and vote. Why is that happening and how can we get more people to vote?
I wish that I had a good answer to that. I don’t have enough sense of what drives voting in India. But I have a student who has now gone on to do a bunch of get-out-and-vote experiments in the US. He runs a big organisation there and they co-ordinate for the Democratic Party. There results are just striking as to what actually gets people to vote.
If I ask you will you vote? Well that has some effect on voting. But if I say to you, will you vote, and you say yes. And then I ask you: tell me when are you planning to go to vote? And you say around 5 p.m. Asking how are you going to implement your intention increases voting by 5%.
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