Improving business outcomes for microentrepreneurs through financial heuristics

Inter-American Development Bank

Ecuador

Microentrepreneurs face complex financial management challenges everyday. Research suggests that many of them do not have the financial skills necessary to address these challenges. Financial literacy training is important, but there is little evidence that these programs actually change people’s decision-making and behavior.

Understanding the Context

One microentrepreneur’s existing inventory purchasing system.

Understanding the Context

Another example of money management by a microentrepreneur.

A behaviorally-informed intervention

Prototype testing new, heuristics-based business management systems.

Applying the intervention

Tackling monthly spending with the help of financial heuristics.

Year

2016

Services

Behavioral Research
Education & Curriculum Design

Partner(s)

Inter- American Development Bank’s Multilateral Investment Fund (MIF)
Banco Pichincha

Approach

Research indicates that simple, actionable rules of thumb (“heuristics”) improve financial capability and positively influence how microentrepreneurs manage their business inventories, sales and profits. GRID Impact conducted two weeks of behavioral research, designed and prototype tested a heuristics-based financial education program for microentrepreneurs, and then supported the rollout of this new program for Banco Pichincha, the largest commercial bank in Ecuador.

Outcome

The project, which GRID Impact completed in collaboration with the Inter- American Development Bank’s Multilateral Investment Fund (MIF) and Banco Pichincha, was evaluated through a randomized control trial (RCT) and saw increases of 7.3% in sales and 8.2% percent in profits among the micro-entrepreneurs who participated.

The baseline monthly average sales for participants in the control group was US$6,022, while the monthly average profits was US$1,272 (based on data from sales and profits on regular days). The heuristic training is estimated to generate US$1,243 in extra profits a year for an average participant, compared to a control of not receiving the heuristic training.

The RCT found evidence that the increases in sales and profits from the heuristic training come not from the acquisition of new clients, but from micro-entrepreneurs adopting best practices and better managing and controlling their inventories. That is, the heuristic training seemed to encourage micro-entrepreneurs to track their inventory more closely, and to choose better products to sell (that is, ones that sell the most, instead of ones promoted by suppliers, etc.).

These promising results for the heuristic training seem driven by women entrepreneurs, who were more influenced to adopt the best practices from the training (an increase of 0.2645 standard deviations relative to the control group) than men (an increase of 0.064 standard deviations relative to the control group) and consequently experienced larger gains in sales and profits.

More results and explanations will be shared in a forthcoming paper by the Inter-American Development Bank.

Team

  • Alexandra Fiorillo

    Project Lead

  • Tania Garbe

    Design Associate

  • Stephanie Halligan

    Financial Literacy Consultant