Week of February 5, 2018

Editor's Note: I'm back. --Tim Ogden

1. Digital Finance: When I name an item "digital finance" you know I'm going to be talking about mobile money and fintech--but should you? Is there something that's particularly more digital about mobile money than about payment cards or plain-old ATMs (both of which are, of course, fintech). Arguably paying a vendor with a credit card requires fewer real world actions than using mobile money--there are certainly fewer keys to be pressed. That's the overriding thought I had when looking at this new research from CGAP and FSD Kenya on digital credit in Tanzania: digital credit looks like credit cards. It's being used to fill gaps in spending, not for investment; is mostly being used by people with other alternatives; it's mostly expanding the use of credit (on the intensive margin); and it's really unclear whether it's helping or hurting.
Perhaps the most striking thing is that digital credit is not being used for "emergencies." Part of the interest, I think, in mobile money and digital credit was that it might enable users to better bridge short-term liquidity gaps given the well-documented volatility of earnings. But that's not what seems to be happening. Again it seems to be mirroring other forms of digital finance that we don't really call "digital finance", namely payday loans (which after all typically involve an automated digital transfer out of the borrowers checking account). Borrowers are very likely to miss payments (1/2 of borrowers) or default (1/3 of borrowers, based on self-reports, not administrative data). Given that, these papers (one, two, three, four) on whether access to payday loans helps or hurts seem like they should be required reading for digital credit observers (and don't forget the links from Sean Higgins a few weeks ago). The gist--they do help when there really are emergencies like natural disasters, but hurt a lot when there aren't.

This week in the US is providing an unusual window into emergencies and digital finance. The sharp declines in the US stock market caused a lot of folks to go look at their portfolios, which brought down a new generation of digital finance websites like Wealthfront and Betterment. Even Fidelity and Vanguard had problems. There's an element there of concern about mobile money systems in developing countries: we really don't know what a "run" on a mobile money platform would look like and how systems and people would be able to handle outages whatever their cause. But the more important story is that the problems encountered were probably pretty good for consumers. Preventing people from accessing their accounts in the perceived emergency of stock prices dropping kept them from panic selling, which is a thing humans do a lot. In fact, for those customers that could log in, they found lots of artificial barriers to taking action. Digital finance's key contribution in this case wasn't expanding access, it was limiting it.

2. Household Finance: Which brings us back to the ever recurring theme of household finance: it's complicated and we really don't understand it very well. What we do understand is that it's very hard for people to make sound decisions (causal inference is hard!) when it comes to money. Here, at long last, is the write-up of work by Karlan, Mullainathan and Roth on debt traps for fruit vendors. You may remember this being referenced in the book Scarcity--but if not, the basics are that people in chronic debt who have their loans paid off fall quickly back into chronic debt. That also seems like something digital credit observers should be thinking about.

Here's another understudied puzzle: consumers do seem to react to stock market gyrations even though only a small portion of Americans have meaningful investments in stocks. Really, the figure is a lot lower than you likely think. But if it's not sold out yet, you can start investing in stocks at a big discount today--not because of the decline of the stock markets, but this curious offer to buy a "gift card" for $20 worth of stock in major companies for $10. I stared at this for a long time wondering, "Should I use this as a teaching tool for my kids? And if so, should the lesson be arbitrage or why not to invest in individual stocks?"
   
3. Our Algorithmic Overlords: I promised a review of Virginia Eubanks new book Automating Inequality this week, but I'm not ready yet. In the meantime, I'll point you to Matt Levine's discussion of how little of what we do matters and how big data is starting to illustrate that. It's a riff that starts from a new paper showing that what banks do doesn't seem to matter much, which I suppose is a big support to the point above about how hard household finance is--even highly paid professionals can't seem to do anything that makes a difference.

And the founder of the Electronic Frontier Foundation died this week. I found this reflection thought-provoking in a number of directions: "I knew it’s also true that a good way to invent the future is to predict it. So I predicted Utopia, hoping to give Liberty a running start before the laws of Moore and Metcalfe delivered up what Ed Snowden now correctly calls 'turn-key totalitarianism.'”

4. Aspirations, and Risk: I've been linking fairly frequently lately (e.g. this overview from David Evans or Campos et al in Togo) to work that might fall into a broad category of "boosting aspirations,” though even whether that moniker is accurate is still unclear. But there are a number of papers finding that if you help people believe that what they do matters and they can improve their lives (regardless of what the data from banks tell us), that can have a big positive effect on their behavior and outcomes. Here's a post on promising early results of another of these studies, with Jamaican entrepreneurs.

Of course, with our good economist hats on we should wonder about persistence of aspiration-raising, and general equilibrium effects. Here Galiani, Gertler and Undurraga find that boosting aspirations through the visible gains of neighbors wears off pretty quickly.

But I've been thinking about this more and more through the lens of risk, particularly on the back of Jonathan's write-up of the new Townsend results on risk-adjusted returns for poor farmers last week. If you haven't read that yet, you definitely should. Perhaps one of the reasons that aspiration-raising is working is that it is boosting people's willingness to take on risk. I'll be writing a lot more about this in next week's faiV.

5. Surprise: I'm easing back into the faiV, and it's late in the day. So I'm going to surprise all of you and just stop there for now. But I can't not have a link, so go play this game about the "retail apocalypse" in the US that Bloomberg put together. And for the American GenXers out there, prepare for flashbacks to Kings Quest.