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PROFESSOR: Why do people save?

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00:00:28,160 --> 00:00:31,070
Well, that seems like--

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I assume you know the
answer to that.

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Well, one answer is the
economics, in the sense of two

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standard answers to
that question.

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One is consumptions smoothing.

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Consumption smoothing
is the idea--

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00:00:44,280 --> 00:00:45,805
what's consumption smoothing?

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00:00:51,383 --> 00:00:54,039
AUDIENCE: It means you're living
kind of like-- let's

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00:00:54,039 --> 00:00:56,670
say one day I purchase all these
different things and I

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eat really well on this day,
but tomorrow I starve.

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00:00:59,018 --> 00:01:01,522
The idea is that I'd spread it
out over a period of time so

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00:01:01,522 --> 00:01:05,537
that each day I would have the
maximum possible to make it as

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00:01:05,537 --> 00:01:07,620
easy as possible over
all those days.

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PROFESSOR: Right.

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00:01:07,946 --> 00:01:10,950
So not have too much variation
in consumption.

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00:01:10,950 --> 00:01:12,470
And what's life cycle?

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00:01:12,470 --> 00:01:15,100
It's another code word
that economists use.

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00:01:15,100 --> 00:01:18,575
What's the life cycle
reason to save?

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00:01:18,575 --> 00:01:20,926
AUDIENCE: Special events in a
person's life, like childbirth

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00:01:20,926 --> 00:01:26,000
or marriage, [INAUDIBLE] with
your parents, marriage.

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00:01:26,000 --> 00:01:31,750
PROFESSOR: Yeah, so saving for
special events in your life.

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00:01:31,750 --> 00:01:34,690
What's the most important event
a lot of people in the

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00:01:34,690 --> 00:01:35,940
US save for?

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00:01:38,420 --> 00:01:39,420
Retirement.

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00:01:39,420 --> 00:01:42,770
So I think, among other
things, saving for--

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00:01:42,770 --> 00:01:48,300
you guys are kind of revealing
your age, I guess.

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00:01:48,300 --> 00:01:51,080
But retirement is the
single biggest

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00:01:51,080 --> 00:01:52,730
reason why people save.

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00:01:52,730 --> 00:01:55,350
And that's one life cycle
event which is very

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00:01:55,350 --> 00:01:56,940
predictable.

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00:01:56,940 --> 00:02:00,450
At least, if you get there,
you'll need money.

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00:02:00,450 --> 00:02:09,090
And then as you said, other
events you can predict, like

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00:02:09,090 --> 00:02:16,180
your child's wedding, own
wedding, child, but all kinds

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00:02:16,180 --> 00:02:19,750
of other predictable events.

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00:02:19,750 --> 00:02:21,440
Any others?

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00:02:21,440 --> 00:02:22,690
Any other reason to save?

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00:02:30,100 --> 00:02:31,088
Yeah?

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00:02:31,088 --> 00:02:33,064
AUDIENCE: [INAUDIBLE]

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00:02:33,064 --> 00:02:34,052
or an opportunity.

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00:02:34,052 --> 00:02:37,650
Like, maybe you want to start
a business [INAUDIBLE].

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00:02:37,650 --> 00:02:39,520
PROFESSOR: Right.

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00:02:39,520 --> 00:02:43,170
The last reason, very important
reason is to take

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00:02:43,170 --> 00:02:45,950
advantage of opportunities.

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00:02:45,950 --> 00:02:47,280
Starting a business is one.

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00:02:47,280 --> 00:02:53,205
What else could you do
if you saved up?

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00:02:53,205 --> 00:02:55,580
AUDIENCE: Buying a home,
buying land.

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00:02:55,580 --> 00:02:56,010
PROFESSOR: Yeah.

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00:02:56,010 --> 00:02:59,440
Buying home, buying land.

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00:02:59,440 --> 00:03:01,170
Just paying for school fees.

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00:03:01,170 --> 00:03:06,050
Sometimes, many places you have
to pay a big part of the

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00:03:06,050 --> 00:03:10,550
school fees at the beginning
of the year, so you want to

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00:03:10,550 --> 00:03:13,250
have money saved up so that
when this beginning of the

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00:03:13,250 --> 00:03:15,440
year shows up, you can
pay the school fees.

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00:03:15,440 --> 00:03:19,050
So there's are all kinds of
very standard reasons why

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people save.

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00:03:23,660 --> 00:03:28,230
So now coming to why
they may not save.

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So sometimes, I'm going
to say, it's

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00:03:32,620 --> 00:03:33,870
efficient not to save.

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What are situations where
you shouldn't save?

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AUDIENCE: [INAUDIBLE]

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PROFESSOR: Right.

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So one possibility is that
today, your marginal utility

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of consumption is very high.

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You're sick, and you
need money today.

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00:04:01,430 --> 00:04:07,250
But let's say on a more
long-term basis, is there a

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00:04:07,250 --> 00:04:10,950
situation where it makes sense
not to save, even over five

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years or something.

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Yeah?

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00:04:12,312 --> 00:04:15,756
AUDIENCE: Well, if you know if
you save, and then you're not

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going to get very much back from
the savings, there isn't

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much point.

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00:04:19,200 --> 00:04:23,650
For instance, if the money you
put away under floorboards

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00:04:23,650 --> 00:04:24,945
rots or something like that.

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00:04:24,945 --> 00:04:25,320
PROFESSOR: Right.

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Another possibility is that it's
may be you can't save, or

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00:04:29,230 --> 00:04:30,480
it's just difficult.

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00:04:33,540 --> 00:04:34,630
High inflation--

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00:04:34,630 --> 00:04:36,870
you have to save in money,
and so that makes

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it you can't save.

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00:04:39,280 --> 00:04:42,220
But I'm asking an even
simpler question--

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or, maybe not simpler, but
different question, which is,

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00:04:44,780 --> 00:04:46,400
imagine that you could save--

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00:04:46,400 --> 00:04:47,940
there's no problem saving--

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00:04:47,940 --> 00:04:51,760
would there be a situation where
you would actually find

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00:04:51,760 --> 00:04:53,290
it optimal not to save?

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00:04:56,236 --> 00:04:58,765
AUDIENCE: If you didn't expect
to be [INAUDIBLE]

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00:04:58,765 --> 00:04:59,615
by it.

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00:04:59,615 --> 00:05:00,040
PROFESSOR: Right.

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00:05:00,040 --> 00:05:08,570
So one possibility is that you
have lots of money now, and

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00:05:08,570 --> 00:05:13,830
the future looks very sharp, you
should not save for sure.

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00:05:13,830 --> 00:05:14,685
But that's something
important.

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We'll come back to it.

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00:05:15,450 --> 00:05:17,540
Yeah?

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00:05:17,540 --> 00:05:19,700
AUDIENCE: If Social Security
is very good, state-based,

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00:05:19,700 --> 00:05:21,300
[INAUDIBLE]

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00:05:21,300 --> 00:05:21,700
PROFESSOR: Right.

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00:05:21,700 --> 00:05:27,400
So if, for example, you
are in the US, social.

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00:05:27,400 --> 00:05:34,260
security covers a large part
of your earnings if you are

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00:05:34,260 --> 00:05:38,020
poor, and not a large part of
your earnings if you're rich.

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00:05:38,020 --> 00:05:42,420
So if you happen to be quite
poor, you know that actually

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00:05:42,420 --> 00:05:45,620
once you turn 65, Social
Security is going to start

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00:05:45,620 --> 00:05:47,920
paying you a fair
amount of money.

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00:05:47,920 --> 00:05:52,350
And let's say Social Security
pays you $30,000 a year.

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00:05:52,350 --> 00:05:55,250
You're making $20,000
a year now.

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00:05:55,250 --> 00:05:59,180
There's no reason for
you to save, right?

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00:05:59,180 --> 00:06:03,570
So Social Security, the
government has guaranteed you

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00:06:03,570 --> 00:06:07,670
$30,000 a year once
you're retired.

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00:06:07,670 --> 00:06:11,960
You are 62, you're making
$20,000 a year.

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00:06:11,960 --> 00:06:15,250
You have no reason to save,
because you know actually, if

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00:06:15,250 --> 00:06:19,350
you saved, your consumption
today would go down to, let's

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00:06:19,350 --> 00:06:20,430
say, $15,000.

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00:06:20,430 --> 00:06:23,410
And then your consumption after
retirement will go up to

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00:06:23,410 --> 00:06:25,390
$35,000, but that
makes no sense.

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00:06:25,390 --> 00:06:27,550
You want to actually smooth.

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00:06:27,550 --> 00:06:30,260
So the general principle--

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00:06:30,260 --> 00:06:31,510
what's the general
principle there?

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00:06:34,560 --> 00:06:37,660
Much more generally, where
would you expect

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00:06:37,660 --> 00:06:41,380
people not to save?

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00:06:41,380 --> 00:06:43,324
AUDIENCE: When they're expecting
[? some money ?]

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00:06:43,324 --> 00:06:48,184
might not be worth what
it is now [INAUDIBLE]

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00:06:48,184 --> 00:06:50,128
where there's not really
[INAUDIBLE]

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00:06:54,530 --> 00:06:54,910
PROFESSOR: Right.

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00:06:54,910 --> 00:06:57,220
So you are saying there's
no way to save.

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00:06:57,220 --> 00:06:59,160
But let's assume there's
a way to save.

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I'm just asking the general
principle from the Social

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00:07:01,740 --> 00:07:02,750
Security example.

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00:07:02,750 --> 00:07:05,320
Think about it, what's the
general principle.

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00:07:05,320 --> 00:07:07,490
When do you want to not save?

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00:07:11,819 --> 00:07:14,710
AUDIENCE: When the utility of
the money becomes [INAUDIBLE]

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00:07:14,710 --> 00:07:17,226
PROFESSOR: Which means what?

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00:07:17,226 --> 00:07:19,666
AUDIENCE: You're saving less.

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00:07:19,666 --> 00:07:20,916
[INAUDIBLE].

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00:07:23,430 --> 00:07:25,450
PROFESSOR: When you say usually
money decreases over

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00:07:25,450 --> 00:07:27,515
time, what are you saying
about the future?

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00:07:30,678 --> 00:07:32,920
AUDIENCE: Maybe that you'll
burn more [INAUDIBLE]

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00:07:32,920 --> 00:07:34,080
PROFESSOR: You're
getting richer.

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00:07:34,080 --> 00:07:36,140
Imagine you were someone
who expects to

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00:07:36,140 --> 00:07:37,780
get richer over time--

148
00:07:37,780 --> 00:07:39,400
a lot richer over time--

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00:07:39,400 --> 00:07:42,850
that person should not be
saving, because if I think my

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00:07:42,850 --> 00:07:46,420
wages are going to grow at 10%
a year, then I have no

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00:07:46,420 --> 00:07:50,870
business trying to save,
because essentially my

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00:07:50,870 --> 00:07:53,870
consumption tomorrow in any case
will be higher, even if I

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00:07:53,870 --> 00:07:55,150
didn't save any.

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00:07:55,150 --> 00:07:56,290
So I have no reason to save.

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00:07:56,290 --> 00:07:59,670
So if I think the future's a
lot better than today, I

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00:07:59,670 --> 00:08:00,360
should not save.

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00:08:00,360 --> 00:08:04,120
That's a general principle about
savings, which is that

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00:08:04,120 --> 00:08:08,590
you're trying to make
small consumption.

159
00:08:08,590 --> 00:08:10,930
If you're trying smooth
consumption, and you know your

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00:08:10,930 --> 00:08:13,640
consumption is going to be
non-smooth in any case, then

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00:08:13,640 --> 00:08:15,740
you want to counteract
that by not saving.

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00:08:15,740 --> 00:08:18,140
So in general, people
who expect--

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00:08:18,140 --> 00:08:19,980
so here's a fact.

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00:08:19,980 --> 00:08:25,490
I'm not going to actually
spend a lot of time

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00:08:25,490 --> 00:08:28,740
elaborating on it--
today at least--

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00:08:28,740 --> 00:08:33,600
which is, what's the country in
the world which is growing

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00:08:33,600 --> 00:08:34,850
the fastest?

168
00:08:39,080 --> 00:08:42,380
Or at least, one at of the
countries in the world.

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00:08:42,380 --> 00:08:43,078
AUDIENCE: China.

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00:08:43,078 --> 00:08:44,370
PROFESSOR: China.

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00:08:44,370 --> 00:08:46,830
Do you know what the personal
savings rate in China is?

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00:08:49,360 --> 00:08:49,570
AUDIENCE: [INAUDIBLE]

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00:08:49,570 --> 00:08:53,570
PROFESSOR: 40%, or 30%.

174
00:08:53,570 --> 00:08:54,410
30%, I think.

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00:08:54,410 --> 00:08:54,790
[? Possibly ?]

176
00:08:54,790 --> 00:08:55,900
[INAUDIBLE]

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00:08:55,900 --> 00:08:58,820
So you think of all of these
people whose wages are growing

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00:08:58,820 --> 00:09:08,260
at 10% a year, or 6-7% a year,
are saving 30% of their

179
00:09:08,260 --> 00:09:09,640
incomes right now.

180
00:09:09,640 --> 00:09:12,040
So it's a very, very odd--

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00:09:12,040 --> 00:09:14,760
economists are completely
baffled by why Chinese are

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00:09:14,760 --> 00:09:17,110
saving so much.

183
00:09:17,110 --> 00:09:21,200
So that's just to remind you
that this sort of analysis we

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00:09:21,200 --> 00:09:24,000
went through actually has a very
clear implication, which

185
00:09:24,000 --> 00:09:29,300
happens to false, which is the
Chinese should be not saving,

186
00:09:29,300 --> 00:09:32,020
because their wages are
going up very fast.

187
00:09:32,020 --> 00:09:35,830
Our theory clearly said that,
and we don't really know why

188
00:09:35,830 --> 00:09:36,300
they say so.

189
00:09:36,300 --> 00:09:38,630
Well, we have some theories.

190
00:09:38,630 --> 00:09:41,250
I might come back to
that next time.

191
00:09:41,250 --> 00:09:44,060
But I want to just keep this
general principle in mind,

192
00:09:44,060 --> 00:09:48,110
which is that the one solid
reason not to save is you

193
00:09:48,110 --> 00:09:49,835
expect your income
to grow a lot.

194
00:09:52,590 --> 00:09:53,800
Whether that works
or not isn't--

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00:09:53,800 --> 00:09:55,658
AUDIENCE: [INAUDIBLE] essay,
they can write about

196
00:09:55,658 --> 00:09:56,630
that if they want.

197
00:09:56,630 --> 00:09:57,630
PROFESSOR: Sorry?

198
00:09:57,630 --> 00:10:00,105
AUDIENCE: Meaning an essay with
an accompanying reading

199
00:10:00,105 --> 00:10:01,095
about China's and savings.

200
00:10:01,095 --> 00:10:04,790
So if anybody's interested.

201
00:10:04,790 --> 00:10:07,310
PROFESSOR: Yeah, so that's
a good topic to write.

202
00:10:07,310 --> 00:10:12,020
Chinese savings is a great topic
to write an essay about.

203
00:10:12,020 --> 00:10:18,050
OK, another reason people often
cite for why people

204
00:10:18,050 --> 00:10:20,950
don't save is they don't
have any money.

205
00:10:20,950 --> 00:10:22,600
How could they save?

206
00:10:22,600 --> 00:10:26,070
Does that argument make sense?

207
00:10:26,070 --> 00:10:27,320
When does it make sense?

208
00:10:33,500 --> 00:10:35,390
So it's a very common
argument.

209
00:10:35,390 --> 00:10:36,460
How could the poor save?

210
00:10:36,460 --> 00:10:37,710
They don't have any money.

211
00:10:41,830 --> 00:10:44,670
Is savings primarily
about having money?

212
00:10:52,320 --> 00:10:53,860
So let me put it differently.

213
00:10:57,810 --> 00:11:03,820
To a first approximation,
savings is about making sure

214
00:11:03,820 --> 00:11:08,800
that there isn't a future where
I've eaten everything

215
00:11:08,800 --> 00:11:09,600
that I have.

216
00:11:09,600 --> 00:11:15,270
So if I have money today, unless
I expect to get richer

217
00:11:15,270 --> 00:11:20,170
tomorrow, then even if I'm poor,
I should save, because

218
00:11:20,170 --> 00:11:23,680
it's not about whether
I have money or not.

219
00:11:23,680 --> 00:11:26,340
If I'm poor today, then I'm
going to be poor tomorrow.

220
00:11:26,340 --> 00:11:29,430
Then it's no different
from I'm rich

221
00:11:29,430 --> 00:11:30,660
today, I'm rich tomorrow.

222
00:11:30,660 --> 00:11:34,260
We have the same incentives to
save, because what you're

223
00:11:34,260 --> 00:11:38,500
trying to achieve is efficient
division of consumption

224
00:11:38,500 --> 00:11:40,160
between today and tomorrow.

225
00:11:40,160 --> 00:11:47,160
So the fact that I'm poor
should not, per se, say

226
00:11:47,160 --> 00:11:49,060
anything about whether I should
save or not, because

227
00:11:49,060 --> 00:11:54,770
savings is about trading off
consumption today with

228
00:11:54,770 --> 00:11:56,110
consumption tomorrow.

229
00:11:56,110 --> 00:11:57,890
And that same trade-off
exists, whether

230
00:11:57,890 --> 00:11:59,200
you're poor or rich.

231
00:11:59,200 --> 00:12:03,190
If I'm poor, I still
have it tomorrow.

232
00:12:03,190 --> 00:12:06,620
And if I have it tomorrow,
then I should still save.

233
00:12:06,620 --> 00:12:09,340
Because if I'm worried that
tomorrow I'm not going to have

234
00:12:09,340 --> 00:12:12,700
any money, that's true
for somebody poor

235
00:12:12,700 --> 00:12:13,130
and somebody rich.

236
00:12:13,130 --> 00:12:15,930
So the fact that I have
little money today--

237
00:12:15,930 --> 00:12:20,300
if I'm going to have even less
money tomorrow, I should save.

238
00:12:20,300 --> 00:12:23,470
So it's not about how much money
you have, but how much

239
00:12:23,470 --> 00:12:25,330
money you expect to have
in the future.

240
00:12:28,000 --> 00:12:30,230
That's the same general
principle that we

241
00:12:30,230 --> 00:12:31,480
went through a minute.

242
00:12:34,090 --> 00:12:38,520
Having said that, is there a
case where being poor might

243
00:12:38,520 --> 00:12:40,920
make you not save?

244
00:12:40,920 --> 00:12:43,150
What's a case where this
argument kind of fails?

245
00:12:46,580 --> 00:12:49,765
AUDIENCE: Well, if your income
is so small that you have to

246
00:12:49,765 --> 00:12:51,490
consume all of it today just
to make it tomorrow.

247
00:12:51,490 --> 00:12:52,740
PROFESSOR: Exactly.

248
00:12:52,740 --> 00:12:54,100
Excellent example.

249
00:12:54,100 --> 00:12:57,870
So one reason even the poor
may not want to save if

250
00:12:57,870 --> 00:13:02,370
they're really so poor that
tomorrow will not show up if

251
00:13:02,370 --> 00:13:05,180
they don't eat today.

252
00:13:05,180 --> 00:13:12,730
In that case, there's no
argument for saving, because

253
00:13:12,730 --> 00:13:16,760
then you would, in any
case, not get there.

254
00:13:16,760 --> 00:13:19,660
So you're desperately poor and
you're starving, you probably

255
00:13:19,660 --> 00:13:20,700
shouldn't save.

256
00:13:20,700 --> 00:13:25,280
But if you're not that poor,
then the fact that you don't

257
00:13:25,280 --> 00:13:27,256
have income should not
matter that much.

258
00:13:27,256 --> 00:13:29,966
Or even a lot of income should
not matter that much.

259
00:13:33,610 --> 00:13:39,120
So another example how many of
you already suggested, another

260
00:13:39,120 --> 00:13:42,930
argument for why people don't
save is that people just don't

261
00:13:42,930 --> 00:13:46,610
have opportunities to save.

262
00:13:46,610 --> 00:13:49,530
Like many of you suggested,
inflation.

263
00:13:49,530 --> 00:13:52,240
So imagine that the only
way I can save is by

264
00:13:52,240 --> 00:13:54,350
keeping cash at home.

265
00:13:54,350 --> 00:14:00,020
And prices go up, so cash
becomes less valuable.

266
00:14:00,020 --> 00:14:02,640
In other words, there's just no
point in trying to save in

267
00:14:02,640 --> 00:14:08,670
that world, because you're in a
hyperinflation or something,

268
00:14:08,670 --> 00:14:12,600
and any money you put away
is going to be valueless

269
00:14:12,600 --> 00:14:15,600
tomorrow, why bother saving?

270
00:14:15,600 --> 00:14:19,620
So one answer to that is that,
well, why not put it into a

271
00:14:19,620 --> 00:14:23,020
bank account, or into an
investment account?

272
00:14:23,020 --> 00:14:29,200
So you buy something that
that's inflation-proof.

273
00:14:29,200 --> 00:14:31,790
Why don't you buy an
inflation-proof government

274
00:14:31,790 --> 00:14:34,390
bond or something?

275
00:14:34,390 --> 00:14:36,250
So there are assets.

276
00:14:36,250 --> 00:14:37,500
You could buy gold.

277
00:14:43,580 --> 00:14:48,100
So if you still make the
argument that the poor are

278
00:14:48,100 --> 00:14:55,760
particularly handicapped,
because they don't have a

279
00:14:55,760 --> 00:14:59,110
place to save, you have to make
the argument that they

280
00:14:59,110 --> 00:15:01,670
have less access to
bank accounts.

281
00:15:01,670 --> 00:15:02,700
And that's true.

282
00:15:02,700 --> 00:15:03,850
In the world, it's true.

283
00:15:03,850 --> 00:15:08,020
It's completely true that the
poor have very limited access

284
00:15:08,020 --> 00:15:10,190
to bank accounts.

285
00:15:10,190 --> 00:15:11,720
Most countries--

286
00:15:11,720 --> 00:15:16,110
like below 20% of the poor- have
access to bank accounts.

287
00:15:16,110 --> 00:15:18,510
So that's very true.

288
00:15:18,510 --> 00:15:21,590
And if you take investment
accounts or other money market

289
00:15:21,590 --> 00:15:23,520
accounts, or other accounts
which are protected against

290
00:15:23,520 --> 00:15:26,080
inflation, that's
even more true.

291
00:15:26,080 --> 00:15:28,740
Very few people have
access to them.

292
00:15:28,740 --> 00:15:29,840
But why is that?

293
00:15:29,840 --> 00:15:32,710
Why don't the poor have access
to bank accounts?

294
00:15:32,710 --> 00:15:34,730
Why should it be that
they have not

295
00:15:34,730 --> 00:15:36,650
access to bank accounts?

296
00:15:36,650 --> 00:15:39,154
What are arguments?

297
00:15:39,154 --> 00:15:40,618
Yeah?

298
00:15:40,618 --> 00:15:43,302
AUDIENCE: They might live in a
region where it doesn't make

299
00:15:43,302 --> 00:15:44,522
sense to have a bank.

300
00:15:44,522 --> 00:15:46,474
Like, if you're in a small-world
village, there's

301
00:15:46,474 --> 00:15:50,870
really not the infrastructure
or the skill for the bank to

302
00:15:50,870 --> 00:15:52,360
be sustainable there.

303
00:15:52,360 --> 00:15:55,180
Likewise, the size of their
deposits might make it where

304
00:15:55,180 --> 00:15:58,790
even if they are in, say, urban
slum, where there might

305
00:15:58,790 --> 00:16:01,405
be banks generally around them,
banks aren't interested

306
00:16:01,405 --> 00:16:03,830
in catering to them because
there are certain fixed costs,

307
00:16:03,830 --> 00:16:06,600
like we've seen in certain money
lending, that the size

308
00:16:06,600 --> 00:16:09,398
of their deposit wouldn't be
worthwhile for the hassle that

309
00:16:09,398 --> 00:16:10,577
it would involve.

310
00:16:10,577 --> 00:16:11,050
PROFESSOR: Right.

311
00:16:11,050 --> 00:16:13,960
So that's exactly right.

312
00:16:13,960 --> 00:16:21,600
So basic argument is that
whenever I want to have a

313
00:16:21,600 --> 00:16:23,890
deposit-taking institution--

314
00:16:23,890 --> 00:16:27,740
any institution that
takes your money--

315
00:16:27,740 --> 00:16:31,280
once I take your money, there
is a cost of that, which is

316
00:16:31,280 --> 00:16:34,880
kind of fixed, and doesn't
entirely scale with

317
00:16:34,880 --> 00:16:35,740
the amount of money.

318
00:16:35,740 --> 00:16:42,110
So if I'm putting in $5, and the
cost is $5 to take care of

319
00:16:42,110 --> 00:16:44,550
your money, nobody's going
to be willing to do it.

320
00:16:44,550 --> 00:16:48,247
So you need enough deposits
to make a bank work.

321
00:16:51,340 --> 00:16:55,770
What will be reasons why there's
a fixed cost, the

322
00:16:55,770 --> 00:16:57,960
fixed cost of banking?

323
00:16:57,960 --> 00:17:01,080
Why does banking have
a fixed cost?

324
00:17:01,080 --> 00:17:02,808
Why should it have
a [INAUDIBLE]?

325
00:17:08,784 --> 00:17:10,776
AUDIENCE: Well you need to at
least hire some number of

326
00:17:10,776 --> 00:17:12,768
people to set up the system.

327
00:17:12,768 --> 00:17:14,262
[INAUDIBLE]

328
00:17:14,262 --> 00:17:17,872
someone working at the bank,
someone who will keep track of

329
00:17:17,872 --> 00:17:20,736
all the records. things
like that.

330
00:17:20,736 --> 00:17:21,240
PROFESSOR: Right.

331
00:17:21,240 --> 00:17:27,970
So I think one version of that
is that banks are required by

332
00:17:27,970 --> 00:17:32,670
law to keep good records of
any deposits they take.

333
00:17:32,670 --> 00:17:36,670
And so even if the deposit is
$5, they can't just say, well,

334
00:17:36,670 --> 00:17:39,470
we're going to just scribble it
down on a piece of paper.

335
00:17:39,470 --> 00:17:43,210
So basically, every deposit that
comes to a bank has to be

336
00:17:43,210 --> 00:17:45,740
recorded in a proper way.

337
00:17:45,740 --> 00:17:55,230
Given that, even if it's $5,
somebody has to have a

338
00:17:55,230 --> 00:17:58,400
computer there, open a computer,
enter the amount

339
00:17:58,400 --> 00:18:01,440
into the computer, send
it to some place.

340
00:18:01,440 --> 00:18:03,280
So there's a lot of reasons
why they're

341
00:18:03,280 --> 00:18:05,370
fixed costs of banking.

342
00:18:05,370 --> 00:18:09,820
And I think that's the single
biggest reason why most poor

343
00:18:09,820 --> 00:18:11,720
people don't have access
to bank accounts.

344
00:18:14,910 --> 00:18:20,220
Now the alternative is
to save at home.

345
00:18:20,220 --> 00:18:23,920
And there are many reasons why
it's difficult to ave at home.

346
00:18:23,920 --> 00:18:26,100
One has something to
do with inflation.

347
00:18:31,120 --> 00:18:35,660
If you keep money and
the prices go up.

348
00:18:35,660 --> 00:18:39,090
Another problem is crime.

349
00:18:39,090 --> 00:18:41,660
You keep money at home,
somebody comes and

350
00:18:41,660 --> 00:18:43,520
takes it, it's gone.

351
00:18:43,520 --> 00:18:46,960
You kept it a bank, it's a
bank's duty to keep it safe.

352
00:18:46,960 --> 00:18:50,190
So that's another reason
why you can do it.

353
00:18:50,190 --> 00:18:54,160
And then there are what I'm
calling the self-controlled

354
00:18:54,160 --> 00:18:57,210
and spouse-controlled reasons.

355
00:18:57,210 --> 00:19:02,970
So self-control is, if I
have money, I spend it.

356
00:19:02,970 --> 00:19:05,020
If I don't have it, maybe

357
00:19:05,020 --> 00:19:05,825
I don't spend It.

358
00:19:05,825 --> 00:19:07,480
So it's in the bank.

359
00:19:07,480 --> 00:19:08,590
It's not in my hand.

360
00:19:08,590 --> 00:19:10,030
I'm not going to be
able to spend it.

361
00:19:10,030 --> 00:19:13,950
If it's really in my pocket,
I'll just spend it.

362
00:19:13,950 --> 00:19:17,070
I see something I
want, I buy it.

363
00:19:17,070 --> 00:19:18,320
What's spouse control?

364
00:19:22,610 --> 00:19:23,760
What do you think it is?

365
00:19:23,760 --> 00:19:25,010
What's your guess?

366
00:19:28,982 --> 00:19:31,916
AUDIENCE: Your spouse might ask
you for money [INAUDIBLE]

367
00:19:31,916 --> 00:19:33,872
because they want it for
something [INAUDIBLE]

368
00:19:36,806 --> 00:19:39,760
based on [INAUDIBLE]

369
00:19:39,760 --> 00:19:40,170
PROFESSOR: Right.

370
00:19:40,170 --> 00:19:46,570
So it may well be that some
people in the family might--

371
00:19:46,570 --> 00:19:48,010
this is more general
than that.

372
00:19:51,240 --> 00:19:55,290
So some people in the family
who have money might be

373
00:19:55,290 --> 00:19:58,310
worried that other people in the
family who don't will come

374
00:19:58,310 --> 00:20:00,370
and lay claims on it.

375
00:20:00,370 --> 00:20:03,120
So if you have nothing, you
can say you have nothing.

376
00:20:03,120 --> 00:20:09,380
But if not, your husband or your
cousin shows up and says,

377
00:20:09,380 --> 00:20:11,270
well, you know, I really
need some money.

378
00:20:11,270 --> 00:20:17,030
I feel like I drink, or I
want to buy something.

379
00:20:17,030 --> 00:20:18,570
How do you say no to people?

380
00:20:18,570 --> 00:20:22,810
So one other issue that
arises is that--

381
00:20:22,810 --> 00:20:25,760
at least, you hear a lot of
reports of-- is people saying

382
00:20:25,760 --> 00:20:29,240
that, look, I don't keep money
at home, because if it does,

383
00:20:29,240 --> 00:20:32,340
then somebody always shows
up and asks for it.

384
00:20:32,340 --> 00:20:35,840
And it could be a spouse, could
be your brother, could

385
00:20:35,840 --> 00:20:37,560
be some friend.

386
00:20:37,560 --> 00:20:40,580
But if there's a lot of people
who come and ask money from

387
00:20:40,580 --> 00:20:44,380
you, then you may actually not
want to keep money at home.

388
00:21:01,320 --> 00:21:04,950
Now the poor have evolved a lot
of different ways to save.

389
00:21:08,330 --> 00:21:10,250
One of them is called a ROSCA.

390
00:21:10,250 --> 00:21:11,310
Do you know what a ROSCA is?

391
00:21:11,310 --> 00:21:14,820
Who knows what a ROSCA is?

392
00:21:14,820 --> 00:21:17,760
AUDIENCE: It's like a type of
merry-go-round [? layover ?]

393
00:21:17,760 --> 00:21:21,875
attributes a set amount And then
a particular day, you get

394
00:21:21,875 --> 00:21:25,286
all the money from the ROSCA.

395
00:21:25,286 --> 00:21:27,376
PROFESSOR: And then what
happens after that?

396
00:21:27,376 --> 00:21:30,352
AUDIENCE: I mean, it continues
usually until a set point

397
00:21:30,352 --> 00:21:31,602
where it stops.

398
00:21:34,690 --> 00:21:37,726
PROFESSOR: But like, let's
say five or four

399
00:21:37,726 --> 00:21:39,390
of us are in a ROSCA.

400
00:21:39,390 --> 00:21:40,890
So we all put in $10.

401
00:21:40,890 --> 00:21:42,200
What happens?

402
00:21:42,200 --> 00:21:46,772
AUDIENCE: So you all put in $10,
and each individual in

403
00:21:46,772 --> 00:21:49,970
the ROSCA gets that lump sum
on alternating days.

404
00:21:52,950 --> 00:21:57,420
So each individual will get
the lump sum at some point

405
00:21:57,420 --> 00:21:58,150
PROFESSOR: Exactly.

406
00:21:58,150 --> 00:22:03,250
So one form of ROSCA is one
where there's a fixed order.

407
00:22:03,250 --> 00:22:05,650
We all join the ROSCA.

408
00:22:05,650 --> 00:22:06,760
We have a lottery.

409
00:22:06,760 --> 00:22:09,125
And then the lottery decides
the order of people.

410
00:22:13,000 --> 00:22:15,150
Somebody goes first, somebody
goes second, somebody goes

411
00:22:15,150 --> 00:22:16,630
third, somebody goes
four, somebody goes

412
00:22:16,630 --> 00:22:17,780
fifth, let's say.

413
00:22:17,780 --> 00:22:19,680
They're five people
in the ROSCA.

414
00:22:19,680 --> 00:22:25,620
Now once that's set, then what
happens is that first day,

415
00:22:25,620 --> 00:22:28,180
everybody puts in,
let's say, $10.

416
00:22:28,180 --> 00:22:31,870
And Mr. One gets all of it.

417
00:22:31,870 --> 00:22:36,910
Next week, everybody puts $10,
and Mr. Two gets all of it.

418
00:22:36,910 --> 00:22:43,650
And so, in the end, everybody
gets all $50.

419
00:22:49,120 --> 00:22:55,870
But a lottery determines
who gets it first.

420
00:22:55,870 --> 00:23:02,730
So if you think of a ROSCA,
what's the advantage of a

421
00:23:02,730 --> 00:23:07,030
ROSCA over just saving
at home?

422
00:23:07,030 --> 00:23:08,280
Is there an advantage?

423
00:23:11,290 --> 00:23:12,540
What are the advantages?

424
00:23:16,920 --> 00:23:17,310
Yeah?

425
00:23:17,310 --> 00:23:20,656
AUDIENCE: You don't need the
discipline to make sure that

426
00:23:20,656 --> 00:23:23,524
you're saving money, because
if you have money at home,

427
00:23:23,524 --> 00:23:26,392
people tend feel tempted
to ask [INAUDIBLE]

428
00:23:26,392 --> 00:23:27,840
use it.

429
00:23:27,840 --> 00:23:30,590
PROFESSOR: So you get
your $50, and then

430
00:23:30,590 --> 00:23:32,522
isn't that a problem?

431
00:23:32,522 --> 00:23:35,228
AUDIENCE: But you have a larger
amount of money that

432
00:23:35,228 --> 00:23:38,426
you can use for a larger
investment, versus like the

433
00:23:38,426 --> 00:23:41,230
$10 you might use that on a
short amount [? of time ?].

434
00:23:41,230 --> 00:23:46,240
PROFESSOR: So you're saying,
if i have a goal associated

435
00:23:46,240 --> 00:23:51,210
with the money, then I'm going
to join a ROSCA where-- let's

436
00:23:51,210 --> 00:23:54,000
say I need $50 one
of these days.

437
00:23:54,000 --> 00:23:56,430
Then I'm going to join
a ROSCA, which has

438
00:23:56,430 --> 00:23:58,390
the price of $50.

439
00:23:58,390 --> 00:24:03,350
That way, when I get it, I buy
it, rather than if I have to

440
00:24:03,350 --> 00:24:06,120
save up to $50, then I'll
have $5 someday.

441
00:24:06,120 --> 00:24:08,590
I'll have $42, but not $50.

442
00:24:08,590 --> 00:24:11,140
And therefore, I still can't buy
the thing I want to buy,

443
00:24:11,140 --> 00:24:12,600
but I now have $42.

444
00:24:12,600 --> 00:24:15,740
Maybe I feel like maybe I could
spend $2 out of that on

445
00:24:15,740 --> 00:24:21,240
some pack off cigarettes
or something, and so.

446
00:24:21,240 --> 00:24:22,900
And you never reach $50.

447
00:24:22,900 --> 00:24:26,410
So the fact that there's a
matching between the amount of

448
00:24:26,410 --> 00:24:29,270
the ROSCA and the
amount to what I

449
00:24:29,270 --> 00:24:30,750
want to buy is important.

450
00:24:30,750 --> 00:24:34,430
That's part of the reason to
solve the self-control problem

451
00:24:34,430 --> 00:24:36,050
is because of this matching.

452
00:24:36,050 --> 00:24:41,130
Because once I have the money,
I can just spend it.

453
00:24:41,130 --> 00:24:45,020
If I need $50, if I have to save
up to it, then there'll

454
00:24:45,020 --> 00:24:47,330
be a lot of times when
I have less than $50.

455
00:24:47,330 --> 00:24:51,280
And I could say, well, maybe
I'll just spend $2 out of it,

456
00:24:51,280 --> 00:24:54,180
and wait another day,
and put in $2 back,

457
00:24:54,180 --> 00:24:55,480
you never get there.

458
00:24:55,480 --> 00:24:59,740
Whereas this gives you $50
all at once, and you

459
00:24:59,740 --> 00:25:00,935
immediately spend it.

460
00:25:00,935 --> 00:25:04,960
So one advantage of it is
delivers the amount you want.

461
00:25:04,960 --> 00:25:06,210
What's another advantage?

462
00:25:08,600 --> 00:25:13,630
Think of the group of us.

463
00:25:13,630 --> 00:25:17,130
Let's say we each need $50.

464
00:25:17,130 --> 00:25:21,780
How long on average would it
take us to get to $50 if we

465
00:25:21,780 --> 00:25:26,785
saved by ourselves, and we
saved, let's say, $10 a week?

466
00:25:29,916 --> 00:25:33,050
AUDIENCE: The advantage of a
ROSCA would be potential for a

467
00:25:33,050 --> 00:25:36,980
immediacy, access to the
large sums of funds.

468
00:25:36,980 --> 00:25:40,725
And even if you're the last
person in the ROSCA, that

469
00:25:40,725 --> 00:25:44,120
amount of time it takes you to
deal with that amount of money

470
00:25:44,120 --> 00:25:46,545
would be the same as if you were
saving it by yourself,

471
00:25:46,545 --> 00:25:49,455
whereas the guy who's first gets
it immediately, and then

472
00:25:49,455 --> 00:25:52,370
it averages out to half the
amount of time [INAUDIBLE].

473
00:25:52,370 --> 00:25:53,450
PROFESSOR: Exactly.

474
00:25:53,450 --> 00:25:58,110
So if you save $50, it would
take five weeks for each of

475
00:25:58,110 --> 00:26:03,480
you, whereas the expected delay
for somebody in a ROSCA

476
00:26:03,480 --> 00:26:07,440
is two and a half weeks,
because the

477
00:26:07,440 --> 00:26:09,510
Mr. One gets it today.

478
00:26:09,510 --> 00:26:11,630
Mr. Two gets it in a week.

479
00:26:11,630 --> 00:26:15,530
Mr. Five gets it in five weeks,
but he's the last.

480
00:26:15,530 --> 00:26:19,400
So you bring it forward by
two and a half weeks.

481
00:26:19,400 --> 00:26:21,170
So it's a large gain.

482
00:26:21,170 --> 00:26:24,530
You immediately get a
large gain from it.

483
00:26:24,530 --> 00:26:26,230
So that's another
big advantage.

484
00:26:26,230 --> 00:26:28,800
So one is that it solves the
self-control problem.

485
00:26:28,800 --> 00:26:33,050
Another is it just brings it
forward to where you want.

486
00:26:33,050 --> 00:26:39,570
Now you know what a
bidding ROSCA is?

487
00:26:43,330 --> 00:26:44,150
Yeah?

488
00:26:44,150 --> 00:26:47,025
AUDIENCE: It's when people bid
for the right to get the money

489
00:26:47,025 --> 00:26:48,011
this time around.

490
00:26:48,011 --> 00:26:53,598
So if you get, say, an amount of
$50, you might bid up to, I

491
00:26:53,598 --> 00:26:58,364
don't know, [INAUDIBLE], but
realistically up to maybe $25

492
00:26:58,364 --> 00:27:01,322
or so just for the right
to get the money today.

493
00:27:01,322 --> 00:27:01,830
PROFESSOR: Right.

494
00:27:01,830 --> 00:27:08,430
A bidding ROSCA is instead of
having a fixed order, we bid

495
00:27:08,430 --> 00:27:12,320
on who's going to
get it today.

496
00:27:12,320 --> 00:27:16,060
So after we each put in $10
dollars, then the bidding

497
00:27:16,060 --> 00:27:19,060
opens, and whoever wins.

498
00:27:19,060 --> 00:27:24,955
So we basically say that,
look, I paid my $10.

499
00:27:24,955 --> 00:27:29,970
I'll pay $10 extra
to get the $50.

500
00:27:29,970 --> 00:27:33,320
And then next week, somebody
else would do the--

501
00:27:33,320 --> 00:27:38,900
maybe he'll say, I'll pay $4
dollars extra to get the $50.

502
00:27:38,900 --> 00:27:43,750
And then the guy who gets it
last, obviously, is going to.

503
00:27:43,750 --> 00:27:47,830
And what's happening, notice,
is that the pot

504
00:27:47,830 --> 00:27:49,050
is now going up.

505
00:27:49,050 --> 00:27:54,450
So I pay $10 into the pot
to get the extra $10.

506
00:27:54,450 --> 00:27:57,730
That can be distributed
among everybody else.

507
00:27:57,730 --> 00:28:02,380
And so, everybody else is
paying less to get $50.

508
00:28:02,380 --> 00:28:05,480
And if the person who gets
it today is paying

509
00:28:05,480 --> 00:28:08,200
more to get the $50.

510
00:28:08,200 --> 00:28:13,540
So instead of everybody paying
$50 to get $50, some people

511
00:28:13,540 --> 00:28:16,170
are paying $60 and some
people are paying $40.

512
00:28:16,170 --> 00:28:17,550
Now why would that make sense?

513
00:28:17,550 --> 00:28:21,170
What's the advantage of that/
why would we want to have a

514
00:28:21,170 --> 00:28:24,271
bidding ROSCA, rather than
a fixed order ROSCA?

515
00:28:27,157 --> 00:28:30,524
AUDIENCE: Because that means
that it rises for a year,

516
00:28:30,524 --> 00:28:31,486
[INAUDIBLE]

517
00:28:31,486 --> 00:28:34,612
rises earlier than you were
scheduled, so you want to make

518
00:28:34,612 --> 00:28:35,815
the argument earlier.

519
00:28:35,815 --> 00:28:36,320
PROFESSOR: Right.

520
00:28:36,320 --> 00:28:40,160
So you may want to be able to
express your preferences.

521
00:28:40,160 --> 00:28:44,010
You might be able to say, look,
I just discovered I have

522
00:28:44,010 --> 00:28:48,070
this opportunity if I buy this
bale of cotton, I can produce

523
00:28:48,070 --> 00:28:51,170
these shirts, and sell them
for a lot of money.

524
00:28:51,170 --> 00:28:56,110
I need the money now, so
I'm going to step in.

525
00:28:56,110 --> 00:29:01,950
I'm going to put in the money
now quickly, and it's worth it

526
00:29:01,950 --> 00:29:06,150
for me to pay some extra.

527
00:29:06,150 --> 00:29:09,170
What's the advantage
of the other?

528
00:29:09,170 --> 00:29:13,590
So basically, what's the
advantage of that too is

529
00:29:13,590 --> 00:29:18,650
others, it's effectively like I
am paying interest to other

530
00:29:18,650 --> 00:29:19,620
people, right?

531
00:29:19,620 --> 00:29:24,460
What it works out to be is if I
am bidding to get it early,

532
00:29:24,460 --> 00:29:26,030
I am paying more.

533
00:29:26,030 --> 00:29:28,580
That's like saying other people
are getting interests

534
00:29:28,580 --> 00:29:29,340
on their savings.

535
00:29:29,340 --> 00:29:32,980
So they they're paying
$10, but I'm actually

536
00:29:32,980 --> 00:29:35,190
giving them $10 back.

537
00:29:35,190 --> 00:29:39,290
So they're getting some interest
on their savings.

538
00:29:39,290 --> 00:29:41,170
This turns it into much
more like a bank.

539
00:29:41,170 --> 00:29:44,260
A bidding ROSCA is much more
like a bank, because it's a

540
00:29:44,260 --> 00:29:48,170
way for us to decide, I want the
money now, I pay the extra

541
00:29:48,170 --> 00:29:49,330
to others to get it.

542
00:29:49,330 --> 00:29:54,290
So it turns it into much
more like a bank.

543
00:29:54,290 --> 00:30:00,080
Now, we talked about the
advantage of ROSCAs.

544
00:30:00,080 --> 00:30:03,250
What are the disadvantages?

545
00:30:03,250 --> 00:30:05,220
What is a ROSCA not good for?

546
00:30:14,040 --> 00:30:14,680
Yeah?

547
00:30:14,680 --> 00:30:17,125
AUDIENCE: ROSCAs can be very
short-lived because the cycle

548
00:30:17,125 --> 00:30:19,570
only goes on for as long
as you have members.

549
00:30:19,570 --> 00:30:22,015
So if you're looking to save
over a long period of time,

550
00:30:22,015 --> 00:30:24,460
the ROSCA probably doesn't
meet your need.

551
00:30:24,460 --> 00:30:27,720
And it's also inflexible that
every member has to save the

552
00:30:27,720 --> 00:30:28,861
same amount at the same time.

553
00:30:28,861 --> 00:30:32,284
And so, if you have a variable
income, then it might not be

554
00:30:32,284 --> 00:30:34,729
suitable for you to try to
save that same amount

555
00:30:34,729 --> 00:30:37,210
[INAUDIBLE].

556
00:30:37,210 --> 00:30:37,740
PROFESSOR: Exactly.

557
00:30:37,740 --> 00:30:40,960
So two disadvantages.

558
00:30:40,960 --> 00:30:42,680
One is it's inflexible.

559
00:30:42,680 --> 00:30:46,820
You are to put in $10 every
time, and if your income is

560
00:30:46,820 --> 00:30:50,470
variable, you may not want
to save $10 every time.

561
00:30:50,470 --> 00:30:55,010
And the other is that it's
typically short-term.

562
00:30:55,010 --> 00:30:58,160
So if you want to save for
retirement, it's not a very

563
00:30:58,160 --> 00:31:06,250
good way to get there, because
it's something that takes--

564
00:31:06,250 --> 00:31:09,510
it's going to end fairly so.

565
00:31:09,510 --> 00:31:17,330
And therefore, you're not going
to be able to save for

566
00:31:17,330 --> 00:31:20,150
retirement using it.

567
00:31:20,150 --> 00:31:27,100
Any other disadvantages or
limitations, let's say?

568
00:31:31,573 --> 00:31:32,567
Yeah?

569
00:31:32,567 --> 00:31:33,817
AUDIENCE: [INAUDIBLE]

570
00:31:38,040 --> 00:31:38,460
PROFESSOR: Right.

571
00:31:38,460 --> 00:31:44,810
So the amount in ROSCAs tend
to be quite limited, and

572
00:31:44,810 --> 00:31:49,290
they're limited precisely by
the fact that it creates an

573
00:31:49,290 --> 00:31:50,510
incentive problem.

574
00:31:50,510 --> 00:31:53,730
Once I've got the money,
I got my $50.

575
00:31:53,730 --> 00:31:54,855
At that point, I have
no incentive

576
00:31:54,855 --> 00:31:56,550
to stay in the ROSCA.

577
00:31:56,550 --> 00:31:58,700
So you need leverage over me.

578
00:31:58,700 --> 00:32:01,890
And if that was $10,000, you
may not have that much

579
00:32:01,890 --> 00:32:02,540
leverage over me.

580
00:32:02,540 --> 00:32:07,340
So $50, the ROSCA will be small,
that I can save small

581
00:32:07,340 --> 00:32:08,750
amounts with ROSCA.

582
00:32:08,750 --> 00:32:11,810
It's going to be hard to save
a large amount, because

583
00:32:11,810 --> 00:32:14,160
somebody's going to be
very tempted by it.

584
00:32:22,990 --> 00:32:25,970
So one other way people save--

585
00:32:25,970 --> 00:32:35,150
I remember, the house I grew
up in India was built--

586
00:32:40,900 --> 00:32:45,140
my grandfather used to write
textbooks for high school.

587
00:32:45,140 --> 00:32:48,440
And whenever he got a contract,
he would build

588
00:32:48,440 --> 00:32:49,980
another room in the house.

589
00:32:49,980 --> 00:32:52,700
So the house was like--

590
00:32:52,700 --> 00:32:56,190
the first rooms were
built in 1939.

591
00:32:56,190 --> 00:32:59,390
The last room was
built in 1959.

592
00:32:59,390 --> 00:33:01,890
20 years, he kept
adding rooms.

593
00:33:01,890 --> 00:33:05,360
And that was because there
were not very many good

594
00:33:05,360 --> 00:33:07,160
savings products available.

595
00:33:07,160 --> 00:33:12,350
And well, for him, it was
something that was going to

596
00:33:12,350 --> 00:33:14,600
always have value.

597
00:33:14,600 --> 00:33:17,680
And so, for him, it was a very
logical way whenever he got

598
00:33:17,680 --> 00:33:19,670
some money, he would
park it into

599
00:33:19,670 --> 00:33:22,490
another room in the house.

600
00:33:22,490 --> 00:33:26,500
So if you look, every
room in the house

601
00:33:26,500 --> 00:33:27,710
has a different floor.

602
00:33:27,710 --> 00:33:32,310
And you can tell that the tiles
that were used to buy

603
00:33:32,310 --> 00:33:35,870
for room one had run out by the
time you got to room two,

604
00:33:35,870 --> 00:33:39,180
because that was five
years later.

605
00:33:39,180 --> 00:33:41,170
So there was a different
set of tiles,

606
00:33:41,170 --> 00:33:42,640
or different flooring.

607
00:33:42,640 --> 00:33:46,850
So every room had a different
floor, different color,

608
00:33:46,850 --> 00:33:48,520
different tile, something.

609
00:33:48,520 --> 00:33:56,670
And that was very normal in
houses constructed in a

610
00:33:56,670 --> 00:33:59,590
particular period, where
especially access to financial

611
00:33:59,590 --> 00:34:00,890
assets was very limited.

612
00:34:00,890 --> 00:34:02,790
So people didn't have much
financial assets.

613
00:34:02,790 --> 00:34:04,400
They usually save in this way.

614
00:34:04,400 --> 00:34:06,920
Now if you go to developing
countries, one thing you

615
00:34:06,920 --> 00:34:12,170
notice is this tons and tons
of unfinished houses.

616
00:34:12,170 --> 00:34:17,330
Like just in the outskirts of
any big city, you see all

617
00:34:17,330 --> 00:34:20,020
these houses which are
half-finished.

618
00:34:20,020 --> 00:34:26,219
Like there's a couple of walls,
or a wall and a roof,

619
00:34:26,219 --> 00:34:32,210
but then on the roof there are
still these pillars sticking

620
00:34:32,210 --> 00:34:34,620
up from the roof, and the
house is not painted.

621
00:34:34,620 --> 00:34:37,330
It doesn't have any doors.

622
00:34:37,330 --> 00:34:40,330
That's a reflection of exactly
the same fact-- people are

623
00:34:40,330 --> 00:34:45,710
actually building these houses
over time, partly because they

624
00:34:45,710 --> 00:34:48,230
don't have good credit markets,
so they can't borrow

625
00:34:48,230 --> 00:34:51,250
to build the house, partly
because they don't have good

626
00:34:51,250 --> 00:34:52,690
savings opportunities.

627
00:34:52,690 --> 00:34:56,110
This a perfect way to solve
their savings problem.

628
00:34:56,110 --> 00:34:58,560
They're getting an asset
in the long run.

629
00:34:58,560 --> 00:35:07,350
And so when my mother had
somebody who used to drive her

630
00:35:07,350 --> 00:35:11,390
car for her, and he would, like,
once in three months,

631
00:35:11,390 --> 00:35:14,500
take leave and go build
a wall in his house.

632
00:35:14,500 --> 00:35:18,080
And he didn't even build
a whole wall.

633
00:35:18,080 --> 00:35:20,220
He would just have
enough money.

634
00:35:20,220 --> 00:35:22,890
He would save up enough money
to build half a wall, and he

635
00:35:22,890 --> 00:35:24,270
would go build half a wall.

636
00:35:24,270 --> 00:35:27,510
And then he's show up two days
later looking all grimy,

637
00:35:27,510 --> 00:35:29,700
because he'd been building
for two days.

638
00:35:29,700 --> 00:35:32,210
Then again, three months
later, he'd

639
00:35:32,210 --> 00:35:33,850
build the next wall.

640
00:35:33,850 --> 00:35:35,350
And now he has a house.

641
00:35:35,350 --> 00:35:37,340
He built his whole house.

642
00:35:37,340 --> 00:35:40,585
He his goal in life was he will
not get married until he

643
00:35:40,585 --> 00:35:41,420
had a house.

644
00:35:41,420 --> 00:35:46,320
So he's now gotten married,
because he had postponed his

645
00:35:46,320 --> 00:35:49,670
whole marriage till he could
build his own house.

646
00:35:49,670 --> 00:35:53,550
So his whole strategy was
he would buy a door--

647
00:35:53,550 --> 00:35:55,520
this was all an investment
towards his marriage.

648
00:35:55,520 --> 00:35:59,020
So once he got all of
that fixed, he went

649
00:35:59,020 --> 00:36:01,170
ahead and got married.

650
00:36:01,170 --> 00:36:04,690
So that's a classic example,
but you see it everywhere.

651
00:36:04,690 --> 00:36:08,190
And it's quite a nice
way to say.

652
00:36:08,190 --> 00:36:09,620
What's a disadvantage?

653
00:36:09,620 --> 00:36:12,095
What's a disadvantage of
saving brick by brick?

654
00:36:15,890 --> 00:36:18,188
What's the obviously
disadvantage?

655
00:36:18,188 --> 00:36:18,652
Yeah?

656
00:36:18,652 --> 00:36:19,888
AUDIENCE: Stuff can
happen to the

657
00:36:19,888 --> 00:36:21,440
house before it's finished.

658
00:36:21,440 --> 00:36:21,945
PROFESSOR: Sorry?

659
00:36:21,945 --> 00:36:23,320
AUDIENCE: Things can
happen to the

660
00:36:23,320 --> 00:36:24,630
house before it's finished.

661
00:36:24,630 --> 00:36:25,710
PROFESSOR: Things could
happen to the

662
00:36:25,710 --> 00:36:27,290
house before it's finished.

663
00:36:27,290 --> 00:36:28,331
That's true.

664
00:36:28,331 --> 00:36:31,157
AUDIENCE: If real value
occurs, then it could

665
00:36:31,157 --> 00:36:32,570
[INAUDIBLE] all of
the investment.

666
00:36:32,570 --> 00:36:34,930
So if you just have
[INAUDIBLE].

667
00:36:34,930 --> 00:36:36,140
PROFESSOR: It's not liquid.

668
00:36:36,140 --> 00:36:40,220
It's very illiquid
form of savings.

669
00:36:40,220 --> 00:36:45,350
You can't sell usually
two walls and a door.

670
00:36:45,350 --> 00:36:50,560
So therefore, if you need money
suddenly, it's a very

671
00:36:50,560 --> 00:36:53,840
bad asset to have.

672
00:36:53,840 --> 00:36:56,330
If you knew that there was
a future which was very

673
00:36:56,330 --> 00:37:00,280
predictable, like this guy who
wanted to get married, and he

674
00:37:00,280 --> 00:37:03,090
knew that one day he will
need this, so it's very

675
00:37:03,090 --> 00:37:03,840
predictable--

676
00:37:03,840 --> 00:37:05,400
that's an excellent asset.

677
00:37:05,400 --> 00:37:09,610
But if something which is
unpredictable, then it's a

678
00:37:09,610 --> 00:37:12,080
very bad asset, because
it's very illiquid.

679
00:37:12,080 --> 00:37:16,240
It's like any other
illiquid asset.

680
00:37:16,240 --> 00:37:20,220
Now another similar asset,
which you see a lot in

681
00:37:20,220 --> 00:37:24,710
developing countries,
is jewelry.

682
00:37:24,710 --> 00:37:30,860
You see very poor people wearing
gold jewelry all over

683
00:37:30,860 --> 00:37:33,270
both India and China.

684
00:37:33,270 --> 00:37:37,090
You look at poor people, even
very poor people are wearing

685
00:37:37,090 --> 00:37:41,690
gold, having a small piece
of jade or something.

686
00:37:41,690 --> 00:37:43,010
These things are expensive.

687
00:37:43,010 --> 00:37:46,040
But again, part of the reason
is that they are very good

688
00:37:46,040 --> 00:37:48,220
real assets.

689
00:37:48,220 --> 00:37:49,760
They are inflation-proof.

690
00:37:49,760 --> 00:37:50,570
Gold goes up.

691
00:37:50,570 --> 00:37:54,890
Actually, right now, gold
is at $1,500, which

692
00:37:54,890 --> 00:37:55,905
is impressive actually.

693
00:37:55,905 --> 00:37:59,420
I wish I bought some
gold last year.

694
00:37:59,420 --> 00:38:02,600
But it's inflation-proof.

695
00:38:02,600 --> 00:38:05,350
It's very divisible.

696
00:38:05,350 --> 00:38:07,490
You can buy very, very
small amounts of it.

697
00:38:07,490 --> 00:38:09,290
You just buy a pair
of earrings.

698
00:38:09,290 --> 00:38:10,540
That's not a lot of money.

699
00:38:13,240 --> 00:38:15,030
And it's sort of nice
while you have it.

700
00:38:15,030 --> 00:38:16,680
You get some use value
out of it.

701
00:38:23,280 --> 00:38:27,460
And partly, gold is very
favored, because the quality

702
00:38:27,460 --> 00:38:29,960
of gold is cheap to verify.

703
00:38:29,960 --> 00:38:32,630
This is why gold was always
made into currency.

704
00:38:32,630 --> 00:38:37,660
And as a result, it's
very liquid.

705
00:38:37,660 --> 00:38:40,860
So if you have a gold jewelry,
you can go to the local

706
00:38:40,860 --> 00:38:43,250
jeweler, and he'll give
you a loan in two

707
00:38:43,250 --> 00:38:44,470
minutes against it.

708
00:38:44,470 --> 00:38:49,820
It's very easy to mortgage
basically, because its quality

709
00:38:49,820 --> 00:38:50,960
is very well known.

710
00:38:50,960 --> 00:38:53,190
If you try to mortgage your
house, people have to come and

711
00:38:53,190 --> 00:38:55,730
do an inspection, figure out
if your house is actually

712
00:38:55,730 --> 00:38:57,420
worth anything or not.

713
00:38:57,420 --> 00:38:58,640
Gold is gold.

714
00:38:58,640 --> 00:39:04,290
And so, you'll find in very poor
neighborhoods, in poor

715
00:39:04,290 --> 00:39:07,900
countries, a jeweler, and the
jeweler's actually somebody

716
00:39:07,900 --> 00:39:11,400
who's constantly giving
and taking money.

717
00:39:11,400 --> 00:39:14,190
It's very much a two-way
business.

718
00:39:14,190 --> 00:39:18,910
He's taking gold and giving
money, and giving gold and

719
00:39:18,910 --> 00:39:19,780
taking money.

720
00:39:19,780 --> 00:39:23,000
And it goes in both directions
all the time.

721
00:39:23,000 --> 00:39:27,260
And the reason why gold is
essentially a more attractive

722
00:39:27,260 --> 00:39:30,270
asset-- it has less use
value than a house.

723
00:39:30,270 --> 00:39:32,310
Obviously, a house--

724
00:39:32,310 --> 00:39:33,800
maybe not.

725
00:39:33,800 --> 00:39:36,910
I don't wear a lot
of gold, so.

726
00:39:36,910 --> 00:39:37,130
But

727
00:39:37,130 --> 00:39:40,160
I suspect it has less use value
than a house, but it has

728
00:39:40,160 --> 00:39:42,140
a lot more liquidity.

729
00:39:42,140 --> 00:39:43,680
It's extremely liquid.

730
00:39:43,680 --> 00:39:45,435
You can just take it to
the local jewelry,

731
00:39:45,435 --> 00:39:46,420
you get money back.

732
00:39:46,420 --> 00:39:49,480
So liquidity is extremely
important for the poor,

733
00:39:49,480 --> 00:39:53,680
because there are often
problems, and if somebody gets

734
00:39:53,680 --> 00:39:56,710
sick, you need money.

735
00:39:56,710 --> 00:40:00,320
The alternative to all of this
is financial savings of one

736
00:40:00,320 --> 00:40:02,560
form or another.

737
00:40:02,560 --> 00:40:05,550
Some form of financial
savings.

738
00:40:05,550 --> 00:40:11,860
Financial savings are
like assets in

739
00:40:11,860 --> 00:40:15,810
banks, or paper assets.

740
00:40:15,810 --> 00:40:18,950
Now these are different ways
to access paper assets.

741
00:40:18,950 --> 00:40:21,660
Even if you don't have a bank
account, these are ways to

742
00:40:21,660 --> 00:40:23,990
access paper assets.

743
00:40:23,990 --> 00:40:25,840
Does anybody know what
a money guard is?

744
00:40:35,730 --> 00:40:38,320
Maybe you're going to do your
readings a bit more carefully

745
00:40:38,320 --> 00:40:41,194
[INAUDIBLE].

746
00:40:41,194 --> 00:40:43,110
Yeah?

747
00:40:43,110 --> 00:40:45,510
AUDIENCE: If someone
else [INAUDIBLE]

748
00:40:45,510 --> 00:40:46,380
PROFESSOR: Yeah.

749
00:40:46,380 --> 00:40:50,670
A money guard is somebody in
your neighborhood who just

750
00:40:50,670 --> 00:40:52,622
accesses a bag.

751
00:40:52,622 --> 00:40:54,546
AUDIENCE: How does that differ
from a savings collector?

752
00:40:54,546 --> 00:40:56,810
Isn't that basically what
a savings collector--

753
00:40:56,810 --> 00:40:59,100
PROFESSOR: No, a savings
collector--

754
00:40:59,100 --> 00:41:00,230
how does it differ from?

755
00:41:00,230 --> 00:41:01,660
Anybody want to try
to answer that?

756
00:41:08,082 --> 00:41:10,480
AUDIENCE: Is that where they
actually visit your house on a

757
00:41:10,480 --> 00:41:13,610
regular basis, collect
small amounts?

758
00:41:13,610 --> 00:41:15,090
PROFESSOR: Savings collectors
typically

759
00:41:15,090 --> 00:41:16,770
take you to the bank.

760
00:41:16,770 --> 00:41:20,620
So the difference is a savings
guard is someone

761
00:41:20,620 --> 00:41:21,940
who keeps it herself.

762
00:41:21,940 --> 00:41:26,640
AUDIENCE: But I thought in the
reading the woman in the

763
00:41:26,640 --> 00:41:28,895
village, I didn't think she
was taken to the bank.

764
00:41:28,895 --> 00:41:29,960
They said--

765
00:41:29,960 --> 00:41:32,046
PROFESSOR: She was depositing
it somewhere else.

766
00:41:32,046 --> 00:41:33,504
AUDIENCE: And not
at her house?

767
00:41:33,504 --> 00:41:34,719
So really, the only
distinction is

768
00:41:34,719 --> 00:41:36,420
where they keep the--

769
00:41:36,420 --> 00:41:41,760
PROFESSOR: Yes, but I think
it's very different.

770
00:41:41,760 --> 00:41:43,210
The incentives are
very different.

771
00:41:43,210 --> 00:41:48,690
So imagine that you deposit all
your savings with me, and

772
00:41:48,690 --> 00:41:52,030
you have no documentary proof.

773
00:41:52,030 --> 00:41:56,780
I say, well, tough, I have
no idea where it went.

774
00:41:56,780 --> 00:41:58,150
What do you do?

775
00:41:58,150 --> 00:42:02,420
If somebody is putting it in
the bank, then the maximum

776
00:42:02,420 --> 00:42:07,710
they can steal from you
is that today's flow.

777
00:42:07,710 --> 00:42:10,540
So if you put it in the bank,
then I give it to them.

778
00:42:10,540 --> 00:42:14,360
They put it in the bank, they
get this stamp in a book that

779
00:42:14,360 --> 00:42:16,740
says that they put
it in a bank.

780
00:42:16,740 --> 00:42:21,640
I know that essentially all they
can steal is the amount

781
00:42:21,640 --> 00:42:25,750
they collected today, not be the
entire stock up to today.

782
00:42:25,750 --> 00:42:28,492
AUDIENCE: So when they put it
in the bank, aren't they

783
00:42:28,492 --> 00:42:31,490
[INAUDIBLE] in your
bank [INAUDIBLE]

784
00:42:31,490 --> 00:42:33,660
PROFESSOR: The could either
put it in your name, or

785
00:42:33,660 --> 00:42:36,630
sometimes what people do is
they have to put in--

786
00:42:36,630 --> 00:42:40,760
let's say 10 of us have to each
give you $1, and you have

787
00:42:40,760 --> 00:42:42,490
to put in $10 into the bank.

788
00:42:42,490 --> 00:42:44,830
So it's an easy check.

789
00:42:44,830 --> 00:42:48,155
AUDIENCE: But I mean, assuming
that, couldn't the savings

790
00:42:48,155 --> 00:42:48,630
collector--

791
00:42:48,630 --> 00:42:50,893
I mean, if the bank [INAUDIBLE]
their bank, can

792
00:42:50,893 --> 00:42:53,350
they still steal everything
that they [INAUDIBLE]?

793
00:42:53,350 --> 00:42:54,700
PROFESSOR: It's not
in their name.

794
00:42:54,700 --> 00:42:56,490
Typically, they can't
take it out.

795
00:42:56,490 --> 00:43:00,400
The accounts are such that
it's deposited into an

796
00:43:00,400 --> 00:43:02,870
account, and to take it
out, somebody else has

797
00:43:02,870 --> 00:43:05,000
to authorize it.

798
00:43:05,000 --> 00:43:08,980
So these are different designs,
because in some

799
00:43:08,980 --> 00:43:11,270
sense, if there's somebody in
your neighborhood who is very

800
00:43:11,270 --> 00:43:14,910
reliable, you can just
give them the money.

801
00:43:14,910 --> 00:43:19,970
Somebody very reliable, they
can save the money for you.

802
00:43:19,970 --> 00:43:23,300
But if you don't have somebody
very reliable in your

803
00:43:23,300 --> 00:43:26,690
neighborhood, then you often
use a savings collector.

804
00:43:26,690 --> 00:43:29,970
Savings collector is basically
someone who doesn't hold on to

805
00:43:29,970 --> 00:43:36,480
the money, and therefore is
much less able to run away

806
00:43:36,480 --> 00:43:37,730
with the money.

807
00:43:55,570 --> 00:43:56,820
What are self-help groups?

808
00:44:01,024 --> 00:44:02,518
Yeah?

809
00:44:02,518 --> 00:44:06,004
AUDIENCE: It's where a group
of people basically collect

810
00:44:06,004 --> 00:44:08,494
and they stay together
[INAUDIBLE]

811
00:44:08,494 --> 00:44:10,486
the process.

812
00:44:10,486 --> 00:44:12,990
It's [INAUDIBLE]

813
00:44:12,990 --> 00:44:13,640
PROFESSOR: Right.

814
00:44:13,640 --> 00:44:16,670
But a self-help group,
in a sense, is more

815
00:44:16,670 --> 00:44:18,610
flexible in a ROSCA.

816
00:44:18,610 --> 00:44:22,530
It basically takes the money.

817
00:44:22,530 --> 00:44:25,200
Whoever gives them money, they
take it, and then they lend it

818
00:44:25,200 --> 00:44:28,290
to other people within
the group.

819
00:44:28,290 --> 00:44:30,400
Or, sometimes what they
do is they just

820
00:44:30,400 --> 00:44:33,290
deposit it in a bank.

821
00:44:33,290 --> 00:44:35,460
That sort of turns them into
a savings collector.

822
00:44:35,460 --> 00:44:36,446
So I think the more--

823
00:44:36,446 --> 00:44:39,720
AUDIENCE: But isn't a ROSCA a
type of a self-help group?

824
00:44:39,720 --> 00:44:41,060
PROFESSOR: Yes, I guess
you're right.

825
00:44:41,060 --> 00:44:41,760
You're right.

826
00:44:41,760 --> 00:44:45,060
ROSCA is a type of self-help
group, but a lot of self-help

827
00:44:45,060 --> 00:44:48,650
groups are much more flexible
than a ROSCA.

828
00:44:48,650 --> 00:44:53,860
They allow you to the option
of putting the money into--

829
00:44:53,860 --> 00:45:01,320
I put whatever, either $2,
$1, et cetera, into it.

830
00:45:01,320 --> 00:45:05,630
So the trade-off between a ROSCA
and a self-help group is

831
00:45:05,630 --> 00:45:08,520
that as self-help group--
particularly the ones that

832
00:45:08,520 --> 00:45:09,510
work well--

833
00:45:09,510 --> 00:45:11,580
have to have a good
accountant.

834
00:45:11,580 --> 00:45:13,100
A ROSCA is very simple.

835
00:45:13,100 --> 00:45:15,220
We don't need to have
any accounting.

836
00:45:15,220 --> 00:45:16,440
We know there's $10.

837
00:45:16,440 --> 00:45:18,440
We put it in each.

838
00:45:18,440 --> 00:45:19,480
There's $50.

839
00:45:19,480 --> 00:45:21,070
Somebody gets it.

840
00:45:21,070 --> 00:45:23,050
Requires zero accounting,
right?

841
00:45:23,050 --> 00:45:26,550
A ROSCA requires zero
accounting.

842
00:45:26,550 --> 00:45:28,910
Self-help group requires some
accounting, and there's some

843
00:45:28,910 --> 00:45:33,420
evidence that when there's no
one that can do accounting,

844
00:45:33,420 --> 00:45:34,170
they collapse.

845
00:45:34,170 --> 00:45:36,550
Because you basically need to
make sure, I'm making a

846
00:45:36,550 --> 00:45:37,570
flexible deposit.

847
00:45:37,570 --> 00:45:44,300
I'm putting $3 today, you put
in $5, and she borrows $7.

848
00:45:44,300 --> 00:45:47,710
So somebody has to keep track
of all those numbers.

849
00:45:47,710 --> 00:45:51,710
And that's much harder if you're
not really comfortable

850
00:45:51,710 --> 00:45:52,980
with reading and writing.

851
00:45:52,980 --> 00:45:58,580
So in a sense, a ROSCA is a
very specific, very simple

852
00:45:58,580 --> 00:46:01,410
form of a self-help group, and
it's simplicity is a huge

853
00:46:01,410 --> 00:46:04,570
advantage, because it's
something that

854
00:46:04,570 --> 00:46:07,420
makes it quite clear.

855
00:46:07,420 --> 00:46:10,260
Nobody needs to know accounting
to run a ROSCA,

856
00:46:10,260 --> 00:46:13,080
whereas to run a self-help
group, typically you need to

857
00:46:13,080 --> 00:46:14,360
know some accounting.

858
00:46:14,360 --> 00:46:14,650
Yeah?

859
00:46:14,650 --> 00:46:17,112
AUDIENCE: [INAUDIBLE]

860
00:46:17,112 --> 00:46:19,920
self-help group without
the same [INAUDIBLE]

861
00:46:19,920 --> 00:46:21,330
ASCA [INAUDIBLE]?

862
00:46:21,330 --> 00:46:21,900
PROFESSOR: Yeah.

863
00:46:21,900 --> 00:46:26,150
An ASCA is a broader category.

864
00:46:26,150 --> 00:46:27,760
Yeah.

865
00:46:27,760 --> 00:46:33,110
Self-help group is an example of
something where there is--

866
00:46:33,110 --> 00:46:35,360
so the trade-off between--

867
00:46:35,360 --> 00:46:37,525
so I already answered
the question.

868
00:46:41,460 --> 00:46:45,250
A savings collector typically
charges money for it.

869
00:46:45,250 --> 00:46:47,700
It's somebody who comes
into your place,

870
00:46:47,700 --> 00:46:48,850
collects the money.

871
00:46:48,850 --> 00:46:50,380
She keeps accounts for it.

872
00:46:50,380 --> 00:46:52,140
She's a professional.

873
00:46:52,140 --> 00:46:53,620
She charges money for it.

874
00:46:53,620 --> 00:47:01,380
People to pay up to 5% per
month, negative interest to

875
00:47:01,380 --> 00:47:02,160
get these things.

876
00:47:02,160 --> 00:47:03,830
So huge.

877
00:47:03,830 --> 00:47:05,370
So you might get might
actually pay

878
00:47:05,370 --> 00:47:07,880
someone quite a lot.

879
00:47:07,880 --> 00:47:11,730
Typically, a self-help group is
one where you don't have to

880
00:47:11,730 --> 00:47:13,090
pay anybody.

881
00:47:13,090 --> 00:47:19,930
It's like a ROSCA, where the
loss is relatively limited.

882
00:47:19,930 --> 00:47:24,150
The constraint is accounting.

883
00:47:24,150 --> 00:47:27,720
So saving collector
is someone who can

884
00:47:27,720 --> 00:47:30,450
typically keep good accounts.

885
00:47:30,450 --> 00:47:32,290
She, or even a money
guard, is someone

886
00:47:32,290 --> 00:47:33,370
who keeps good accounts.

887
00:47:33,370 --> 00:47:35,800
You go and give her the money,
she can show a book where she

888
00:47:35,800 --> 00:47:39,330
keeps exact records of
how much you put it.

889
00:47:39,330 --> 00:47:42,080
It's not easy to find someone in
your neighborhood if you're

890
00:47:42,080 --> 00:47:44,490
poor who has good accounting
skills.

891
00:47:44,490 --> 00:47:50,205
Whereas if you think a ROSCA,
for example, is beautiful in

892
00:47:50,205 --> 00:47:52,630
that it doesn't require
a lot of accounting.

893
00:47:55,210 --> 00:47:59,210
So the trade-off between these
come on how much accounting

894
00:47:59,210 --> 00:47:59,920
they require.

895
00:47:59,920 --> 00:48:02,085
So self-help groups are
intensive in accounting.

896
00:48:02,085 --> 00:48:06,920
They require that somebody keeps
track of who's putting

897
00:48:06,920 --> 00:48:08,820
in money, who's taking
out money.

898
00:48:08,820 --> 00:48:16,260
So if that's not being done
by a professional, then it

899
00:48:16,260 --> 00:48:18,550
depends very much on the
quality of the group.

900
00:48:18,550 --> 00:48:22,460
If there's no one in the group
that can do the account well,

901
00:48:22,460 --> 00:48:24,890
the group will collapse.

902
00:48:24,890 --> 00:48:27,760
If you compare that with like,
say, a savings collectors--

903
00:48:27,760 --> 00:48:29,940
saving collectors typically
are someone who is good at

904
00:48:29,940 --> 00:48:33,870
accounting, and therefore can be
relied on to do that job on

905
00:48:33,870 --> 00:48:34,570
their own--

906
00:48:34,570 --> 00:48:35,750
gets paid for it.

907
00:48:35,750 --> 00:48:38,800
So that sort of the trade-off
between these things, is that

908
00:48:38,800 --> 00:48:42,150
if you have someone around who
is a good accountant who is

909
00:48:42,150 --> 00:48:48,955
part of your group, you can
have a self-help group.

910
00:48:51,980 --> 00:48:54,200
If you're willing to pay
someone a lot to do the

911
00:48:54,200 --> 00:48:57,530
accounting for you, you can
have a savings collector.

912
00:48:57,530 --> 00:49:01,580
And if you have neither,
you can have a ROSCA.

913
00:49:01,580 --> 00:49:03,670
So ROSCA is the simplest
product.

914
00:49:03,670 --> 00:49:06,140
It's the least flexible
product.

915
00:49:06,140 --> 00:49:10,700
But it's the one that doesn't
require any skilled person to

916
00:49:10,700 --> 00:49:12,010
do the job for you.

917
00:49:12,010 --> 00:49:15,110
So that's the big trade off
between these things is that

918
00:49:15,110 --> 00:49:17,930
some of them rely on having
skilled people around to do

919
00:49:17,930 --> 00:49:21,530
the job, other don't.

920
00:49:21,530 --> 00:49:27,160
Microcredit is another possible
savings instrument.

921
00:49:27,160 --> 00:49:28,230
How could that be?

922
00:49:28,230 --> 00:49:30,190
How could microcredit be
a savings instrument?

923
00:49:35,190 --> 00:49:37,690
AUDIENCE: It's like
[INAUDIBLE]

924
00:49:37,690 --> 00:49:38,940
savings [INAUDIBLE]

925
00:49:45,190 --> 00:49:46,690
your fixed savings
[INAUDIBLE].

926
00:49:46,690 --> 00:49:47,190
PROFESSOR: Right.

927
00:49:47,190 --> 00:49:50,630
So in a sense, it's a funny
way to save, but a lot of

928
00:49:50,630 --> 00:49:51,860
people to save that way.

929
00:49:51,860 --> 00:49:54,310
So you want a television.

930
00:49:54,310 --> 00:49:56,430
You can either save--
let's say a color

931
00:49:56,430 --> 00:49:58,160
television costs $200.

932
00:49:58,160 --> 00:50:02,250
You can save $2 a week
for 100 weeks.

933
00:50:02,250 --> 00:50:04,060
That's very difficult.

934
00:50:04,060 --> 00:50:08,050
$2 a week, you forget, you
spend some of the money.

935
00:50:08,050 --> 00:50:10,070
You're keeping a lot
of money at home.

936
00:50:10,070 --> 00:50:13,290
The alternative is somebody
gives you $200.

937
00:50:13,290 --> 00:50:16,970
You buy the television, and then
you pay them $2 a week,

938
00:50:16,970 --> 00:50:18,500
but then they charge
you some interest.

939
00:50:18,500 --> 00:50:21,155
You pay $2.50 a week.

940
00:50:21,155 --> 00:50:23,800
But because you're paying $2.50
a week, they're willing

941
00:50:23,800 --> 00:50:26,280
to give you the money early.

942
00:50:26,280 --> 00:50:29,630
And then it is their job
to make sure you pay.

943
00:50:29,630 --> 00:50:31,890
They come and pester you
if you don't pay.

944
00:50:31,890 --> 00:50:36,602
So you transfer the burden of
repayment, and in instead you

945
00:50:36,602 --> 00:50:39,830
having to do the saving,
somebody else forces you to do

946
00:50:39,830 --> 00:50:41,550
the saving.

947
00:50:41,550 --> 00:50:43,570
It's expensive.

948
00:50:43,570 --> 00:50:49,550
You're paying 24% a year
to get save, basically.

949
00:50:49,550 --> 00:50:57,630
It's like giving up 24% of your
money, but it has this

950
00:50:57,630 --> 00:51:02,770
advantage that you don't
have to wait.

951
00:51:02,770 --> 00:51:05,340
OK, so some little math.

952
00:51:08,600 --> 00:51:14,965
So all of this we've
been discussing.

953
00:51:19,950 --> 00:51:23,110
We've been sort of going back
and forth, and saying, well,

954
00:51:23,110 --> 00:51:25,960
it's difficult for
the poor to save.

955
00:51:25,960 --> 00:51:28,940
Maybe they don't want to save.

956
00:51:28,940 --> 00:51:31,560
Maybe there's some good reason
why they don't save.

957
00:51:31,560 --> 00:51:35,520
So we haven't shown any smoking
gun that there really

958
00:51:35,520 --> 00:51:37,720
is an efficiency in savings.

959
00:51:37,720 --> 00:51:39,850
So I wanted to give you an
example of how you would make

960
00:51:39,850 --> 00:51:44,040
the reason that is actually
people actually under-save.

961
00:51:44,040 --> 00:51:47,470
So how would you make the case
that people under-save?

962
00:51:47,470 --> 00:51:51,310
So to me this case, we'll have
to do a little bit of algebra.

963
00:51:51,310 --> 00:51:55,550
So let's think about
it carefully, OK?

964
00:51:55,550 --> 00:51:58,990
The first line in that
slide is what's

965
00:51:58,990 --> 00:52:00,250
called the Euler equation.

966
00:52:00,250 --> 00:52:06,650
The Euler equation is a
condition for savings

967
00:52:06,650 --> 00:52:09,500
optimality over time.

968
00:52:09,500 --> 00:52:14,660
What it says is the marginal
utility of consumption today--

969
00:52:14,660 --> 00:52:17,330
how much consumption is
worth to you today--

970
00:52:17,330 --> 00:52:18,810
should be equal to--

971
00:52:21,390 --> 00:52:25,230
so something times
[? marginal ?]

972
00:52:25,230 --> 00:52:26,730
consumption tomorrow.

973
00:52:26,730 --> 00:52:28,250
What's the question
being asked?

974
00:52:28,250 --> 00:52:31,972
It's asking the question,
imagine I saved one more

975
00:52:31,972 --> 00:52:33,222
dollar today.

976
00:52:35,600 --> 00:52:37,470
What would it be
worth tomorrow?

977
00:52:37,470 --> 00:52:40,360
Well, one thing that's going
to work is [INAUDIBLE].

978
00:52:40,360 --> 00:52:42,720
So it's going to be
worth 1 plus r.

979
00:52:42,720 --> 00:52:46,930
If the interest is r, I'm going
to get 1 plus r for it.

980
00:52:46,930 --> 00:52:48,360
Yeah?

981
00:52:48,360 --> 00:52:53,590
But then, utility tomorrow isn't
worth as much as it's

982
00:52:53,590 --> 00:52:54,460
work today.

983
00:52:54,460 --> 00:52:57,270
It's like tomorrow
is in the future.

984
00:52:57,270 --> 00:52:59,080
I want it now.

985
00:52:59,080 --> 00:53:00,100
So that's delta.

986
00:53:00,100 --> 00:53:02,170
Delta is a number less than 1.

987
00:53:02,170 --> 00:53:05,470
So it says that utility tomorrow
is worth only a

988
00:53:05,470 --> 00:53:08,350
fraction delta of
utility today.

989
00:53:08,350 --> 00:53:10,160
And then the last is
[? marginal ?]

990
00:53:10,160 --> 00:53:12,550
consumption tomorrow.

991
00:53:12,550 --> 00:53:17,200
So basically, imagine that the
right-hand side of that is

992
00:53:17,200 --> 00:53:21,480
less than the left-hand
side, OK?

993
00:53:21,480 --> 00:53:22,820
Then, what should I do?

994
00:53:22,820 --> 00:53:25,330
Well, I should [INAUDIBLE]
says the [? module ?]

995
00:53:25,330 --> 00:53:28,230
utility today is higher
than what it

996
00:53:28,230 --> 00:53:29,480
will be worth tomorrow.

997
00:53:33,080 --> 00:53:36,690
Or actually, let's do it the
other way If [? module ?]

998
00:53:36,690 --> 00:53:44,140
utility today is less than delta
times 1 plus r times U

999
00:53:44,140 --> 00:53:49,410
prime [? c ?] plus 1, that means
that $1 today saved will

1000
00:53:49,410 --> 00:53:53,700
give me more utility than I
would get it today, right?

1001
00:53:53,700 --> 00:53:57,960
Today I will get $1 will give
me U prime [? c ?].

1002
00:53:57,960 --> 00:54:00,750
If I saved it, I would
get 1 plus r.

1003
00:54:00,750 --> 00:54:02,870
That's going to be worth
delta U prime [? c ?]

1004
00:54:02,870 --> 00:54:04,040
times 1 plus r.

1005
00:54:04,040 --> 00:54:08,080
So basically, I'm getting more
utility by putting money into

1006
00:54:08,080 --> 00:54:09,330
the future.

1007
00:54:13,650 --> 00:54:15,920
So that's the standard condition
for consumption

1008
00:54:15,920 --> 00:54:17,170
optimality.

1009
00:54:19,620 --> 00:54:22,560
The next line says, imagine the
utility function that's a

1010
00:54:22,560 --> 00:54:26,460
standard form of the utility
function is that it has that

1011
00:54:26,460 --> 00:54:28,580
form, consumption
to the power of

1012
00:54:28,580 --> 00:54:31,060
something divided by something.

1013
00:54:31,060 --> 00:54:33,805
It's a fairly standard form
of utility function.

1014
00:54:37,420 --> 00:54:40,610
Actually, you should notice
that even when sigma is

1015
00:54:40,610 --> 00:54:45,180
greater than one, that works.

1016
00:54:45,180 --> 00:54:45,450
Why?

1017
00:54:45,450 --> 00:54:52,240
Because c to the [? r1 ?] minus
sigma is then decreasing

1018
00:54:52,240 --> 00:54:54,990
in c, but is divided by
a negative number.

1019
00:54:54,990 --> 00:54:56,610
So it's again increasing by c.

1020
00:54:56,610 --> 00:55:00,120
So it works even for that.

1021
00:55:00,120 --> 00:55:03,640
So if I did that, then I
substituted U of c into both

1022
00:55:03,640 --> 00:55:07,610
sides I would get that the
question in the third line.

1023
00:55:07,610 --> 00:55:14,620
The third lines comes from the
second line, U of c equals c

1024
00:55:14,620 --> 00:55:19,425
to the power 1 minus sigma
divided by 1 minus sigma, U

1025
00:55:19,425 --> 00:55:22,150
prime is then what?

1026
00:55:22,150 --> 00:55:23,400
What's U prime?

1027
00:55:25,990 --> 00:55:26,890
Take the derivative.

1028
00:55:26,890 --> 00:55:27,820
What do you get?

1029
00:55:27,820 --> 00:55:28,595
It's MIT.

1030
00:55:28,595 --> 00:55:31,570
You know the answer.

1031
00:55:31,570 --> 00:55:32,820
Come on.

1032
00:55:36,040 --> 00:55:38,220
All too superior to answer?

1033
00:55:38,220 --> 00:55:40,040
You all feel like, how
could you ask me

1034
00:55:40,040 --> 00:55:41,300
such an inane question?

1035
00:55:41,300 --> 00:55:42,280
Tell me what it is.

1036
00:55:42,280 --> 00:55:44,280
AUDIENCE: c to the
negative sigma.

1037
00:55:44,280 --> 00:55:46,830
PROFESSOR: Yeah, c to the
negative sigma is U prime.

1038
00:55:46,830 --> 00:55:49,080
I put that into the
first equation, I

1039
00:55:49,080 --> 00:55:50,410
get c to the power.

1040
00:55:50,410 --> 00:55:57,795
And then you can see that I'm
gonna get the third line out

1041
00:55:57,795 --> 00:56:01,930
of that if I substitute U prime
into that equation.

1042
00:56:01,930 --> 00:56:06,280
And then I invert that to
get the fourth line.

1043
00:56:06,280 --> 00:56:09,440
Now reasonable values
of delta, standard

1044
00:56:09,440 --> 00:56:14,440
values are, like, 0.9.

1045
00:56:14,440 --> 00:56:17,410
People use that number
0.9, 0.95.

1046
00:56:17,410 --> 00:56:18,680
I'm taking a low number.

1047
00:56:18,680 --> 00:56:22,140
You'll see that a low number
is going to make it less.

1048
00:56:24,860 --> 00:56:26,810
If I do the higher number,
then my case

1049
00:56:26,810 --> 00:56:29,060
will be even stronger.

1050
00:56:29,060 --> 00:56:32,230
Sigma, people think it's a
number like two, three, four.

1051
00:56:32,230 --> 00:56:35,980
That's the kind of number
of people usually find.

1052
00:56:35,980 --> 00:56:38,290
Sigma is a measure of risk
aversion, and when they

1053
00:56:38,290 --> 00:56:40,620
measure that, they find
something like that.

1054
00:56:40,620 --> 00:56:42,590
So take those numbers.

1055
00:56:42,590 --> 00:56:44,600
Trust me, they are
standard numbers.

1056
00:56:44,600 --> 00:56:47,430
And then the last thing
is, what is r?

1057
00:56:47,430 --> 00:56:51,520
And I want to say that we looked
at data last time where

1058
00:56:51,520 --> 00:56:58,450
it said that people were
borrowing at 80% a year.

1059
00:56:58,450 --> 00:57:02,760
If you're borrowing at 80%
a year, you're an asset.

1060
00:57:02,760 --> 00:57:07,400
That's exactly like having an
asset which pays 80% a year.

1061
00:57:07,400 --> 00:57:15,570
Because if I borrowed $1 less,
I would pay $1.80 less on it.

1062
00:57:15,570 --> 00:57:19,570
So anybody who had an asset
which has an interest rate of

1063
00:57:19,570 --> 00:57:22,870
80% is sitting on an
asset with an 80%

1064
00:57:22,870 --> 00:57:24,760
interest rate on it.

1065
00:57:24,760 --> 00:57:26,000
It's exactly the same thing.

1066
00:57:26,000 --> 00:57:29,830
I just borrow $1 less.

1067
00:57:29,830 --> 00:57:34,360
So anybody who has a loan which
is paying 80% is exactly

1068
00:57:34,360 --> 00:57:37,470
like having an asset
which is 80% on it.

1069
00:57:37,470 --> 00:57:40,940
So now, I plug that in.

1070
00:57:40,940 --> 00:57:44,190
So think of somebody who has a
loan, who is borrowing at 80%.

1071
00:57:44,190 --> 00:57:48,600
67% of the people-- yeah, we saw
that actually last time,

1072
00:57:48,600 --> 00:57:50,700
were borrowing, had loans,
and the average

1073
00:57:50,700 --> 00:57:53,710
interest rate was 80%.

1074
00:57:53,710 --> 00:57:55,740
So this is not an unreasonable,
these numbers.

1075
00:57:55,740 --> 00:58:01,750
So let's take those numbers,
plug them in, and you get

1076
00:58:01,750 --> 00:58:05,740
consumption growth will
be 17% per year.

1077
00:58:08,980 --> 00:58:10,260
That's a huge growth rate.

1078
00:58:10,260 --> 00:58:15,250
That I would say poverty would
vanish in five years, because

1079
00:58:15,250 --> 00:58:19,490
17% per year is a very,
very fast growth rate.

1080
00:58:19,490 --> 00:58:21,110
What's the logic here?

1081
00:58:21,110 --> 00:58:26,080
Say, these guys have an
investment opportunity which

1082
00:58:26,080 --> 00:58:27,850
pays 80% a year.

1083
00:58:27,850 --> 00:58:31,080
They're not using it.

1084
00:58:31,080 --> 00:58:33,460
So there must be, only reason
you don't use an investment

1085
00:58:33,460 --> 00:58:37,890
opportunity that's paying that
much is that you're going to

1086
00:58:37,890 --> 00:58:41,570
be much richer in the future,
so you don't want to invest.

1087
00:58:41,570 --> 00:58:43,340
Otherwise, you should use
this opportunity.

1088
00:58:43,340 --> 00:58:45,750
So people who are forward
looking, and they have an

1089
00:58:45,750 --> 00:58:49,030
investment opportunity which
paid them 80% a year, they

1090
00:58:49,030 --> 00:58:53,140
should be pumping all their
money into the future.

1091
00:58:53,140 --> 00:58:56,280
80% a year is a great investment
opportunity.

1092
00:58:56,280 --> 00:58:58,980
Only people who will do it are
people who are getting rich

1093
00:58:58,980 --> 00:59:02,610
very fast, because if you're
getting rich very fast, then

1094
00:59:02,610 --> 00:59:06,330
you don't want consumption
in the future.

1095
00:59:06,330 --> 00:59:16,010
So that says that if we take
assume people are rational,

1096
00:59:16,010 --> 00:59:19,370
then the fact that people are
persistently borrowing-- and

1097
00:59:19,370 --> 00:59:22,090
I'll show you this
in a minute.

1098
00:59:22,090 --> 00:59:24,260
I'm not making this
example up.

1099
00:59:24,260 --> 00:59:27,620
So I'll show you the problem
in a minute.

1100
00:59:27,620 --> 00:59:31,450
The fact that people are
persistently borrowing at 80%

1101
00:59:31,450 --> 00:59:39,240
a year means that they must
be getting rich very fast.

1102
00:59:39,240 --> 00:59:43,470
But in other words, since
they're not getting rich very

1103
00:59:43,470 --> 00:59:46,620
fast, the poor seem
to remain poor.

1104
00:59:46,620 --> 00:59:49,210
Something is wrong with this
calculation, so we're going to

1105
00:59:49,210 --> 00:59:51,670
try to figure out what's
wrong with it.

1106
00:59:51,670 --> 00:59:55,410
But if I take the model
seriously, and say, this is

1107
00:59:55,410 --> 00:59:58,620
how people save, it is clear
that this implication is that

1108
00:59:58,620 --> 01:00:01,580
the poverty should be the
vanishing phenomenon, because

1109
01:00:01,580 --> 01:00:05,310
basically these guys have such
a wonderful investment

1110
01:00:05,310 --> 01:00:06,180
opportunity.

1111
01:00:06,180 --> 01:00:12,050
You an just save at 80% a year
and get a lot richer.

1112
01:00:12,050 --> 01:00:13,350
So that's--

1113
01:00:13,350 --> 01:00:14,237
yeah?

1114
01:00:14,237 --> 01:00:17,870
AUDIENCE: What's the logic to
why sigma is equal to 3?

1115
01:00:17,870 --> 01:00:19,120
PROFESSOR: Sigma
is equal to 3?

1116
01:00:24,060 --> 01:00:28,460
So sigma is the coefficient
of risk aversion.

1117
01:00:28,460 --> 01:00:32,550
If you look at the utility
function, and you look at--

1118
01:00:32,550 --> 01:00:34,310
given that utility function,
how would

1119
01:00:34,310 --> 01:00:36,660
people react to risk?

1120
01:00:36,660 --> 01:00:37,870
That will be measured
by sigma.

1121
01:00:37,870 --> 01:00:39,590
So you can actually
look at how people

1122
01:00:39,590 --> 01:00:41,500
actually react to risks.

1123
01:00:41,500 --> 01:00:49,150
I offer you $10 for sure, or
$4 with probability 1/3 and

1124
01:00:49,150 --> 01:00:53,610
$15 with probability 2/3, and
I see whether you want then

1125
01:00:53,610 --> 01:00:54,550
bet are not.

1126
01:00:54,550 --> 01:00:57,130
And from that, people back
out of risk aversion.

1127
01:00:57,130 --> 01:00:58,740
And to do that, they get
a number like 3.

1128
01:01:03,300 --> 01:01:06,580
So this is sort of a hint
at what's going on.

1129
01:01:06,580 --> 01:01:13,150
And I want to show you kind of
something more worrying.

1130
01:01:13,150 --> 01:01:18,860
So here's an experiment which is
kind of a different way of

1131
01:01:18,860 --> 01:01:20,930
getting at the same point.

1132
01:01:20,930 --> 01:01:22,860
I showed it to you kind
of theoretically.

1133
01:01:22,860 --> 01:01:25,120
Now I want to show it to
you as an experiment.

1134
01:01:25,120 --> 01:01:25,970
Here's an experiment.

1135
01:01:25,970 --> 01:01:28,700
It's an experiment with fruit
vendors and vegetable vendors

1136
01:01:28,700 --> 01:01:29,980
in India and the Philippines.

1137
01:01:29,980 --> 01:01:32,780
Two separate experiments
doing identical things.

1138
01:01:37,000 --> 01:01:39,920
So fruit vending is a very,
very simple production

1139
01:01:39,920 --> 01:01:44,110
function, OK?

1140
01:01:44,110 --> 01:01:47,060
Very, very simple, meaning you
buy fruits in the morning, you

1141
01:01:47,060 --> 01:01:53,500
sell all day, you get money in
the evening, you go home.

1142
01:01:53,500 --> 01:01:57,710
Next morning, you come back,
and you buy fruit again.

1143
01:01:57,710 --> 01:01:59,050
You sell it.

1144
01:01:59,050 --> 01:02:04,560
It's very predictable, very
continuous, daily production.

1145
01:02:04,560 --> 01:02:06,920
Not very high risk, actually.

1146
01:02:06,920 --> 01:02:10,250
It's mostly you know what you
can sell, you can see the

1147
01:02:10,250 --> 01:02:12,770
price, et cetera.

1148
01:02:12,770 --> 01:02:18,800
So here's a table which kind
of summarizes a bit about

1149
01:02:18,800 --> 01:02:20,930
these people.

1150
01:02:20,930 --> 01:02:25,880
So most of these people make one
trip a day to the market.

1151
01:02:25,880 --> 01:02:29,300
This one's for the Indian
experiment.

1152
01:02:29,300 --> 01:02:39,850
They buy fruits worth about
1,000 rupees in the morning.

1153
01:02:39,850 --> 01:02:42,780
They sell it, and they get
profits of over 100 rupees.

1154
01:02:42,780 --> 01:02:46,600
That's the 10% profits
during the day.

1155
01:02:46,600 --> 01:02:50,200
Not bad, actually.

1156
01:02:50,200 --> 01:02:53,770
How do they run the business?

1157
01:02:53,770 --> 01:02:57,160
70% take a loan every day.

1158
01:03:03,310 --> 01:03:04,310
Every month--

1159
01:03:04,310 --> 01:03:06,860
26 days-- somebody
takes a loan.

1160
01:03:06,860 --> 01:03:10,530
So this is to buy fruit.

1161
01:03:10,530 --> 01:03:16,100
The interest rate on the
loan per day is 5%.

1162
01:03:16,100 --> 01:03:18,850
Basically, the way it works is
you go to the fruit seller,

1163
01:03:18,850 --> 01:03:22,470
and he says, you want to
buy cash or credit?

1164
01:03:22,470 --> 01:03:25,350
Cash price is this, credit
price is that.

1165
01:03:25,350 --> 01:03:26,600
Which one's higher?

1166
01:03:29,382 --> 01:03:29,840
AUDIENCE: Credit.

1167
01:03:29,840 --> 01:03:32,220
PROFESSOR: Credit price
is higher, right?

1168
01:03:32,220 --> 01:03:34,810
Basically, you get the same
fruit, so you pay more if you

1169
01:03:34,810 --> 01:03:38,330
buy it in credit.

1170
01:03:38,330 --> 01:03:40,395
But the advantage of credit is
you don't have to pay for it

1171
01:03:40,395 --> 01:03:42,040
in the morning, you paid
it in the night.

1172
01:03:42,040 --> 01:03:44,620
You go back in the evening,
and you pay for it.

1173
01:03:44,620 --> 01:03:45,870
5% per day.

1174
01:03:57,150 --> 01:04:00,150
So most of these people
have been in--

1175
01:04:00,150 --> 01:04:02,770
no, I'm missing one table.

1176
01:04:02,770 --> 01:04:06,260
Most of these people have been
in business for nine years.

1177
01:04:06,260 --> 01:04:07,960
They do this day after day.

1178
01:04:07,960 --> 01:04:10,260
Nine years they've
been in business.

1179
01:04:10,260 --> 01:04:17,450
Every day, they borrow at 5%,
meaning that they come in the

1180
01:04:17,450 --> 01:04:21,700
morning, they take, let's say,
1,000 rupees worth of fruits,

1181
01:04:21,700 --> 01:04:24,650
but they actually get 950 rupees
worth of fruits, and

1182
01:04:24,650 --> 01:04:27,590
then they go sell it.

1183
01:04:27,590 --> 01:04:31,650
They say this is 1,000 rupees,
but in fact get 950 rupees at

1184
01:04:31,650 --> 01:04:34,070
first first, and then
go sell it.

1185
01:04:34,070 --> 01:04:37,760
Remember that daily income
is about 100 rupees.

1186
01:04:37,760 --> 01:04:40,410
They pay 50 rupees out
of 1,000 as interest.

1187
01:04:40,410 --> 01:04:44,900
So if they didn't pay interest,
they're earnings

1188
01:04:44,900 --> 01:04:47,590
every day would be 50% higher.

1189
01:04:47,590 --> 01:04:51,570
It would go from 100
to 150, roughly.

1190
01:04:51,570 --> 01:04:53,920
So that's a huge
interest cost.

1191
01:04:53,920 --> 01:04:59,460
Now here's a way to think about
5% a day, what it means.

1192
01:05:03,370 --> 01:05:05,075
Suppose I took the following
strategy.

1193
01:05:09,930 --> 01:05:14,090
Drink one less couple
of tea every day.

1194
01:05:14,090 --> 01:05:17,550
A cup of tea costs,
in this same

1195
01:05:17,550 --> 01:05:19,310
currency, 2 and 1/2 rupees.

1196
01:05:19,310 --> 01:05:24,870
So let me take one less cup
every day, and I reinvest that

1197
01:05:24,870 --> 01:05:25,900
in the business.

1198
01:05:25,900 --> 01:05:31,740
So what I do is I drink one less
cup of tea, so I borrow.

1199
01:05:31,740 --> 01:05:35,620
2 and 1/2 rupees less today.

1200
01:05:35,620 --> 01:05:38,240
That means I don't pay interest
on the 2 and 1/2

1201
01:05:38,240 --> 01:05:40,250
rupees, so I get a little
bit extra money.

1202
01:05:40,250 --> 01:05:41,520
I reinvest that.

1203
01:05:41,520 --> 01:05:43,410
I do that for 30 days.

1204
01:05:43,410 --> 01:05:51,425
Every day, I drink one less
cup of tea for 30 days.

1205
01:05:54,520 --> 01:05:56,290
At 5% a day--

1206
01:05:56,290 --> 01:05:57,070
you should do this
calculation.

1207
01:05:57,070 --> 01:05:58,370
It's stunning.

1208
01:05:58,370 --> 01:06:01,310
Compound interest really
is impressive.

1209
01:06:01,310 --> 01:06:09,160
So once you do this for 30 days,
you would have doubled

1210
01:06:09,160 --> 01:06:11,970
your capital.

1211
01:06:11,970 --> 01:06:15,530
So these women could double
their capital by simply having

1212
01:06:15,530 --> 01:06:21,560
one less cup of tea every
day for 30 days.

1213
01:06:21,560 --> 01:06:23,455
They've been in this business
for nine years.

1214
01:06:27,900 --> 01:06:30,850
Their earnings would be 50%
more if they did this.

1215
01:06:34,400 --> 01:06:37,470
They could pay down their entire
1,000 rupees debt by

1216
01:06:37,470 --> 01:06:39,120
doing that for 30
days, basically.

1217
01:06:42,890 --> 01:06:51,090
So your 1,000 rupees are
essentially just the price of

1218
01:06:51,090 --> 01:06:52,430
30 days worth of tea.

1219
01:06:59,500 --> 01:07:04,010
So that's sort of stunning,
if you think about it.

1220
01:07:04,010 --> 01:07:07,970
So this goes back to the same
point I was trying to make,

1221
01:07:07,970 --> 01:07:10,160
which is that there's some
reason to get worried that

1222
01:07:10,160 --> 01:07:13,030
these people are somehow--

1223
01:07:13,030 --> 01:07:15,280
they're not managing.

1224
01:07:15,280 --> 01:07:18,050
What they're trying to do in
this experiment is they offer

1225
01:07:18,050 --> 01:07:19,250
two treatments.

1226
01:07:19,250 --> 01:07:24,290
They basically think that two
possible ways in which we

1227
01:07:24,290 --> 01:07:29,510
could-- maybe one possibility is
that these people are now--

1228
01:07:29,510 --> 01:07:33,900
they need 1,000 rupees to
survive, 100 rupees to eat

1229
01:07:33,900 --> 01:07:37,780
every day, so they can't save.

1230
01:07:37,780 --> 01:07:41,130
And so they're stuck.

1231
01:07:41,130 --> 01:07:45,410
So it's not clear why
they couldn't have

1232
01:07:45,410 --> 01:07:46,665
one cup of tea less.

1233
01:07:49,210 --> 01:07:55,350
So they say, well, maybe if
we just pay their debt.

1234
01:07:55,350 --> 01:07:57,110
So let's say they owe
1,000 rupees, we'll

1235
01:07:57,110 --> 01:08:02,010
give them 1,000 rupees.

1236
01:08:02,010 --> 01:08:04,410
Imagine that there's some reason
they can't get out it.

1237
01:08:04,410 --> 01:08:09,940
Do they stay out of debt if
I pay them 1,000 rupees?

1238
01:08:09,940 --> 01:08:14,440
Second possibility is that I
teach them what compound

1239
01:08:14,440 --> 01:08:16,359
interest is.

1240
01:08:16,359 --> 01:08:22,080
I explain to them that if you
just did this, you could save

1241
01:08:22,080 --> 01:08:24,470
yourself a lot of money.

1242
01:08:24,470 --> 01:08:25,790
So there are two treatments.

1243
01:08:25,790 --> 01:08:29,579
They're experimental, so some of
them get one, some of them

1244
01:08:29,579 --> 01:08:33,069
get the other, some
of them get both.

1245
01:08:33,069 --> 01:08:35,029
So do you see what the
experiment is?

1246
01:08:35,029 --> 01:08:38,870
I either go to someone and say,
you owe the food seller

1247
01:08:38,870 --> 01:08:40,010
1,000 rupees.

1248
01:08:40,010 --> 01:08:41,930
Here's 1,000 rupees.

1249
01:08:41,930 --> 01:08:42,700
You're done.

1250
01:08:42,700 --> 01:08:45,609
Now from now on, you
start from scratch.

1251
01:08:45,609 --> 01:08:47,920
Or I go to them, and I
say, come to a class.

1252
01:08:47,920 --> 01:08:51,370
I'll explain to you
compound interest.

1253
01:08:51,370 --> 01:08:53,044
Or, I offer them both.

1254
01:08:56,420 --> 01:08:57,460
So what happens?

1255
01:08:57,460 --> 01:09:00,029
So that's the question.

1256
01:09:00,029 --> 01:09:05,170
So some of these people, for
some reason, they had

1257
01:09:05,170 --> 01:09:06,180
got into this debt.

1258
01:09:06,180 --> 01:09:08,300
Let's say they were liberated
from the debt.

1259
01:09:08,300 --> 01:09:11,899
Some people were educated on
the arithmetic component of

1260
01:09:11,899 --> 01:09:13,149
compound interest.

1261
01:09:15,819 --> 01:09:19,180
So training was half a day
training, where they were

1262
01:09:19,180 --> 01:09:23,689
explained how much they spent
on interest, all these

1263
01:09:23,689 --> 01:09:24,420
illustrations.

1264
01:09:24,420 --> 01:09:28,330
If you save just one cup
of tea a day, it will

1265
01:09:28,330 --> 01:09:29,250
be enough, et cetera.

1266
01:09:29,250 --> 01:09:30,500
So all of that.

1267
01:09:33,279 --> 01:09:34,529
Skip.

1268
01:09:37,460 --> 01:09:39,240
So here's the result.

1269
01:09:48,463 --> 01:09:51,140
This one's from the--

1270
01:09:51,140 --> 01:09:51,770
[INAUDIBLE]

1271
01:09:51,770 --> 01:09:53,945
let's see which country
this is.

1272
01:09:57,210 --> 01:09:59,650
Philippines.

1273
01:09:59,650 --> 01:10:00,900
From the Philippines.

1274
01:10:04,380 --> 01:10:06,940
Here's the basic result.

1275
01:10:06,940 --> 01:10:12,180
[? Force ?] times payoff
says if you--

1276
01:10:12,180 --> 01:10:15,440
ignore everything else
that says, but just

1277
01:10:15,440 --> 01:10:17,730
look at what it says.

1278
01:10:17,730 --> 01:10:19,180
Do you have a debt?

1279
01:10:19,180 --> 01:10:22,500
The question is, do you have
a debt from a money

1280
01:10:22,500 --> 01:10:26,085
lender after two weeks?

1281
01:10:29,090 --> 01:10:33,800
That number says you are 33%
less and less likely to have a

1282
01:10:33,800 --> 01:10:36,280
debt from a money lender
after two weeks.

1283
01:10:36,280 --> 01:10:41,640
So two weeks after I pay your
entire 1,000 rupees down,

1284
01:10:41,640 --> 01:10:46,980
you're back to having
a loan for 5% a day.

1285
01:10:51,340 --> 01:10:55,660
So 33% don't have a loan,
so 67% have a

1286
01:10:55,660 --> 01:10:58,010
loan after two weeks.

1287
01:10:58,010 --> 01:11:01,740
After six weeks, 60%
have a loan.

1288
01:11:01,740 --> 01:11:04,780
After 10 weeks, 80%
have a loan.

1289
01:11:04,780 --> 01:11:08,840
So basically, after 10 weeks,
that 1,000 that they had been

1290
01:11:08,840 --> 01:11:10,190
given just vanishes.

1291
01:11:12,750 --> 01:11:16,620
They don't seem to be able
to stay out of debt.

1292
01:11:19,450 --> 01:11:22,110
The same results
are true for--

1293
01:11:22,110 --> 01:11:24,910
this is the India study.

1294
01:11:28,810 --> 01:11:32,035
So debt payoff after--

1295
01:11:34,910 --> 01:11:35,850
first, follow up.

1296
01:11:35,850 --> 01:11:50,300
After three months, so this
negative 10% don't have a

1297
01:11:50,300 --> 01:11:54,390
loan, so 90% after three months
have got back a loan.

1298
01:11:54,390 --> 01:11:59,190
So even though these the loan
was paid down, that went away

1299
01:11:59,190 --> 01:12:01,515
within three months.

1300
01:12:04,300 --> 01:12:11,870
And the training, just
2% had nothing.

1301
01:12:11,870 --> 01:12:13,450
There was no effect
of training.

1302
01:12:13,450 --> 01:12:17,210
OK, you can see, people
were trained.

1303
01:12:17,210 --> 01:12:20,970
If you look at the training
row, that row says nothing

1304
01:12:20,970 --> 01:12:22,670
significant in that row.

1305
01:12:22,670 --> 01:12:26,320
That's just saying that
force times training

1306
01:12:26,320 --> 01:12:28,040
is the effect of--

1307
01:12:28,040 --> 01:12:30,550
if you had had a training,
what's the

1308
01:12:30,550 --> 01:12:33,900
probability you have loan?

1309
01:12:33,900 --> 01:12:36,760
It's positive, meaning you're
more likely to have a loan,

1310
01:12:36,760 --> 01:12:39,180
but it's suddenly not
significance.

1311
01:12:39,180 --> 01:12:41,803
So it's basically no effect
on whether you

1312
01:12:41,803 --> 01:12:44,560
have a loan or not.

1313
01:12:44,560 --> 01:12:48,860
So the fact they would explain
compound interest seems to

1314
01:12:48,860 --> 01:12:52,120
have no effect on whether
you get a loan or not.

1315
01:12:52,120 --> 01:12:55,460
It's kind of stunning, actually,
these results.

1316
01:13:04,110 --> 01:13:05,360
How are people slipping?

1317
01:13:08,170 --> 01:13:10,160
Why are they getting
back into?

1318
01:13:10,160 --> 01:13:17,910
So one thing that you
find is that when

1319
01:13:17,910 --> 01:13:19,160
they get any shocks--

1320
01:13:22,790 --> 01:13:24,750
like somebody gets sick--

1321
01:13:29,460 --> 01:13:33,900
if your debt was paid off so
that you were given the money,

1322
01:13:33,900 --> 01:13:38,950
you are much more likely to deal
with the shock with your

1323
01:13:38,950 --> 01:13:41,180
own money rather than
by borrowing.

1324
01:13:41,180 --> 01:13:43,870
So what these people are doing
is they seem to be using the

1325
01:13:43,870 --> 01:13:46,420
money to deal with shocks.

1326
01:13:46,420 --> 01:13:49,730
So basically, there's so much
uncertainty in these people's

1327
01:13:49,730 --> 01:13:54,230
lives that there's always
something that comes up.

1328
01:13:54,230 --> 01:13:58,240
And when that comes up,
you use the money to

1329
01:13:58,240 --> 01:13:59,360
deal with the problem.

1330
01:13:59,360 --> 01:14:02,550
And then you're back borrowing,
basically.

1331
01:14:08,770 --> 01:14:14,910
We'll start to think about what
these results mean on

1332
01:14:14,910 --> 01:14:15,810
Tuesday, OK?

1333
01:14:15,810 --> 01:14:19,730
So think about them.

1334
01:14:19,730 --> 01:14:20,770
Do the reading.

1335
01:14:20,770 --> 01:14:22,350
We'll talk more about
it on Tuesday.