The Rationality of Mobile Spending

Richard Heeks has written an interesting post entitled Mobiles for Impoverishment in which he says that recent m4d research “suggests mobiles are doing more economic harm than good, and sometimes making poor people poorer”.  He points to quantitative and qualitative research that suggest that economic benefits are not being realised by the users of mobile phones in poor countries.   The full post is well worth reading.  In the end, he draws two conclusions:  1) that if significant value is being spent by the poor on phones, then they must be deriving significant value; and 2) that financial gain is not the only benefit that the poor derive from mobile phones.

I agree with his second conclusion. I think most people believe, correctly, that mobile phones are having a complex but generally positive impact on the lives of the poor in developing countries.  Until very recently, I would also have agreed with his first conclusion as well.  It does seem blindingly obvious that people would not spend money they can ill-afford to do without on something they don’t value.  It was the phrase “putting aside the possibility of irrationality” that was the trigger for me.  Having recently read Dan Ariely’s popular book on behavioural economics, “Predictably Irrational: The Hidden Forces That Shape Our Decisions“, I have begun to wonder to what extent the  forces of irrationality are having an impact on mobile phone expenditure in developing countries.

In his book, Arielly gives a lot of attention to savings and personal finance in the United States, pointing out how people behave in ways which don’t reflect their economic self-interest.  He presents a wealth of evidence that people are swayed by emotion, by context, by social norms, even by the not-so-simple word “free”.  Frankly, it is very disturbing book.  :-)  A particular hobby-horse for him is the credit-card.  He has lobbied credit card companies in the past to produce a “safety” credit card which would enforce a waiting period for any large expenditure, in order to allow reason to catch up with the decision-making brain.

It made me think that mobile phones are the credit cards of Africa. No one would argue the tremendous general utility of credit cards yet evidence of the last few years points to the fact that Americans (as a case in point) are not very good at controlling and managing their credit.  A lot of this has to do with how credit cards are marketed and how information from credit card companies is communicated to consumers.  There is an interesting article in the Economist a couple of weeks ago pointing out that minimum payment requirements on credit card bills actually influence people to pay less than they might otherwise on their bill.  In this case, displaying a minimum payment requirement is the law but credit card companies and mobile operators alike know a lot about what makes people spend.  Similarly, it seems to me, mobile phones are designed for spending and not very well designed for controlling spending or saving for that matter.

As I continue to unpack this idea, lots of links emerge for me between mobile phone behaviour  and the irrational behaviour Ariely profiles in his book.  Relativism is an obvious example in the way people upgrade their phones beyond what is necessary or even sometimes what they can afford.  The irresistible allure of “free offers” influences decision-making about cell phone packages.  Finally, there is the impulse-driven nature of phone calling in general.

Behavioural economists promote the creation of conditions that nudge people (or better still help people nudge themselves) toward good behaviour.  A few ideas that occur to me in this direction are:

  1. being able to set a monthly budget on your pay-as-you-go phone that would warn you if you near or going over your monthly budget;
  2. being able to set a budget for call times that would alert you if you were talking beyond a preset time;
  3. better consumer information services on the relative value of the myriad plans on offer from mobile operators;

And finally, what about saving?  What if you could buy a pay-as-you go plan that put 10% of your call expenditure into a savings account?  Experience from the developed world is that saving is easiest when it is most invisible.  Payroll savings plans are a great example of this.  Roll on mobile banking.

There is little doubt for me that mobiles are opening up amazing opportunities in developing countries but that doesn’t mean that people are using them as economically as they could be.   Offering people the choice to nudge themselves in the right direction might help.

P.S.  If you haven’t time or inclination to read the book, here’s an interesting Guardian article on Ariely and behavioural economics.

  • http://rowetel.com/ucasterisk David Rowe

    The idea of predictable irrationality is both fascinating and disturbing. Makes me think of a few other examples:

    1/ Legalised gambling and heroin both rely on uncontrollable impulses in some peoples wiring. The only difference is that governments tax the former activity.

    2/ Traditional economic theory relies on the assumption that the actors are rational. Oops.

    3/ My 13 year old daughter just got her first mobile and is manifesting irrational txt-ing and burning of pocket money and suffering plan-confusion.

    Roll on “Free Telephony”. A phone call from anyone to anyone should be a human right and essentially free – like an email (and not like a txt or mobile call).

  • Steve Song

    Governments do worse than tax gambling, they sponsor it. What is up with that?

    It is frustrating the way traditional economics lingers on beyond all “rationality”. :-) However the trend of rewarding the mathematic modelers seems to be on the wane and a new generation of experimental economists seem to be the hot properties. See the Economist article this week on the rising stars… http://www.economist.com/finance/displaystory.cfm?story_id=12851150

  • http://ujusgottalaugh.blogspot.com/ Bevinda Collaco

    What I find amazing are the college students of Goa and some secondary senior school students climbing into buses busy with their mobile phones and I-pods, fighting for their half-ticket student concession.

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