(2010-11-17) Rao Portfolios Of Poor

Venkatesh Rao reviews/summarizes Portfolios Of The Poor, a book about the Financial Planning strategies of people in extreme Poverty ($2/family/day).

But as it turns out, a regular and predictable $2/day income would actually be powerful enough that the poor could potential bootstrap themselves out of poverty with it. What makes their condition so difficult is irregularity and unpredictability.

They actually go beyond daily expenses and manage to save, buy insurance, raise capital and plan for retirement. Not very effectively by rich-world standards, but they do it. Turns out that they manage their small, irregular and unpredictable incomes with extraordinarily sophisticated financial portfolios. Reviewing the details, I was shocked: for many of the research subjects, the financial lives on display were more complicated than mine.

The big insight in the book is the extent to which the cash-flow management solution is a social, rather than individual. You might have the mistaken idea that until Micro Finance (MicroLending) came around, the only financial instrument available to the poor was loans from sharks at predatory interest rates. This is wrong on two levels... It is actually the apparently superior low-interest banking models we use that are oppressive for the poor, due to the rigidity of how they can be used.

But the sophistication of organic financial systems among the poor comes at a cost. They put enormous strain on reserves of Social Capital. To make the mechanisms work, the poor are forced to trust each other far more than we rich people do. And like us, they are ordinary human beings, who’d rather not deal with unpleasant neighbors or annoying relatives more than they must. The social burden is bad enough that the poor often forgo even food, rather than have to deal with the mechanisms available to them.

He has some interesting applications of this thinking to Entrepreneur-s. 9. Recognize the amount of active Cash Flow management you will need to do, and take on that complexity.