Managing a Business or Managing a Mind?
Photo source: World Bank Photo Collection
Starting ang growing a business is a messy process with many decision points along the way. To be successful, entrepreneurship programs therefore must account for the psychological and social context in which entrepreneurs operate.
Ama runs a small bodega in Kumasi, Ghana. Starting a corner store in Ghana requires limited investment, no specialized training, and little formal education — a convenient option for an individual without many resources and only nine years of schooling. After eight years running her business, Ama has one employee and focuses only on selling enough to make ends meet. Ama’s management practices aren’t exactly gold standard. For example, she doesn’t separate out her business income from her household income: she’s apt to pick up household supplies on the way home from work with her freshly earned cash, so she doesn’t know how much she earns.
One day, Ama receives a hand-delivered invitation to participate in a business training program that focuses on business planning, record management, costing and pricing, and customer relationship management. Ama is interested in attending and considers the program a reasonable time investment. She verbally confirms her interest in the course for the next week. However, Ama’s interest wanes as the start date of the training approaches. The location of the training center is far from her business, and getting a bus ticket is a hassle. Can she really trust her employee to run the business in her absence? Doubtful. Plus, if she chooses to close down during the week of the training, customers may not come back. Is it worth the risk? After all, she’s run her business for eight years already. In the end, Ama decides not to attend the training. Her story is a familiar one: 50% take-up rates for such programs are common.
Entrepreneurs like Ama are common targets for business training programs, grant money, and other interventions designed to help them improve or expand their small businesses. Given that more than half of workers in low- and middle-income countries run their own businesses, these individuals represent a significant (and often vulnerable) portion of the global population. Even though interventions to support these entrepreneurs make sense in theory, they run into trouble in practice: many interventions have low rates of take-up and limited impacts on business performance. Why aren’t these interventions more effective?
The answer may lie in behavioral science, the study of the complexity of human decision-making processes. Behavioral science shows that our decisions are driven not only by internal factors (our personalities and preferences) and external factors (information, incentives, and regulations), but also by the decision-making process itself. For example, the decision to work hard on an urgent project for your boss isn’t solely the product of your preferences (to get it done as quickly as possible so you don’t have to worry about it over the weekend) and regulations (your boss is pressuring you to finish). Whether or not you actually get your work done is also influenced by your self-control (how often you stop to read your phone’s push notifications or scroll social media), whether there are other people around (if your colleagues are taking a coffee break, it seems like a good idea for you to as well), and your mental models (if you don’t think you’re going to get the promotion anyway, does it matter whether you impress your boss by finishing this project quickly?).
Entrepreneurs face many of these behavioral barriers throughout the process of starting and running a business (see Figure 1). For instance, individuals considering whether to pursue entrepreneurship may be dissuaded by a lack of self-efficacy — they doubt they can be successful. If an aspiring entrepreneur decides to start a business, she must source start-up capital, perhaps by taking out a loan or applying for a grant. However, in some communities she may not trust an external funding source. Running a business is stressful and time-consuming, which taxes mental resources and may lead entrepreneurs to choose the least burdensome option, such as Ama’s choice not to separately track business income. Successful entrepreneurs may face behavioral barriers in choosing whether or not to expand operations. For example, they may be loss averse, in that they value “not losing” more than they value winning. These examples represent only a small sample of the potential behavioral challenges facing entrepreneurs.
Figure 1: Behavioral barriers facing entrepreneurs throughout the stages of entrepreneurship
Behaviorally Informed Interventions
Identifying such behavioral barriers is the first step to responding to them, often through behaviorally informed interventions. For example, psychologically-based entrepreneurial mindset training can help improve self-efficacy. Using social proof, or examples of others in the community who have taken advantage of a program, can help overcome lack of trust in entrepreneurship support services. Rules-of-thumb-based trainings offer easier-to-understand rules for improving business practices for bandwidth-constrained participants, such as keeping personal and business income in separate drawers. Individuals who are loss averse may benefit from matching grants (e.g., grant money given to double how much they invest), which lower the cost of investment to and increase potential upside.
Figure 2: Overview of Behaviorally Informed Entrepreneurship Interventions
A better understanding of the behavioral barriers in entrepreneurs’ decision-making processes is key to improving interventions that support entrepreneurship. Prospera Consulting’s new report, “Beyond Finance and Business Skills: Leveraging Behavioral Insights for Entrepreneurship Interventions in Low- and Middle-Income Countries,” reviews the existing evidence on behavioral barriers and behaviorally informed interventions for entrepreneurs in low- and middle-income countries. Although significant scope for continued research remains, behaviorally informed interventions have shown notable promise in improving entrepreneurs’ outcomes.
Using behavioral science, we can better understand what went wrong in our attempt to help Ama: the hassle of taking the bus, her lack of trust in her employee, and her risk aversion to losing customers all meant that the perceived cost of attending training outweighed potential benefits for her. Recognizing these barriers to her participation can help us design a training that overcomes them, such as training delivered over mobile phone so that Ama can continue to run her business while receiving remote instruction in manageable increments for her busy schedule. Accounting for Ama’s decision-making process makes the prospect of improving her accounting practices much more attainable.
About the authors:
Mandy Bowers is currently completing a dual-degree with an MA in International Economics from Johns Hopkins SAIS and an MBA from INSEAD. She formerly worked in the International Finance Division of the Federal Reserve Board and was a Research Analyst at Prospera in summer 2020.
Kevin Hempel is the Founder and Managing Director of Prospera Consulting, a boutique consulting firm working towards stronger policies and programmes to facilitate the labour market integration of disadvantaged groups. You can follow him on Twitter @KevHempel.