Higher Aspirations, Less Investment? Some New Experimental Evidence

New research by David McKenzie, Aakash Mohpal, and Dean Yang finds that exogenously increased financial aspirations lead to less borrowing and business investments two years later.

This finding is consistent with existing evidence, using observational data, of an inverted U-shaped relationship between the aspirations gap and ‘future oriented’ behavior such as investments (by me), education spending (by Phillip Ross), on saving (by Janzen et al.), and existing theoretical work (by Genicot and Ray). It is an important finding because while aspirations may be an important factor that can lead to increased ‘future oriented’ behavior, increasing aspirations by themselves may not necessarily be beneficial if setting aspirations ‘too high’ can lead to frustration and possibly a behavioral poverty trap.

So, what is the experiment? The authors work with over 2,000 small-scale entrepreneurs (e.g., microenterprise clients) in the Philippines. They randomly select a group of these entrepreneurs into an ‘aspirations treatment,’ which is an eight week training session that encourages the participants to set ambitious life goals and choose specific savings targets to help achieve these goals. The authors also cross-randomize a second knowledge treatment that provides training on savings, budgeting, and planning and is, more-or-less, a standard type of training conducted by microfinance organizations around the world.

What did the authors find? Two years later, the authors measure meaningful increases in savings goals among participants of the aspirations treatment, however, this treatment does not increase savings on average. Moreover, participating in the aspirations treatment leads to less borrowing (15 percent less) and fewer investments (37 percent less).

In the above table (Table 2 in the current draft of the paper), the authors show the estimated effect of participating in either aspirations treatment and the knowledge treatment on a host of financial outcomes. Panels A and B both show that these trainings don’t really influence savings goals or actual savings. Instead, as shown in Panel C, the aspirations treatment reduces borrowing as measured in the total number of loans and the total value of loans. Importantly, this finding shows up when using survey data or administrative data.

In addition, in the above table (Table 3 in the current draft of the paper), the authors show the estimated effect again of the aspirations treatment and the knowledge treatment now on household expenditures. We see no measurable changes in consumption, temptation goods, celebrations, durable goods, or education, but we do see a decline in business investments.

Why do these results matter? I can think of at least two key reasons.

(1) This paper is the first that uses experimental variation in aspirations and identifies results that are consistent with theoretical predictions of aspirations frustration and the inverted U-shaped relationship between the aspirations gap and investments. As noted above, this finding persists in previous studies but each of these previous studies use observational data and these relationships are clearly endogenous. This new evidence provides clear empirical evidence supporting both these previous studies and existing theoretical predictions.

(2) The use of relatively light-touch, psychological interventions are becoming increasingly popular both in public policy circles and also specifically among development policy makers. This research highlights that although aspirations may be critical to inspire future oriented behavior, they are no panacea. Instead, these psychological interventions may be more beneficial when they are integrated into a larger, more multidimensional intervention that also addresses material constraints on future oriented behavior like saving and investment.