One of the few economists who won the Nobel Peace Prize is Muhammad Yunus, a Bangladeshi who invented the concept of microcredits. What is it about?

Usually, it is very difficult for poor people to receive credits from banks. Their creditworthiness is considered low, as they have no collateral and little resources to make up for possible losses. Yunus believed, however, that poor people have good business ideas, and he did not doubt their seriousness to pay back the money. In the late 1970s, he visited the poorest families in a Bangladeshi village called Jobra and found out that they were producing practical bamboo furniture that sold well in the market. Unfortunately, they could not extend their production due to an extreme scarcity of capital, preventing them from buying more bamboo canes. Without hesitation, he lent a total of 27 US dollars to 42 families in the village, and, as it turned out, all of them paid back their debts, and Yunus could even charge a small interest. The idea of microcredits was born. 

Yunus’ approach to lending poor people small amounts of money turned into serious business, and in 1982 the bank he had founded, the Grameen Bank (“village bank”), had 28,000 customers. To this day, the bank is still operating, and in 2010 it created revenues of about 120 million US dollars and profits of about 10 million.

An interesting aspect of microcredits is that these loans are almost exclusively given to women. When the system spread in Bangladesh, it quickly became clear that women who received microcredits were more conservative in their spending and investment behavior, and hence, more reliable to pay back the money. Men, on the other hand, had a futile tendency to waste money. In the best case, they used it for investment but were much more risk-taking and unreasonably optimistic about the outcomes. Yet often, the credits were not used for economically reasonable purposes at all, but for conspicuous consumption or gambling, alcohol, and cigarettes.

Are the phenomenon of financially dissolute guys and trustworthy girls restricted to Bangladesh, or can it be found elsewhere as well?

EVIDENCE FROM GEORGIA AND THE WORLD

Since May 2012, the ISET Policy Institute computes the Consumers Confidence Index (CCI) for Georgia. The CCI is based on the answers given every month by 400 randomly chosen consumers to questions about their current and future economic situations, their actual and planned purchases, and their outlook on the economy. The index measures the degree of optimism consumers have about the overall state of the economy and their personal financial situation. If consumer confidence is higher, consumers are making more purchases, and if confidence is lower, they tend to save more and spend less.

Looking separately at the CCI computed for the answers of female respondents and the CCI computed for the answers of male respondents reveals striking differences. In the chart, one can see the CCI values since May 2012, separated by gender. The brighter lower line is the “female CCI”, the darker upper line is the “male CCI”. Plainly speaking, in all but 5 months since May 2012, the willingness to consume was higher for men than for women.

These numbers suggest that if in the last two years one would have given an amount of money to a woman, it is more likely that the money would have been saved and invested than if the same amount would have been given to a male. In a country like Georgia, suffering heavily from a lack of savings and the associated high-interest rates, the “gender factor” should not be left aside!

Consumer confidence is computed in many countries, and as it turned out, the same gender difference in the CCI can be observed almost everywhere in the world. In their 2008 article “Are men more optimistic?” (SSRN working paper), the economists Ben Jacobsen, John B. Lee, and Wessel Marquering find similar results for 17 out of 18 countries included in their analysis. They write: “Consumer confidence data of eighteen different countries show strong gender differences, with women being the less optimistic gender. For instance, in the US we find that since 1978 there has only been one month (March 2000) when consumer confidence of women was higher than consumer confidence of men.”

There are other findings that have the same flavor. In psychological research, it is a well-established fact that men are more prone to the so-called “overconfidence effect” than women. Overconfidence is a systematic bias towards overestimating one’s own abilities, and it is ubiquitous not only among males but among males it is particularly pronounced. To give an example for overconfidence, at ISET the students are asked (as part of the course evaluations) what they expect to be their relative ranks in the exam. Usually, about 80% of the students respond that they expect to be among the top 20% of the students in the course. Similarly, people in the streets were asked how well they drive cars compared to others, and again, almost everybody considers themselves to be in the top 10% of drivers. In quizzes, people were requested to report how confident they were that their answers were correct, and typically, the rate of correctly answered questions is far below their reported confidence.

Likewise, it was shown in countless studies that men are more risk-taking than women.

LEAVE FINANCE TO THE WOMEN!

In most families, it is either the husband or the wife who is concerned with the household money, not both of them. Given the striking empirical evidence mentioned above, it is safe to say that on average it will be better if finances are controlled by women.

The argument gets even stronger if one goes beyond individual households and also considers the failures of the financial system which in the last 100 years have regularly shaken the world economy. All of them were rooted in a good deal of overconfidence and unjustified optimism which was then abruptly taken down to earth, be it in 1929, 2008, or the many smaller crises that occurred in between. It is not too speculative to assume that in many of these instances a higher share of women among stock market brokers and financial managers would have taken the heat out of the market and allowed for a “soft landing” instead of a crash.

The more frequent it is in a society that women take the back seat in money issues, the more resources will be wasted, be they used for nonsensical consumption or risked in dangerous projects. Traditions restricting women from making financial decisions for themselves and their families, as they are in place in many societies around the globe, come at a high economic cost. Yet even in the most advanced countries, one will find that the financial industry is heavily male-dominated. As long as this is the case, the next financial crisis will be man-made again.