Apr 1, 2014

Financial Literacy and Rules of Thumb

Micro-entrepreneurs often lack the financial literacy required to make important financial decisions. We conducted a randomized evaluation with a bank in the Dominican Republic to compare the impact of two distinct programs: standard accounting training versus a simplified, rule-of-thumb training that taught basic financial heuristics. The rule-of-thumb training significantly improved firms' financial practices, objective reporting quality, and revenues. For micro-entrepreneurs with lower skills or poor initial financial practices, the impact of the rule-of-thumb training was significantly larger than that of the standard accounting training, suggesting that simplifying training programs might improve their effectiveness for less sophisticated individuals.
The rule-of-thumb training taught mainly to keep personal and business financial accounts separated, and also to include a fixed salary as a business expense. Those measures are important for the sustainability of the business and to prevent capital depletion. 
The paper is by Alejandro Drexler, Greg Fischer & Antoinette Schoar. A draft is here

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