Our theory of change, our market based approach, and our focus on savings programs.

Our Theory Of Change

The collapse of the housing market and the rapid increase in the national unemployment rate to double digit figures were the trademarks of the Great Recession of the third millennium. These developments have once again put poverty in the spotlight. Regardless of political ideology or emphasis on “social justice” or “economic efficiency”, poverty is a refractory social disease that needs to be addressed effectively if either of these ideals is to be achieved. Poverty, if left unchecked, will lead to a polarized society and will undermine economic stability.

There is a cornucopia of reasons, institutional and otherwise, that explain why people fall into poverty. But in a broad brush view of the world, there are only two different types of poverty experienced in different parts of the world. In the third world countries, poverty remains primarily a growth related phenomenon where societies are unable to produce goods and services sufficient to provide a minimum level of economic wellbeing for their citizens. In advanced societies, however, the problem of poverty is primarily distribution-related; goods and services are produced in sufficient amounts, but their distribution means many do not have enough to consume. Attempts to redistribute goods and services to the poor are helping, but there is a limit to which redistribution can be pursued as a sound macroeconomic policy. So, on a parallel track to redistribution, advanced societies are making progress in improving their economic and political systems by instituting more inclusionary policies designed to create opportunities for the poor and help them gain access to the economic mainstream. Examples of these policies are numerous, but the common denominator among them is mostly a knowledge-based or empowerment-focused approach. There is a widely held belief in the field of practice that poverty can be addressed by lifting barriers and transferring knowledge to the poor.

At OPTA, we believe that such measures are necessary but not sufficient. The knowledge-based approach is usually most effective when used preventatively. For people who are already trapped in poverty however, preventative policy measures that only aim to expand opportunities are not always effective. While the jury is still out on the exact reasons for this, we suspect that there is a distinct behavioral element to poverty that limits the success of such measures. Perhaps, at some point, life in poverty transmutes from a mere state of financial livelihood into to a state of mind. If the poor feel uncompetitive and disillusioned, the traditional notion of maximizing (rational) behavior suggested by the mainstream economic theory is simply not tenable. Instead, we believe that people in poverty tend to employ “survival” as their dominant behavioral strategy. Due to lack of access to reliable sources of information, social networks, or proper insurance mechanisms to avoid excessive risks, low income families often face higher costs in their everyday decisions. Therefore, a maximizing behavior that requires a subjective cost-benefit algorithm in a decision-making process becomes less and less relevant for low income households since they usually face higher costs in given decision situations.

To put this into perspective, imagine that a low-income household is offered a chance to invest a sum of money for two years with a guaranteed high rate of return. For obvious reasons, even by assuming that the household has the required amount in lump sum in the first place, still, the decision to invest the money is riskier, therefore costlier to the low-income family who utilizes a survival strategy as compared to a non-low-income household that utilizes the benefit maximizing strategy. Both have an equal opportunity to benefit from investing their resources, yet chances are that the poor household will simply opt out. This cost disparity explains why low-income people are generally compelled to have shorter decision horizons.

We understand that our approach to poverty is neither unique nor universal in its application, but we believe that it still provides a logical explanation as well as a straightforward solution to the problem of poverty. In our opinion, almost everything that defines life in poverty is a consequence of decision horizon differences. And since the kinds of decisions that are most adversely affected by survival strategies are usually on the higher end of a risk-return tradeoff frontier (such as investments in education and human capital formation, health, and home-ownership where risks are high but so are the long term rewards), the inability of the low-income households to invest their limited resources in these areas calls for an active asset-based intervention as a potent strategy to help families break out of the cycle of poverty. It is in this spirit that we support asset-based, market-oriented approaches to reduce poverty. We strongly advocate for strategies that help restore the sense of competitiveness and self-confidence among the poor. We believe that certain interventions can have a deep psychological impact in helping the poor households to gradually transition away from a survival mode of existence and closer to the benefit maximizing mode of behavior. It is only then that we can hope for equal opportunity to imply equal access.

Our Market Based Approach

For over half a century, public policy has actively supported programs and initiatives aimed at reducing poverty in America. However, strategies collectively branded as financial empowerment and wealth-building have gained momentum only recently. Attention to wealth-building strategies has offered an unparalleled opportunity to practitioners in the field of community economic development to utilize market-based models and programs to help the underserved communities. There are several examples of market-based approaches currently practiced across the United States. The rationale behind these strategies is simple; businesses, such as financial institutions, insurance companies, and even chain retail stores should eye the low-income markets as potentially profitable long-term business opportunities and therefore actively invest in expanding their services to these target markets. Expansion of services would without a doubt benefit low-income families as it fosters better access to many vital mainstream services.

While the above is generally the idea behind market-based models, our definition of a market based approach includes an additional aspect. According to our theory of change, our definition of a market-based approach also relies heavily on the notion of promoting competitiveness in helping shape a maximizing behavior. It is for this reason that we strongly promote market-based models that include the use of proper financial incentives within contexts low-income households find themselves more conversant with.

Our Focus on Savings Programs

At OPTA, we believe that the first step in helping low-income families to achieve financial capability starts with an effective savings strategy. Benefiting from cutting edge technology and a scientific approach to program development, OPTA has introduced its signature Savings Accelerator Account (SAA) platform of savings programs. This approach utilizes various behavioral heuristics to foster a sense of competitiveness as well a carefully designed incentive structures to offset the hidden risk premiums low-income people face in their everyday decision-making process.

In designing savings programs for the low income, we view savings primarily as an unrestricted-use resource. A restricted-use resource is prescriptive and channels savings into specific areas of investment. However, as an unrestricted resource, savings is crucially important in anti-poverty strategies as it provides an effective insurance mechanism for households to cope with uncertain events, thereby creating the necessary momentum for a gradual transition from a behavior based on survival to a maximizing behavior. In addition, promoting a healthy savings habit is a politically neutral proposition. Unrestricted savings strategies are neither heavily engineered nor too paternalistic.

Accumulation of savings will help level the playing field for all market participants and will foster equal access where opportunities are equally provided to all members of society.