Chapter 6
Barefoot Hedge-Fund Managers

The poor face a huge amount of risk – a friend of ours from the world of high finance reflected they are like hedge fund managers. These risks can come from health shocks, like an accident, or agricultural shocks, like a drought, or any other number of unexpected crises. 

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Risk is a central fact of life for the poor, who often run small businesses or farms or work as casual laborers, with no assurance of regular employment.
For the poor, risk is not limited to income or food: Health, political violence, crime and corruption are also major sources of risk.
Not only do the poor lead riskier lives than the less poor, but a bad break is likely to hurt them more by sending them to a poverty trap.
The poor often try to cope with risk by diversifying activities. That way, if one activity falters, others can keep them going.
The poor are also very conservative in the way they manage their farms or their businesses, and are often unwilling to try new technology because of the risk it poses.
These ways in which the poor cope with risk tend to be costly. Thus, the risk the poor face is not only costly once a shock hits: The fear that something bad might happen affects poor people’s ability to realize their potential.
Informal insurance networks, where villagers help each other out during bad times, help absorb shocks; however, the insurance they provide is far from perfect.
Health insurance, insurance against bad weather, and insurance against the death of livestock are more or less absent in the developing world. Why is that the case?
Formal insurance can only be relatively crude: catastrophic health insurance or insurance against weather events.
This does not correspond to the need or expectations of the poor, who have low demand for those products.
Given the enormous potential gains that could be achieved if the poor reduced their risk, government subsidies should be used to help grow insurance markets in developing countries.

Risk studies

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Barefoot Hedge-Fund Managers

The poor face a huge amount of risk – a friend of ours from the world of high finance reflected they are like hedge fund managers. These risks can come from health shocks, like an accident, or agricultural shocks, like a drought, or any other number of unexpected crises. 

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Extended Body: 

The poor face a huge amount of risk - a friend of ours from the world of high finance once noted that they're like hedge fund managers. These risks can come from health shocks - like an accident - or agricultural shocks - like a drought - or any other number of unexpected crises. Often, the poor just don't have the means to weather these shocks, and so they get pushed into poverty traps.

The steps they take to protect themselves form these risks are insufficient and often costly: they choose less profitable and less risky crop, they spread themselves too thin across a great number of activities; they exchange favors with neighbors. Yet all this doesn't always even cover large shocks.

So where is formal insurance for the poor? Is that the next billion-customers opportunity? 

Spotlight

Shawn Cole, Xavier Gine, Jeremy Tobacman, Petia Topalova, Robert Townsend, James Vickery / India / 2009
From the abstract: "[The authors] use a series of randomized field experiments  in rural India  to  test the  importance of price and non-price factors in the adoption of an  innovative rainfall  insurance product."

The poor face a huge amount of risk - a friend of ours from the world of high finance once noted that they're like hedge fund managers. These risks can come from health shocks - like an accident - or agricultural shocks - like a drought - or any other number of unexpected crises. Often, the poor just don't have the means to weather these shocks, and so they get pushed into poverty traps.

The steps they take to protect themselves form these risks are insufficient and often costly: they choose less profitable and less risky crop, they spread themselves too thin across a great number of activities; they exchange favors with neighbors. Yet all this doesn't always even cover large shocks.

So where is formal insurance for the poor? Is that the next billion-customers opportunity? 

Spotlight

Shawn Cole, Xavier Gine, Jeremy Tobacman, Petia Topalova, Robert Townsend, James Vickery / India / 2009
From the abstract: "[The authors] use a series of randomized field experiments  in rural India  to  test the  importance of price and non-price factors in the adoption of an  innovative rainfall  insurance product."