Mental Accounting or Accounting for Mentalities?: Socio-Cultural Influences on the Financialization of Peruvian Coffee Farmers

A normative neoclassical accounting model assumes expected utility and perfect fungibility between accounts (i.e., money is substitutable between accounts), while a descriptive behavioral finance accounting model posits a prospect theory of choice (e.g., risk-averse in domain of gains, risk-propensity in domain of losses, lack of fungibility between labeled accounts, loss aversion, etc.) (Thaler 1999). Economists have applied these insights to the study of financial capability in emerging markets (Dupas & Robinson 2013).

However, this behavioral model was developed via qualitative interviewing of and experiments with subjects from the United States and Europe and focused on individual and household consumers, thus lacking understanding of the socio-cultural context of consumption and production, together, especially when household heads are simultaneously self-employed, wage laborers, and producers of their foodstuffs. Quite simply, the context of the model generation is distinct from the emerging market site of application.

This qualitative study – based on 38 in-depth interviews and an 8-person focus group with members of northern Peru's largest coffee farmer cooperatives – highlights the importance of social-cultural influences on mental accounting. Findings contradict both neoclassical and behavioral understandings of individual and household accounting, thus offering correctives for the applicability of mental accounting models to emerging market contexts. Contradictions come in three domains:

(1) The challenge for coffee farmers is not account labeling in-itself, which may hinder perceptions of fungibility, but of ineffective labeling. In fact, the problem is too much fungibility. Is money substitutable between accounts despite the existence of mental budgets or because mental budgets do not exist? Coffee farmers do employ mental labeling - expenditures are assigned to budgets; wealth is divided into accounts; and income falls into categories. Rather, fungibility operates alongside mental labels because of two challenges: (a) the distinction between “booking” vs. “posting” of expenses and (b) local understandings of “spending,” “investment,” "credit," and “savings” concepts.

(2) Competing time-horizons of accounts matter. Thaler asserts that based on his evidence in the U.S., people in poverty have stricter budget rules and shorter budget time-horizons. Meanwhile, wealthier people have less strict budget rules and longer time-horizons. Yet rural coffee growers have both (a) shorter-time horizons given their immediate consumption needs and (b) longer time-horizons given the agricultural cycle. Since their income stems from productive activities, the short-term and long-term opening and closing of accounts becomes very complicated, more so, one could hypothesize, than for the poor in advanced economies or the urban poor in emerging markets. 

(3) Farmers maintain mental “surplus” (for-profit) and “break-even” accounts. For some accounts, they hope to end with a gain, while for others they consciously seek a “zero” balance, the latter affects perception of financial "credit." Finally, if one is operating with a “break-even" account – not unlike a Chayanovian understanding of household utility in which one produces until satisfying wants – then questions arise about what farmer value functions looks like. Is it one of neoclassical expected utility, prospect theory, or something else? Accounting for mentalities – as opposed to universal mental accounting – may offer an answer.