How poverty changes your mind-set

The proportion of the global population living on less than $1.90 per person per day has fallen—from 18 percent in 2008 to 11 percent in 2013, according to the World Bank. In the United States, however, the poverty rate has been more stubborn—41 million people lived below the country’s poverty line in 2016, about 13 percent of the population, nearly the same rate as in 2007. Recent policy initiatives haven’t meaningfully reduced that rate. House Speaker Paul Ryan (Republican of Wisconsin) indicated this past December that the government would make fighting poverty, but also welfare, which many Republicans believe is a failed policy, a priority in 2018.

US lawmakers have expressed frustration when investments such as welfare programs don’t pull people out of poverty. “I believe in helping those who cannot help themselves but would if they could,” said Senator Orrin Hatch (Republican of Utah) this past December, when explaining his views on government spending. “I have a rough time wanting to spend billions and billions and trillions of dollars to help people who won’t help themselves, won’t lift a finger, and expect the federal government to do everything.”

Hatch’s statement reflects a common view that removing government support would force many poor people to improve their conditions themselves. Without welfare and government assistance, would able-bodied people find a job, get an education, stop buying lottery tickets, and focus on paying bills?

Not quite, indicate researchers, whose work is telling a different story of poverty. Contrary to the refrain that bad decisions lead to poverty, data indicate that it is the cognitive toll of being poor that leads to bad decisions. And actually, decisions that may seem counterproductive could be entirely rational, even shrewd. The findings suggest that to successfully reduce poverty, it would help to take this psychology into account.

What drives ‘bad’ decisions

In a 2013 study published in Science, researchers from the University of Warwick, Harvard, Princeton, and the University of British Columbia find that for poor individuals, working through a difficult financial problem produces a cognitive strain that’s equivalent to a 13-point deficit in IQ or a full night’s sleep lost. Similar cognitive deficits were observed in people who were under real-life financial stress. Theirs is one of multiple studies suggesting that poverty can harm cognition.

But it was the fact that cognition seems to change with changing financial conditions that Chicago Booth’s Anuj K. Shah, along with Harvard’s Sendhil Mullainathan and Princeton’s Eldar Shafir, two authors of the Science paper, were interested in getting to the root of. They suspected that poverty might essentially create a new mind-set—one that shifts what people pay attention to and therefore how they make decisions.

“Some say you really have to understand the broad social structure of being poor, and what people do and don’t have access to,” says Shah. “Others say that poor individuals have different values or preferences. We stepped back and asked: ‘Is there something else going on?’”

To test the idea, the researchers designed experiments that stripped away money and put other resources in demand. In one such study, the researchers had participants play variants of the popular games Wheel of Fortune, Angry Birds, and Family Feud, looking for how scarcity affected players’ attention. “Rich” people in these constructs had more chances to earn points, so more time to play the game. “Poor” people had fewer chances.

In the Wheel of Fortune–style game, the researchers measured how cognitively fatigued the players became. Logic would predict that rich players would be more fatigued, since they were allowed more turns to make more guesses. Instead, the researchers observed that poor players, having received fewer tries to guess at the answers, were more fatigued, having put more effort into each guess.

In an Angry Birds–style game in which people tried to shoot targets, rich players were given more chances to train a virtual slingshot on a target. Poor players, given fewer attempts, spent longer lining up their shots, and many scored more points per shot than rich players. For all the extra shots rich players had, they didn’t do as well, proportionally. “It seems that to understand the psychology of scarcity, we must also appreciate the psychology of abundance. If scarcity can engage us too much, abundance might engage us too little,” the researchers write.

In some ways, scarcity appears to make people better problem solvers. In these game versions of the world, says Shah, the players randomly assigned to be poor focused on what was concrete and in front of them. And that’s what happens in real life, too, write Shah, Mullainathan, and Shafir. When money is tight, “the very lack of available resources makes each expense more insistent and more pressing. A trip to the grocery store looms larger, and this month’s rent constantly seizes our attention. Because these problems feel bigger and capture our attention, we engage more deeply in solving them.”

Unfortunately, one way to solve the problem in the short run is to borrow, which can backfire. In the experiments, when poor participants were allowed to borrow resources, that borrowing undid some of the advantages of scarcity. When the researchers looked at performance as a function of borrowing, they find that poor players often borrowed more than they should have, and performed better when they weren’t permitted to borrow. Poverty led to wise decisions, but it also led to counterproductive ones.

Trade-offs become real

Shah, Mullainathan, and Shafir looked further into how poverty affects decision-making, and find that poor people may evaluate trade-offs better than their wealthier counterparts. Just as the Angry Birds players spent more time lining up a shot, people with actual financial concerns might also make better, more focused decisions, closer to what economists consider ideal.

The researchers asked real people of various socioeconomic strata if they were willing to travel an extra 30 minutes to save $50 on a $300 tablet. Some said they were. But when asked if they’d drive that far to save the same amount on a $1,000 tablet, some of the respondents changed their minds. Their answer depended on their income.

Many people were, irrationally, more likely to say yes when buying a $300 tablet rather than a $1,000 one. But that response was more common among wealthier people. For poorer individuals, the cost of the tablet often didn’t matter—regardless of the price, they were just as likely to travel for the discount.

That’s the correct financial decision, according to traditional economics—to drive the extra distance no matter the original cost. Saving $50 is the same regardless of the amount of the item in question. But wealthier participants saw the savings in relative terms, noticing the percentage savings. By contrast, poorer participants thought in absolute terms. To them, $50 saved was $50 to spend on groceries or the electric bill.

The same pattern showed up in experiments that involved smaller and larger amounts of money or other rewards. Even calories fit the pattern: people who were dieting, and therefore in a scarcity mind-set, recognized that an order of McDonald’s fries was just as fattening whether thought of in terms of daily or weekly calorie intakes. But people who were not dieting were more swayed by context. Once again, scarcity prompted the more accurate decision.

Put it into practice

If people in poverty are making smart decisions considering the situation, how could that be recognized and better encouraged? There may be ways to help people when they’re facing potentially expensive borrowing decisions. For example, Chicago Booth’s Marianne Bertrand and University of California at Berkeley’s Adair Morse studied high-interest payday loans and find that people made better decisions when the interest rate was expressed in terms of dollar amounts, namely the cost they’d pay over three months. “We’d explain this by saying that a dollar amount is a lot more concrete,” says Shah. “You can think about exactly what you’d have to give up to pay off the loan.”

“Program designers and policy makers often suffer from a failure to accurately take the perspective of the people they are trying to help,” says Chicago Booth’s Christopher J. Bryan. “They design programs that would be appealing to people if they had the luxury of being able to devote careful thought and attention to considering them. But poverty imposes a heavy attentional ‘tax’ that prevents people from devoting that kind of thought to new opportunities, so program uptake is low.”

Bryan was the lead author of a policy paper that recommended new strategies to policy makers and other relevant parties based on recent findings. Among other things, he and his coresearchers advise that an effort be made to reduce the up-front cost of future-oriented behaviors. For example, they point out that in a study by researchers at the World Bank, Harvard, and Yale, giving kids free school uniforms boosted school enrollment in Kenya by more than 6 percentage points. Similarly, researchers at Stanford, Harvard, and the University of Toronto, in conjunction with H&R Block, find that offering US students assistance with their applications for federally funded college student aid has been shown to increase enrollment in college by 24 percent.

The researchers urge service providers to weigh price and inconvenience carefully, particularly when offering health-related services, which many people may forgo if the cost or the distance is too great. A program in Uganda brought health products such as water-purification tablets and antimalarial drugs to people door-to-door, which removed the issue of making people travel to get these products. That simple step to counter the inconvenience of seeking out products and services had an effect. “It can sometimes be better to charge a small fee and make a service very convenient than to charge nothing for a very inconvenient service,” write the researchers. In this case, the cost of delivery was included in the price of the products.

The researchers also recommend taking into account the timing of incentives—and they advise to avoid offering them when money is tight and people are consumed with the pressing need to budget what little they have to meet basic needs. In India, where sugarcane farmers are paid annually after the harvest, farmers’ attention scores were the equivalent of 10 IQ points higher than just before the harvest, when farmers were relatively poor, according to data from the 2013 Science study mentioned earlier.

Offering subsidies or other incentives when people are more receptive to and have the spare capacity to consider them, such as after a harvest or a payday, may make a difference over the long run. One effort, in Tanzania, asked people to sign up for health insurance at cashpoint locations right after payday, and the timing led to a 20 percentage point increase in health-insurance use.

Introducing cognitive aids can help address the limited capacity for attention that may constrain people in poverty. In one study, it helped to show farmers research regarding the most productive ways to plant their crops. When poor, stressed, and in a scarcity mind-set, farmers had a harder time taking in the information. “This result has nothing to do with the intelligence of the farmers,” writes Bryan’s team. “A fact is only obvious if the observer has the spare attentional capacity to notice it.”

They also suggest that reminders, in the form of text messages or stickers, can be effective. Such gentle pushes—for instance, to take medication on schedule—can help people remember to do what they may otherwise forget, since other duties and obligations may compete for attention.

For those who design and implement antipoverty initiatives, it’s important to recognize that while scarcity can help people focus on costs and benefits, it can also cause stress that shifts attention and steals cognitive bandwidth. A big step forward would be to understand these psychological limits that poverty imposes and make some policy tweaks, write the researchers, to “substantially improve the impact they have on the poor.”

From Booth Review

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