Living in poverty can affect decision-making
Having a lower income level can negatively affect decision-making, a study finds. The upside? The findings can be used to help improve financial outcomes for the poor.
Mon, Nov 05 2012 at 2:59 PM
Poverty is a major societal concern, not just in developing countries but right here in the United States. As a result, poverty and individuals who live in poverty
are of interest to researchers. The more that is known about low-income families, the more that can be done to help improve their situation. A recent study by researchers from the University of Chicago Booth School of Business, Harvard University and Princeton University focused on how being poor can affect the decision-making process.
The research team worked on the hypothesis that being poor caused individuals to focus on immediate problems instead of the most pressing problems. For example, trips to the grocery store
when money is tight are seen as an urgent problem. Obviously, putting food on the table is a concern, but this almost all-encompassing focus on the immediate prevents problem solving and planning for future events, like paying the rent a few weeks down the road.
The hypothesis was tested through a series of five different experiments. Each experiment was a different game that provided some players more money or borrowing opportunities than other players. Players were randomly assigned budgets and the “poor” players borrowed more, even when they were the most engaged in the experiment.
Conclusions from the study include:
“Taken together, these studies provide compelling support for the notion that scarcity elicits greater engagement and that a focus on some problems leads to neglect of others (manifesting in behaviors such as overborrowing).” Source: ScienceMag.org
“Another explanation might be that scarcity creates cognitive load, thereby diminishing performance. Cognitive load might prevent people from figuring out the optimal borrowing rates, or it might lead people to use their resources less efficiently or make riskier financial decisions.” Source: ScienceMag.org
Ultimately the researchers concluded that programs that focus on meeting specific future financial needs and what steps should be taken to save for these needs
will help improve the lives of low-income individuals.
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