Does Poverty Lead to Poor Decision Making?
Business + Economy

Does Poverty Lead to Poor Decision Making?

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Poverty and the worry that goes with it uses up so much mental energy that the poor have little room in their brains for anything else.

As a result, people of limited means are more likely to make mistakes and bad decisions that may be amplified by, and perpetuate, their financial woes.

A new study suggests that being poor may keep some people from concentrating on ways that would lead them out of poverty. Cognitive function is diminished by the constant and all-consuming effort of coping with the immediate effects of having little money, such as scrounging to pay bills and cut costs.


So a person is left with fewer “mental resources” to focus on complicated, indirectly related matters such as education, job training, and time management.

A series of experiments show that pressing financial concerns have an immediate impact on the ability of low-income individuals to perform on common cognitive and logic tests. On average, a person preoccupied with money problems exhibited a drop in cognitive function similar to a 13-point dip in IQ, or the loss of an entire night’s sleep.

When their concerns were benign, low-income individuals performed competently, at a similar level to people who were well off, says corresponding author Jiaying Zhao, who conducted the study as a doctoral student in the lab of co-author Eldar Shafir, professor of psychology and public affairs at Princeton University.


“These pressures create a salient concern in the mind and draw mental resources to the problem itself. That means we are unable to focus on other things in life that need our attention,” says Zhao, who is now an assistant professor of psychology at the University of British Columbia. “Previous views of poverty have blamed poverty on personal failings, or an environment that is not conducive to success. We’re arguing that the lack of financial resources itself can lead to impaired cognitive function. The very condition of not having enough can actually be a cause of poverty.”

The mental tax that poverty can put on the brain is distinct from stress, Shafir says. Stress is a person’s response to various outside pressures that, according to studies of arousal and performance, can actually enhance a person’s functioning.

In the new study, published in Science, researchers instead describe an immediate rather than chronic preoccupation with limited resources that can be a detriment to unrelated yet still important tasks. “Stress itself doesn’t predict that people can’t perform well; they may do better up to a point,” Shafir says. “A person in poverty might be at the high part of the performance curve when it comes to a specific task and, in fact, we show that they do well on the problem at hand.

“But they don’t have leftover bandwidth to devote to other tasks. The poor are often highly effective at focusing on and dealing with pressing problems. It’s the other tasks where they perform poorly.”

The fallout of neglecting other areas of life may loom larger for a person just scraping by, Shafir says. Late fees tacked on to a forgotten rent payment, a job lost because of poor time-management - these make a tight money situation worse. And as people get poorer, they tend to make difficult and often costly decisions that further perpetuate their hardship.

“They can make the same mistakes, but the outcomes of errors are more dear,” Shafir says. “So, if you live in poverty, you’re more error prone and errors cost you more dearly, it’s hard to find a way out.”

The first set of experiments took place in a N.J. mall between 2010 and 2011 with roughly 400 subjects chosen at random. Their median annual income was around $70,000; the lowest income was around $20,000. Researchers created scenarios wherein subjects had to ponder how they would solve financial problems, for example, whether they would handle a sudden car repair by paying in full, borrowing money, or putting the repairs off.

Participants were assigned either an “easy” or “hard” scenario in which the cost was low or high, such as $150 or $1,500 for the car repair. While participants pondered these scenarios, they performed common fluid-intelligence and cognition tests.

Subjects were divided into a “poor” group and a “rich” group based on their income. The study showed that when the scenarios were easy, or the financial problems not too severe, the poor and rich performed equally well on the cognitive tests. But when they thought about the hard scenarios, people at the lower end of the income scale performed significantly worse on both cognitive tests, while the rich participants were unfazed.

To better gauge the influence of poverty in natural contexts, between 2010 and 2011 the researchers also tested 464 sugarcane farmers in India who rely on the annual harvest for at least 60 percent of their income. Because sugarcane harvests occur once a year, these are farmers who find themselves rich after harvest and poor before it. Each farmer was given the same tests before and after the harvest, and performed better on both tests post-harvest compared to pre-harvest.

The cognitive effect of poverty the researchers found relates to the more general influence of “scarcity” on cognition, which is the larger focus of Shafir’s research group. Scarcity in this case relates to any deficit, be it in money, time, social ties or even calories, that people experience in trying to meet their needs. Scarcity consumes “mental bandwidth” that would otherwise go to other concerns in life.

“These findings fit in with our story of how scarcity captures attention. It consumes your mental bandwidth,” Zhao says. “Just asking a poor person to think about hypothetical financial problems reduces mental bandwidth. This is an acute, immediate impact, and has implications for scarcity of resources of any kind.”

“We documented similar effects among people who are not otherwise poor, but on whom we imposed scarce resources,” Shafir says. “It’s not about being a poor person. It’s about living in poverty.”

Many types of scarcity are temporary and often discretionary, Shafir says. For instance, a person pressed for time can reschedule appointments, cancel something, or even decide to take on less. “When you’re poor you can’t say, ‘I’ve had enough, I’m not going to be poor anymore.’ Or, ‘Forget it, I just won’t give my kids dinner, or pay rent this month.’ Poverty imposes a much stronger load that’s not optional and in very many cases is long lasting. It’s not a choice you’re making; you’re just reduced to few options. This is not something you see with many other types of scarcity.”

Services for the poor should accommodate the dominance that poverty has on a person’s time and thinking. Such steps would include simpler aid forms and more guidance in receiving assistance, or training and educational programs structured to be more forgiving of unexpected absences, so that a person who has stumbled can more easily try again.

“You want to design a context that is more scarcity proof,” says Shafir, noting that better-off people have access to regular support in their daily lives, be it a computer reminder, a personal assistant, a housecleaner, or a babysitter. “There’s very little you can do with time to get more money, but a lot you can do with money to get more time. The poor, who our research suggests are bound to make more mistakes and pay more dearly for errors, inhabit contexts often not designed to help.”

Anandi Mani, an associate professor of economics at the University of Warwick, and Sendhil Mullainathan, a Harvard University economics professor, contributed to the study.

This article originally appeared in Source: Princeton University.