[Highlight#009]On the psychology of poverty_Chelsea

Poverty by Matteo Angelino by creative commmons from Flickr

Excerpt from

Science 23 May 2014:
Vol. 344 no. 6186 pp. 862-867
DOI: 10.1126/science.1232491

Poverty remains one of the most pressing problems facing the world; the mechanisms through which poverty arises and perpetuates itself, however, are not well understood. Here, we examine the evidence for the hypothesis that poverty may have particular psychological consequences that can lead to economic behaviors that make it difficult to escape poverty. The evidence indicates that poverty causes stress and negative affective states which in turn may lead to short-sighted and risk-averse decision-making, possibly by limiting attention and favoring habitual behaviors at the expense of goal-directed ones. Together, these relationships may constitute a feedback loop that contributes to the perpetuation of poverty. We conclude by pointing toward specific gaps in our knowledge and outlining poverty alleviation programs that this mechanism suggests.

More than 1.5 billion people in the world live on less than $1 a day (purchasing power parity in December 2013 dollars) (1). This lack of financial means has far-reaching consequences: In Africa, the average person dies 21 years earlier than in Europe, one-third of the population is illiterate (1), and one in three children is stunted in growth (2). Economic poverty means living in squalor, dying early, and raising children who face similar prospects.

But does poverty affect people’s affective states and their economic choice patterns, i.e., the way they feel and act? Here, we discuss recent findings that suggest that poverty causes negative affect and stress—defined as an organism’s reaction to environmental demands exceeding its regulatory capacity—and that this effect may change people’s behaviorally revealed preferences. Poverty may, in particular, lower the willingness to take risks and to forgo current income in favor of higher future incomes. This may manifest itself in a low willingness to adopt new technologies and in low investments in long-term outcomes such as education and health, all of which may decrease future incomes. Thus, poverty may favor behaviors that make it more difficult to escape poverty.

Two caveats are in order at the outset. First, poverty is characterized not only by insufficient income but also by dysfunctional institutions, exposure to violence and crime, poor access to health care, and a host of other obstacles and inconveniences. This diversity complicates a single and simple account of the relationship between poverty and psychology. However, a first, useful step can be made by focusing on material poverty as a central feature and powerful predictor of the ancillary features of poverty described above. Second, in asking whether poverty reinforces itself through psychological channels, we are not suggesting that the poor bear blame for their poverty. Rather, an environment of poverty into which one happens to have been born can trigger processes that reinforce poverty. On this view, any one of us might be poor if it were not for certain environmental coincidences.

The Effect of Poverty on Risk-Taking and Time-Discounting
People living in poverty, especially in developing countries, have repeatedly been found to be more risk averse and more likely to discount future payoffs than wealthier individuals. For example, discount rates of poor U.S. households are substantially higher than those of rich households (3); likewise, studies of Ethiopian farm households (4) and a South Indian sample (5) find that lower wealth predicts substantially higher (behaviorally measured) discount rates. Wealthier households or those with higher annual incomes also display lower levels of risk aversion in representative samples (6, 7).

In addition to these correlations between wealth/income and preference measures, there is also evidence suggesting that poverty has a causal effect on risk-taking and time-discounting. In (7), the potential reverse causality problem—that low risk aversion may on average lead to higher incomes or wealth—is tackled by using windfall gains as an instrumental variable (IV). The IV estimates show a substantial negative effect of income/wealth on risk aversion. The assumption needed for this approach to work is that windfall gains are positively correlated with household income/wealth—which they are—and that they only affect risk aversion through the income/wealth channel—which is plausible. In another study (8), experimentally measured discount rates of Vietnamese respondents were negatively related to income; that is, poorer households were more likely to choose smaller and earlier monetary rewards over larger, delayed ones. Here, the potential reverse causality problem—that high incomes may cause low discount rates—was solved by using rainfall as an instrumental variable for income. Rainfall is significantly correlated with income, and on the assumption that it affects the discounting of future payoffs only through income it is a valid instrument. The IV estimates confirm the negative relationship between the discount rate and income, suggesting that poverty may causally affect time-discounting. In addition, the results show marginally more risk aversion in poorer participants.

Negative income shocks are a pervasive feature of the lives of the poor, and they are particularly vulnerable to these shocks because of limited access to credit markets (9, 10). It is therefore interesting to study the effect of negative income shocks on economic choice. In (11), subjects were randomly assigned to income shocks in a laboratory experiment after they had first earned some income in an effort task. The authors compared the discounting of future payoffs of subjects who experienced a negative shock with those of a control group that had not experienced an income shock; importantly, a suitable choice of initial endowments ensured that the two groups had the same absolute income when they performed the discounting task. In addition, the potential reverse causality between income levels and time-discounting could be perfectly controlled in the laboratory setting through exogenous manipulation of income levels. Controlling for absolute income, subjects who received a negative income shock exhibited more present-biased economic behavior than those whom the shock did not affect. No opposite effect was found for positive income shocks. Thus, negative income shocks—a pervasive feature of poverty—appear to increase time-discounting.

In a similar study, subjects were randomly assigned to a smaller (“poor condition”) or a larger (“rich condition”) budget (12) and were then asked to make a series of “purchasing” decisions. Naturally, those with a smaller budget faced more difficult trade-offs because they could afford fewer of the desirable goods. Because decision-making under difficult trade-offs is likely to consume scarce cognitive resources, subjects with a small budget were hypothesized to be impaired in subsequent tasks that require willpower and executive control (13). The study indeed found that previous decision-making in the poor condition—but not the rich condition—impaired behavioral control, as measured by the duration of time subjects were able to squeeze a handgrip and their performance in a Stroop task. Thus, poverty appears to affect decision-making by rendering people susceptible to the willpower and self-control depleting effects of decision-making. Because willpower and self-control are hypothesized to be important components of the ability to defer gratification, such effects may also affect time-discounting behavior.

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P.S. It's a pretty interesting yet "imaginable" outcome that poverty breeds further. What to do with the finding would be the next question to address.