How poverty changes the way we make decisions

Mullainathan's research focuses on the effects of poverty on behavior.

Image of Scarcity: Why Having Too Little Means So Much
Author: Sendhil Mullainathan, Eldar Shafir
Publisher: Times Books (2013)
Binding: Hardcover, 304 pages

For years, academic studies have found that the poor tend to make worse decisions than their more well-off counterparts. But is it simply that people who are bad decision-makers tend to end up poor, or is there something about poverty and money that affects our process decision-making itself?

That's what Sendhil Mullainathan and his colleagues wanted to find out.  Mullainathan, an economics professor at Harvard, is a co-author of the new book, Scarcity and recently published an article in the journal Science titled "Poverty Impedes Cognitive Function."

"The starting point for our research was really to say, 'What if we flip this question on its head?'" Mullainathan says, "What if it's not that the poor, as people, are worse decision makers, but instead what if it's that poverty makes everyone a worse decision-maker?"

Mullainathan says his research team tested this by going a shopping mall in New Jersey and giving people from different backgrounds tests of their brain function, like their IQ, and for half of the subjects, "tickled" the part of the brain that deals with money.

"We basically said, 'Hey, here's a hypothetical scenario involving money,' and then we gave them the IQ test," says Mullainathan, who described the hypothetical as a question about how you would deal with needing money for car repairs.

"Getting the rich to think about money doesn't do anything; they just do as well on the IQ test," Mullainathan says, "Get the poor to think about money, and all of a sudden, their IQ performance drops significantly."

Mullainathan says the magnitude of the results were similar to those seen in tests that required college students to be sleep-deprived before taking an IQ assessment.

"Just getting near the cognitive space of money taxes the brain," he says, "Those thoughts interfere and keep us from whatever we're trying to focus on."

The next part of Mullainathan's study didn't "tickle" its subjects, but looked at the cognitive states of farmers in India during two times: before they got their harvest payment, and after.

"Being in rural India as a sugarcane farmer, versus being in a mall in Trenton, New Jersey -- these are such different contexts -- but we're finding very similar effects and very similar magnitudes," Mullainathan says, "It led us to believe there were some legs to this notion that being poor can tax your mind."

Take a look at small occurrences in our own lives: "Imagine you go into a meeting, it's two o'clock, and somebody brought a plate of cookies and you're like, 'Should I have a cookie? Maybe I should, maybe I shouldn't,'" says Mullainathan, "And then ten minutes into the meeting you realize, 'Oh, I haven't really heard much of what's going on, because I've been focused on this cookie.'"

This scenario, he says, is emblematic of how certain thoughts can steal some of our focus, but most come and go.

"But for the poor, they have a constant drumbeat of those thoughts," Mullainathan says, "There's a constant background noise, a constant concern tugging at their minds: 'How will I make rent this month? What am I going to do, my kid's birthday is coming up?'"

These kinds of thoughts essentially leave the brain with less processing power for other types of problem solving Mullainathan says.

So if you're stuck in this cycle of bad decision-making, how do you break out? Mullainathan recommends changing the times when you make big decisions.

"We often neglect the importance of bandwidth in our decision-making," he says.

If you recognize that you tend to make better decisions after payday, for example, it may be better to delay important ones until the time when you have better mental capacity.

Mullainathan believes these findings can teach us how better to structure anti-poverty programs as well. Most types of these programs aim to provide services at a low cost to the poor, but they may be straining people anyway.

"A lot of these programs, without intending to, charge the poor a lot of bandwidth, and we know they're low on bandwidth," Mullainathan says, who gives the example of having to fill out complicated paperwork to qualify for financial aid as an action that taxes someone mentally.

To hear all of the conversation, click play on the audio player above.

About the author

Adriene Hill is a senior multimedia reporter for the Marketplace sustainability desk, with a focus on consumer issues and the individual relationship to sustainability and the environment.
Image of Scarcity: Why Having Too Little Means So Much
Author: Sendhil Mullainathan, Eldar Shafir
Publisher: Times Books (2013)
Binding: Hardcover, 304 pages
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Further thoughts:
1. It has been said that IQ is what IQ tests test for, and that's all. The apparent lapse into stupidity on the part of the obviously low-income when questioned about money can reasonably result from two other considerations other than IQ.
First, low-income people are typically in a more or less continual state of stress over money. So the researcher finds them in a shopping mall, where they (and their children) are bombarded with temptations to spend beyond their means, usually by running up the credit card, and where the Good Life that is enjoyed by the financially secure is literally flaunted. Money problems produce stress, and stress has a stupifying effect, as anyone knows who has experienced it. I'm not talking about the stress of athletes or aggressive people, but the stress that you feel in the pit of your stomach when you are frightened.
Second, they may just be reacting negatively to being questioned in the first place, exposing themselves to criticism (as in fact they are--they're not wrong about that). Moreover, they may well have felt intimidated. For a year I worked as a field interviewer in a national health study and although the majority of respondents were cooperative, a large number were adamantly opposed to my "prying" even though they stood to make $90 for their time. If the researchers for this book thought they were getting 100% candid responses from people who live with some level of deprivation every day, they were truly naive. Of course, the financially comfortable were brimming with self-confidence, felt on the same social footing with the researchers, and naturally were mentally and emotionally relaxed, producing a better and sharper response.

Back to the thesis of the book. Do we low-wage earners make "bad" decisions? What is a "bad" decision? When none of your options are particularly good, and in fact are equally lousy, you can only make the best of a bad situation, so does that mean you didn't make a "good" decision? Only someone who is financially secure has the freedom to entertain some ideal scenario and then go for it. Money cushions the hard blows, attracts friends, and greases the machinery. It's possible to aim for the stars, you have a plethora of good options and opportunities and possibilities, which the low-income simply do not have.
One pitfall of the children of the Me Generation of the 80's is that they seem to judge others by their own standards. If you don't enjoy the success that I do, if you don't adopt the lifestyle that I have chosen as the ideal best one, well, what's wrong with you??? Must be you're stupid, because I certainly am not.
This is a purely attitudinal phenomenon. I have no idea what could change it except a big dose of poverty, which may be coming about as the middle class is forced to give up on benefits they believe they've been promised, although no one ever promised them those things except advertisers.

OK, now I get to respond with what I know to be the truth of simply having too little money to live well on, as "well" is defined in the industrialized world. First of all, I do take great exception to the implication of this article, which is that low-income people are too dumb to make the right decisions, whether it's the result of undernourishment or whether low-income people are just plain dumb. I submit the following:
1. I know for a fact (and by direct experience) that low-income people probably know a lot more about budgeting, making smart decisions concerning money, and where their money comes from and where it actually goes, than people who have so much money they don't know what to do with it all. I'm 68 years old, working a part-time job that I love and am committed to, lucky to get it as I quickly ran out of other options when I retired from teaching. I am breaking even every single month. My current income is $22,000. I keep a ledger of income and expenses and monitor it closely, calculating what is in my checkbook and when I might need to use a credit card to pay bills. I have been living like this since 2002 and in the meantime I was able to buy a small, unfinished house, bring it to liveable condition, and sell it this year. I was able to buy a Ford Focus through the Cash-for-Clunkers program at a monthly payment I can just barely afford, but I needed a good, reliable, fuel-efficient car to commute to work with. I have learned to plan ahead and have been able to pay off short-terms loans and credit card debt, although a couple of high balances still remain. I shell out now for insurance and thankfully I'm on Medicare so I can stay healthy and also take care of any problems that arise without bankrupting myself. This is typically what people do who are just breaking even. Sorry, I just don't think we're missing any brain cells!
2. The financially secure make strategic decisions on a high level that have more to do with investing and placing their money where it will win the biggest return, but on a day-to-day basis they never need worry about missing credit card payments or overdrawing their checking accounts, with the financial penalties attached to those problems. They live on an abstract level, where social considerations and lifestyle shape their attitude to money. I recently listened to a Marketplace program about the relative lack of mobility among Americans. Speculating about the causes for this, both Kai and his guest jawboned about everything BUT the fact that it costs money to move! In 2002 I moved across the country to return to my home state in the east from Washington State. It cost a good $2,000 when all was said and done, and I could not have done it without cashing in my IRA. This summer I moved 35 miles away, using a short-distance moving company, and it cost me $1,000, not counting items I needed to buy for the new apartment, such as window curtains, a smaller bed and bedding, etc. We in the lower-income rungs know that this money needs to be earned, it doesn't grow on trees, and when we do take that leap of faith to move to what we hope is better opportunity, we still take a financial hit in the form of moving expenses, lost income while we move, the cost of settling in once we have moved, and often starting all over again in a dismal job market. This is why people don't just pick up and move as they used to do 40-50 years ago. That, and they're getting older now and have learned that you don't gain by gambling in such a poor economy as this one.
3. I do appreciate your department, the Wealth and Poverty desk. Marketplace is, in fact, the only forum that even attempts to approach the fact that poverty is a reality. But in all the discussion about money, there still is not enough recognition and acknowledgement that it takes a great deal of skill, smarts, and simply placing needs ahead of wants when you are trying to live decently on an income less than $25,000.

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