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Money Secrets

How poverty changes the way we make decisions

Adriene Hill Oct 21, 2013
Money Secrets

How poverty changes the way we make decisions

Adriene Hill Oct 21, 2013

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.

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