Scarcity’s toll

Sometimes I think I’m not poor because I’m smart.  An article in the Harvard Magazine this month reminded me this isn’t so.

Sendhil Mullainathan, a behavioral economist at Harvard, is studying how being poor affects economic decision-making. Low blood sugar can deplete physical capacities; a struggling mind can create similar chemistry in the brain – and trigger the same debilitating results.  Mullainathan says,

“To put it crudely, poverty – no matter who you are – can make you dumber.”

It’s a well-documented phenomenon:  if the mind is focused on one thing, other abilities and skills such as attention, self-control, and long-term planning, often suffer.  We don’t lose any inherent capacities, just the ability to access the full complement of our skills. But in the face of scarcity,

“We’re not just talking about shorter patience or less willpower. We’re often talking about short-term financial fixes that can have disastrous long-term effects.”

As policymakers look at ways to make good choices easier to make, it turns out that small changes can have huge effects.  Thaler and Sunstein in their book Nudge:  Improving Decisions about Health, Wealth, and Happiness (2008) showed that “nudging” people into better choices can be as easy as changing the wording on a page.  80% of new workers signed up for a 401(k) retirement plan if asked to check a box to opt out; 45% if they had to check a box to opt in.

In 2002 Daniel Kahneman won a Nobel Prize for his work with Tversky on the idea that the way choices are presented has as much effect on decisions as the actual value of the things people choose.  He says of Mullainathan’s research inverts the long-held thinking that the poor are poor because they make bad decisions.

“Instead, people make bad decisions because they are poor.”

 

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