People facing financial hardships are prone to making poor decisions: they don’t save money, they don’t adhere to medications regimes, borrow too much, etc. Can we blame the poor for being poor? What is the cause of such bad decision-making? Can we assume that they have the same pressures on their cognitive capacities as people who have abundant resources at their disposal?
There is a growing body of research that shows that financial strain can have widespread effects on how we make decisions.
To understand why people facing financial difficulties make bad decisions, one can’t just look at their cognitive indicators. Such an approach could oversimplify the problem because it ignores enormous social, economic and political realities.
One’s financial capabilities are linked to their domicile, existing political power structures, inequality of wealth distribution, access to healthcare, education, employment, etc. This caution was best articulated by the evolutionary biologist Steven Jay Gould thus: “I am somehow less interested in the weight and convolutions of Einstein’s brain than in the near certainty that people of equal talent have lived and died in cotton fields and sweatshops.” However, the cognitive element should also not be completely ignored, and a slew of studies have been making this case.
A person born into poverty will already begin with certain cognitive setbacks. Studies have shown that children born to a malnourished mother have poor cognitive ability and that then extends into adulthood. However, we also face financial difficulties in an episodic manner.
We might have a poorly paid job or have to pay for ill health. Do these episodes of financial strain affect our thinking? The main idea of how economic scarcity affects cognitive functions comes from a theory put forth by a behavioural economist named Senthil Mullainathan in his so-called “scarcity hypothesis”. This theory rests on the fact that we have a finite amount of mental capacity to make decisions. So when we are faced with scarcity – say, of money or time – we pay more attention to more immediate financial strains and don’t have the ‘mental bandwidth’ to pay attention to other decisions. This could be the reason why people facing financial stress make decisions that are harmful to them in the long run.
Mullainathan and his group built their theory around experimental evidence. In his studies, participants played games like ‘Wheel of Fortune’, ‘Angry Birds’ and ‘Family Feud’ under conditions prompting financial stress, and their responses were recorded.
In one experiment, participants were randomly assigned to either a “rich” group, where they had more time and resources at their disposal, or a “poor” group, where they were short of time and resources. Mullainathan and his peers found that people randomly assigned to the “rich” group performed better at the games than those the “poor” group, even though those additional resources were not needed to do better.
Tellingly, when participants were offered to take loans during the game, those in the “poor” group borrowed heavily, mimicking real-life observation; they also performed worse after they borrowed.
In all, the experiments show that when faced with limited resources, people’s performance could become subpar, leading to poor decision making.
To narrow down the specific cognitive elements, more specific studies were carried out. To mimic the ‘mentality of scarcity’, the researchers asked participants to think about a fictitious financial problem: their car needed repair and they had three choices: pay in full, take a loan or ignore the problem. While they were asked to think about this problem, they were made to undertake simple tests to measure their cognitive capacity, like fluid intelligence, which is the capacity to think logically and solve problems in novel situations, and cognitive control, an indication of how well we can choose the right course of action in a given situation.
The participants in this experiment were grouped according to their income, as rich and poor. The researchers found that when the repair costs were high, such that it required some financial juggling, the poor did badly in the cognitive tests. Further proof came from studies in the field. The cognitive ability of sugarcane farmers in India before harvest (“poor phase”, when they face financial difficulty) was worse than after harvest (“rich phase”, where they could sell the goods and make money).
Theories to explain these cognitive deficiencies are still being worked out. Some factors that could be affecting the outcomes include hormonal changes, stress and neurotransmitters, which can affect the way we pay attention, remember and make decisions. Additionally, the extent of cognitive limitations imposed by financial hardship is only beginning to be recognised.
Recently, a study advanced a provocative idea: that people in rich countries have better navigational capabilities. Researchers developed a game called ‘Sea Hero Quest’ as a smartphone app, which was played by half a million people. They found that people living in countries with a higher GDP were better at the game. Although this study was correlational, and the navigation skills could be because of better access to technology, travel, driving skills, etc., the findings prompt us to look for other a cognitive abilities that could be affected by financial stress. Deficiencies in multi-purpose functions like fluid intelligence and cognitive control affect everyday decisions – which food to buy, whether to buy lottery tickets, to put off medical tests, to take insurance, to indulge in risky behaviour, etc.
That poverty affects basic cognitive abilities is a powerful idea. This stands in contrast to messages from pop psychology that suggest if you work harder, change your attitude and get smarter, then you will be able to beat poverty. On the contrary, what these studies have shown is that being poor also robs one of certain cognitive capabilities and that it is not an inherent trait as much as the very nature of financial strain. It’s time now to rethink and tailor poverty alleviation schemes such that they are mindful of the cognitive abilities of people faced with financial stress.