Article Review

“Adapting to the Destitute Situations: Poverty Cues Lead to Short-Term Choice”

Review of a paper by Liu, Feng, Suo, Lee, Li (2012)

In previous posts (“Scarcity”, “Through the psychology of poverty”), we showed how scarcity affects the way people consider problems and take decisions. Although scarcity may concern many kinds of goods, including even available time, in this article we will consider only the lack of financial means. The underlying idea is that when people are wealthy enough not to have to worry about small expenditures, they do not need to spend mental resources on the task, whereas indigents have to invest time and thought on it.

This has a consequence: scarcity leads people to focus primarily on problems wherein shortage is more severely perceived, even though those same issues are not necessarily the most relevant ones for long term well-being. This compromises the individual’s ability to choose wisely.

Mani, Mullainathan, Shafir and Zhao (2013), following the same intuition, showed how Intelligence Quotient (IQ) test scores are correlated to the perception of poverty. In particular, by inducing thoughts about everyday small financial problems in poor subjects, they were able to severely diminish their cognitive ability, while leaving the wealthy ones unaffected. Interestingly, when no manipulation was performed, there were no significant differences between the rich and the poor’s test scores, suggesting that the reduction in cognitive skills was due to the stress linked to the fact of being (relatively) poor, and not to indigence itself. The idea behind this observation is that cognitive capability is limited and poverty – or simply a reminder of the fact of being poor – “taxes” it, leaving less to handle everyday choices.

Liu, Feng, Suo, Lee and Li (2012) took the discussion a step further: in this case, the considered subjects (all college students) were not poor, but simply cued into different economic statuses. In particular, they studied whether poverty cues affected inter-temporal choices under the general assumption that people exposed to poverty prefer a short-term but smaller reward.

In all experiments, participants could opt between a smaller but immediate payment and larger but later in time one. They were asked to take their choice before and after completing the priming task, so that the first one can be used as a benchmark. The games were repeated several times. In Experiment 1, subjects were primed in an explicit way by having to judge the degree of poverty or affluence (according to the group they were randomly assigned to) of several pictures; in Experiment 2 they had to count the number of people in each picture, so that the purpose of the experiment was less explicit; in the third one they participated in a lucky draw game in which they would gain a prize or nothing, thus being exposed to a moment of relative affluence or poverty.

22782124_10212901226357233_1588832224_nPictures representing “poverty” and “affluence” from Experiments 1 and 2.

In every experiment the groups assigned to the different cues were balanced, as the percentage of present biased individuals was the same. However, after completing the task, subjects who had been exposed to poverty cues became significantly more prone to opt for an immediate but smaller payment, while those cued into affluence showed a non-significant increase in the choice of the later but larger prize. Results were the same in each experiment, thus suggesting that the environment influences individuals’ perceptions, which is in turn reflected in time preference. Indeed, according to the authors, the poor are subconsciously associated with an unstable context and a lack of means to deal with it, whilst the rich are perceived as economically independent. As a consequence, people, when exposed to situations of poverty, felt more in need of liquidity to deal with uncertainties and hence opted for a smaller but closer-in-time reward. Moreover, the fact that the choices of the other group did not change suggests that individuals are more sensitive to negative cues.

22833343_10212901224477186_1592177517_o22812843_10212901225637215_307340708_oResults from Experiment 2 and 3 respectively: mean percentage of immediate reward as a function of the manipulations of the ‘‘poverty’’ state (left) and the ‘‘affluence’’ state (right), with pre-test (brown) vs. post-test (green) percentage of demand for immediate payments. Error bars indicate standard errors of the mean.

Therefore, the authors conclude that  “just the feeling of poverty influences intertemporal choices – the actual reality of poverty (restricted resources, etc.) is not necessary to get the effect”.

 

References:

Liu L., Feng T., Suo T., Lee K., Li H. (2012), “Adapting to the Destitute Situations: Poverty Cues Lead to Short-Term Choice”, PLoS ONE, Vol. 7, No. 4: e33950.

Mani A., Mullainathan S., Shafir E., Zhao J. (2013). “Poverty Impedes Cognitive Function”, Science, Vol. 341, No. 6149: 976-980.

Mullainathan S., Shafir E. (2013), Scarcity: Why Having Little Means So Much, Times Books, New York.

 

Advertisements
Our Work

The Increasing Challenge of Mental Health Problems

The key assumption in neoclassical economic theory is that individuals are perfectly capable of taking rational decisions, translated into the homo economicus ideal-type. But what happens if individuals are not in perfect health and have their decision-making process threatened?

Lately, much has been discussed about the rise in mental health issues, especially among youngsters. In a fast-changing world full of uncertainties, individuals may constantly focus on achieving perfection and success under highly competitive environments, threatening the efficiency of their decision-making processes. A recent report by Craig Thorley for the Institute for Public Policy Research in the UK shows that the number of students under 25 years of age disclosing a mental illness to their institution has increased fivefold over the past decade. What are the causes behind this?

The combination of academic, financial and social pressures is the key to understanding what motivated this phenomenon. It is undeniable that individuals have been living in environments that undermine mental health. For instance, a survey published by stem4, a teenage mental health charity, reveals that the top anxieties among 12-to-16 years old are exam worries, work overload, friendship concerns, lack of confidence and self-esteem, and feelings of being overwhelmed. In parallel, this new generation of youngsters feels more financially pressured given their large student debts, under the expectation that such investments will pay off in the future. Under scarcity of time and mental health, as defined by Mullainathan and Shafir (check our review of their book on Scarcity here), individuals have their “mental bandwidth” depleted, i.e. they become less mentally efficient. What can be done to avoid this?

mentalhealthtags

There is a need to not only prepare students better for academic challenges, but also to provide them with good health support systems inside universities. However, there are three underlying challenges. First, it is necessary to make students speak out for their feelings and enlist the help of a specialist to cope with pressure and avoid loneliness. Second, academic institutions ought to provide easy access to university counseling services, though it is not always the case that supply meets demand, and in less developed countries this type of service may not even exist. Third and more importantly, students may not realize that they need help, or that there is someone willing to listen to them.

Under these circumstances, the national health service and private institutions need to combine forces to find an innovative solution to the rise of mental illnesses. We need to understand its causes and how to tackle it, because it has huge economic costs. Also, we must work towards a society that is sensitive to these issues and realizes the importance of mental well-being.

References

Shafir, E. & Mullainathan, S. (2013). Scarcity: Why Having So Little Means So Much. Times Books, New York.

Thorley, C. (2017). Not by Degrees: Improving student mental health in the UK’s universities, IPPR.

The Guardian (March 26, 2017). Mental health problems rife among teenagers but teachers lack skills to help by Rachel Ellis.

The Guardian (August 29, 2017). The rise in student mental health problems – ‘I thought my tutor would say: deal with it’ by Donna Ferguson.

The Guardian (September 05, 2017). More students than ever suffer mental ill health. We must change our toxic world by Nihara Krause.

Article Review

“Scarcity”: a book review

What is scarcity?

“Scarcity” was published in 2013, written by Sendhil Mullainathan, professor of Economics at Harvard, and Eldar Shafir, professor of Psychology and Public Affairs at Princeton. The greatest strength of this book is also its greatest weakness: it’s educational. On the one hand this is good, because it brings Behavioral Economics to the general  public and we certainly need it; on the other hand, the lack of a model makes the analysis shakier than we would like.

At the very beginning the authors define scarcity as “having less than you feel you need”; traditionally, development economists focused only on physical poverty. However, with this definition, they want to emphasize that scarcity can be both physical and mental. The main takeaway of the book is that scarcity is a mindset that lures people into a poverty trap, the leaving of which is very difficult.

To better illustrate this point, throughout the book they refer to  several experiments that have taken place both in developed and developing countries. The best feature is that they test physical and mental scarcity in both settings, and more importantly how they interact. The interaction is fundamental, because their thesis is that physical scarcity causes mental scarcity, i.e. the scarcity mindset. It’s easy to imagine physical scarcity, it ranges from not having enough food, money, time or (spoiler alert!) enough blueberries in a videogame. However, it is more difficult to think of mental scarcity, even though we constantly experience it. To explain it, they use the concept of bandwidth, or mental capacity. We can think of it as the “RAM of our brain”, the precision and speed at which we process information and execute decisions.

What are the effects of scarcity?

When we experience  scarcity we tunnel, i.e. we get extremely focused on solving the scarcity at hand. This focus can have 2 effects: one positive, and one negative. In the short run it is generally positive, because it makes us focus on the task at hand, operating at maximum capacity. However, it can have a negative effect too, since in this case when we are focusing we are actually tunneling, i.e. leaving everything else out of the picture, with possibly dire consequences. Moreover, in the long run scarcity erodes the availability of mental capacity, given that we can focus on nothing else.

To support this view, they refer to  several experiments and I’m going to explain three of them to help you understand. There is one experiment where people with less bullets available in each round of a shooting  game scored proportionately higher than people with more bullets: having less prompts efficiency. In another one, dieters found more difficult to concentrate on the next task if the previous one mentioned pastries: scarcity captures the mind and lets us focus on nothing else. The final experiment concerns Indian farmers, who score lower on an IQ test (measured with Raven’s matrix test) just before harvest than just after it. Why? Because they typically squander their harvest money in the months immediately following it, and the closer they get to harvest period, the poorer they are. That causes what is called a “bandwidth tax”; part of the brain continuously focuses on the scarcity at hand, leaving less room for other thoughts. It is really important to notice that all kinds of scarcity could cause that tax, ranging from money, time, love, etc.

Before turning to how to escape the scarcity trap, they focus on another negative side effect: borrowing. When tunneling, we leave everything else outside the tunnel, such as future consequences. To illustrate it , they make their case against the utility of payday loans. These loans are extremely short ones, with high interest rates. Moreover, they are extremely easy to get: in the US there are more payday lenders than McDonald´s and Starbucks outlets combined! Hence, once inside the tunnel, payday loans seem like the best way to get money, but in the long run they’re extremely detrimental.

How can we help people escaping the scarcity trap?

Seeing as scarcity is a lack of something, there are essentially 2 solutions: a windfall of the something needed or a more efficient use of the quantity at our disposal.

However, scarcity is insidious. For instance, they once gave Indian traders enough money to extinguish their debts, drastically increasing their disposable income, since they did not need to pay interests anymore. However, one by one they started borrowing again, eventually reverting to their previous situation. So a one time payment wasn’t enough to escape the poverty trap because they were not efficient, i.e. they did not reserve any slack. Indeed, the main reason to fall into the scarcity trap is that we are at the limit of the resource in question, so that when we face an unexpected “expense” we start borrowing from the future and taxing our bandwidth. Hence, the authors strongly advocate for the creation of slack, both to exit and to avoid (re)entering the scarcity trap.

Moving on to the strictly efficient part, they refer of the St.John’s Regional Center in Missouri: they were  constantly operating at maximum capacity, so when an unexpected surgery came up all the elective ones needed to be rescheduled. The solution was brilliant: keep an Operating Room (OR) only for the unexpected surgeries. Having one less OR available actually increased the number of surgeries performed: the creation of slack solved the problem. The last example highlights another important feature of scarcity: it does not concern only individuals, but also organizations.

In conclusion, the authors offer an exciting, novel interpretation of  poverty, tackling it from different angles, following a new framework: scarcity. Even though they lack a formal model (so far), the book offers an interesting view on one of the oldest problems, using several hints from Behavioural Economics. In short: a must read.