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Poor people’s lack of funds affects decision-making, research shows

By Amina Khan, Los Angeles Times –

LOS ANGELES—Why do poor people spend money in ways that seem to squander their already limited resources, like buying lottery tickets? It’s not necessarily that they’re less savvy about financial matters, but their lack of funds appears to affect the way they think, according to new research.

The poor often make decisions that deepen their poverty, such as borrowing money at exorbitant interest rates. Sociologists and behavioral researchers have several explanations for this, including a “culture of poverty” that makes it seem normal to be poor, undermining efforts to join the middle class.

But a study published this week in the journal Science offers another explanation: No matter who you are, having severely limited resources alters the way you make decisions about them.

When cash is flowing and money is no object, people handle groceries, gas and rent without a second’s thought, the theory goes. But when there aren’t enough funds to easily meet all these expenses, payers may spend a lot of mental energy focusing on the grocery bill but will then miss a credit card payment, even though they’ll accrue penalties.

This theory would be difficult to test in the real world, said Anuj Shah, the behavioral economist at the University of Chicago who led the study with colleagues from Harvard and Princeton. “In our experiment, we basically tried to make people poor and make them rich.”

Shah’s team set up five different games. In each case, they limited some of the players’ resources to see how it impacted their decisions.

In one game, 60 participants played a version of “Wheel of Fortune.” The “poor” players were allowed to make 6 guesses per round, while “rich” players got 20. Since the rich were playing more than the poor, their brains should have been more tired. Instead, the researchers found that poor players performed worse on a cognitive task after playing the game, a sign that their brains were working harder.

In the next experiment, 68 volunteers played a slingshot-firing game similar to “Angry Birds.” Poor players could take only three shots on each level, while rich players got 15 shots. The researchers found that the poor spent more time than their rich counterparts aiming the first shot of each level. The poor were focusing more on that first shot, the researchers said, because they knew they had to use their limited resources wisely.

That deeper engagement paid off — poor players earned more points per shot (2.31, on average) than the rich (1.67). But that advantage disappeared if they were allowed to borrow a shot from a future round. When players had the option of taking an extra shot now and giving up two shots later — essentially, paying an interest rate of 100 percent — poor players were 12 times more likely than rich players to take that deal, even though it resulted in lower average scores.

The next few experiments strengthened these findings. In one of the games, the researchers ran a Family Feud-style trivia contest, giving poor players just 15 seconds to answer questions while rich players got 50 seconds. The same patterns emerged, even though the resource was time, not money.

And when they were given previews of questions in upcoming rounds, poor players still performed roughly the same as when they were blind to future questions. Rich players, on the other hand, improved with the previews. The researchers surmised that the poor must be too focused on the round at hand to worry about a round in the future.

The results add a layer of complexity to economic theories of poverty, Shah said. It’s not that poor people don’t save or tend to ignore the future, they just see things differently.

“If you look at the data, you see that low-income individuals do save, but they save a little differently,” he said. “They save for specific expenses — for an appliance or for their kid’s wedding. They’re saving because their attention has shifted to a particular problem that is out there.”

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