Are the Poor More Irrational, or Does Poverty Lead to Poverty?

Why are the people who can least afford to buy lottery tickets the most likely to do so? Any half-decent mathematician can show that lottery tickets are a losing bet. Buying them is irrational to buy them, unless you derive pleasure from losing. The same goes for taking out high-interest paycheck loans.

Are the poor just more irrational than others? Are they poor because they not financially savvy? Or perhaps is something about being poor that’s at the root of the problem?

A recent behavioral economics study suggests that it may be the latter.

Researchers from University of Chicago, Harvard, and Princeton set up five different economic games. In one, for example, 60 participants played an “Angry Birds” type slingshot game. “Poor” players were allowed 3 shots per round, while the “rich” got 15.

The poor players were more careful with their shots and earned more points per shot than the rich. Interpretation: When you have less money, you’re more careful in spending it, and that pays off.

That is, unless they were allowed to “borrow”. Players were given the option of taking 1 extra shot, but in exchange had to give up 2 shots in a later round. This obviously was a bad deal – an effective 100% interest rate – but the poor players were 12 times as likely as rich players to do so. Never mind that the poor could least afford to sacrifice any of their 3 shots. And “borrowing” a shot eliminated any advantage the poor got from their added care in shooting.

Admittedly, Angry Birds games are a long way from the real world, but economic experiments such as these can go a long way towards shedding light on actual human behavior, particularly when a number of different games find evidence supporting the same conclusions.

The researchers concluded that people living in poverty aren’t necessarily less rational. They just see things differently, perhaps focusing more closely on certain specific needs, and disregarding others. When messages are tailored to the way poorer people are thinking, they do better at reaching goals.

There are lots of ways that society can help the poor improve their financial (and health) situations. Things like automatically enrolling low-wage employees in retirement and savings program, or mandatory school vaccination policies.

It’s easy to brush off the problems of the poor and simply blame the poor themselves. But studies such as this suggest that poverty itself might be one of the causes of poverty. This might help to explain why it’s so difficult for societies to alleviate it.


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