Choosing Poorly

There’s a really interesting new paper out in Science by my colleague Anuj Shah at Booth (the business school at the University of Chicago, where I teach). It explores how poverty can change people’s psychology, leading people with few resources to begin with to make decisions that only undermine their financial situation. This approach, which he has been working on with two of the leaders in the area, Eldar Shafir and Sendhil Mullainathan, doesn’t pin poverty on a poor person’s inability to reason properly, or their shortsightedness, or their lack of motivation. It shows how – for anybody, rich or poor – facing a scarcity of resources (i.e., not having enough of something you need) produces a sense of urgency that changes the way we make decisions. This perspective not only helps us understand these problems better, but steers us in new directions when we’re thinking about how to fix the problem.

On a personal note, I’ve just started to do some writing for Capital Ideas, the soon-to-be revamped Chicago Booth publication that highlights new ideas and research from Booth faculty. They’ll be fully up and running in the new year, but for now I thought I’d share a short piece I wrote for them on Anuj’s research, which I’ve reproduced below.

Does Being Poor Lead to Poor Decisions?

One of the obstacles that keeps the poor from rising out of poverty is the tendency to make costly financial decisions – like buying lottery tickets, taking out high interest loans (PDF), and failing to enroll in assistance programs – that only make their situation worse. In the past, these poor decisions have been attributed either to low income individuals’ personalities or issues in their environment, such as poor education or substandard living conditions. New research published this month in Science by Booth Assistant Professor of Behavioral Science Anuj Shah points to a new answer: living with scarcity changes people’s psychology.

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The basic idea is that when resources are scarce – when people are short on time, or money, or food – each decision about how best to use those resources takes on greater urgency than when resources are abundant. This focus can have positive effects in the short term, but it comes at the expense of neglecting other, less urgent demands. For example, when they are under the press of urgent expenses like rent and groceries, people may neglect to do routine maintenance on their car and end up with costly (and avoidable) repairs down the road.

Shah, along with colleagues Sendhil Mullainathan of Harvard and Eldar Shafir of Princeton, published five studies in which he studied the effects of scarcity on decision making in various games in which people were paid according to their performance. In each of the studies some people received ample resources with which to play, while others received very few. Moreover, in some studies the players had the opportunity to borrow additional resources with interest. The researchers then observed how scarcity affected the players’ borrowing behavior, their performance, and the psychological processes at play.

Across the studies Shah found that for people who had very few resources, the games took on more urgency. They became more focused on the task at hand in order to make the best use of their scarce resources, but that this added focus came at a price, including mental fatigue, costly borrowing decisions, and poor overall performance.

For example, in an Angry Birds-type of game, in which the object was to knock down as many targets as possible, players who could take only three shots per round spent more time aiming each shot than players who had fifteen shots. This added focus improved performance, but it had downsides. When players were given the opportunity to “borrow” a shot, by giving up two shots in a later round of the game, players who had fewer in shots made counterproductive borrowing decisions that hurt their overall performance.

These simple experimental games are obviously a step removed from the actual problems facing people living in poverty, but they capture the essential features of the situation. The findings tell us that decisions that are considered routine by the relatively affluent can take on great urgency for the poor, and that this added urgency can lead to poor decision making in other matters by monopolizing attention and draining cognitive resources. These findings also suggest the sorts of interventions that are likely to be effective, such as clearer explanations of the costs of payday loans that are less cognitively demanding, as has been shown to be the case in research by Booth Professors Marianne Bertrand and Adair Morse.

[important]Bonus: Here’s a link to a TED talk by Eldar Shafir from last year, talking about scarcity. He talks about another study from this paper (starting 7:37 into the video).

If you have questions for Anuj please let me know in the comments and I'll try to get you answers.[/important]