Ethics @ Work: Does poverty lead to bad decisions?

An influential group of social scientists claim that poverty itself impels people to make bad decisions.

By ASHER MEIR
February 23, 2012 22:14
2 minute read.
A homeless man lies on a sidewalk

poverty homeless dirty 311. (photo credit: Marc Israel Sellem)

 
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Why are the poor poor? Is it because they lack opportunities and are locked into poverty? Or is it because they make bad decisions? These are questions that have occupied scholars and social activists for centuries, and the answers often tend to classify people on a left-right spectrum.

An influential group of social scientists, including Princeton psychology professor Eldar Shafir and Harvard economics professor Sendhil Mullainathan, assert that this dichotomy is misleading. They claim that poverty itself impels people to make bad decisions.

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The idea is that bad decisions are not a result of low ability levels or an impatient nature, but rather of the stress and time pressure of poverty itself.

Their experiments show that well-off people also make poor decisions when subject to stress, but they are better able to insulate themselves from pressures. The poor people are so busy worrying about today that they can’t think effectively about tomorrow; i.e, poverty makes them “penny wise and pound foolish.”

“People with the greatest need to think about the future don’t have the leisure or emotional capacity to do so,” Shafir told Haaretz. “The very essence of poverty complicates decisions and makes immediate needs so urgent that you start making wrong choices.

These mistakes aren’t any different from anyone else’s, but they occur more frequently due to the element of stress, and their implications are much greater.”

One policy solution these researchers propose is giving poor people a “nudge” to make choices that are usually the best. A Time magazine article on this approach gave a few examples. For instance, instead of relying on the insight that education will help a poor youth’s earning prospects in the future, he or she could be offered a cash prize for a high-school diploma, or automatically be enrolled in a savings plan.

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This approach is interesting, but it is hard to square with reality. The most harried and stressed people are not the poor but the middle-class two-earner families. A highly disproportionate number of poor people are unemployed or underemployed and have plenty of time on their hands to consider their financial future.

It’s hard to believe the main reason poor people don’t save is that the benefit of saving never occurred to them. Probably it’s because it doesn’t make that much sense to save when your income is very low.

You save when you think that tomorrow you will be making less than today, but that’s not very likely when you’re out of a job.

That doesn’t mean the nudge approach lacks merit.

Poverty could be correlated with poor ability to make decisions for other reasons besides stress and time pressure. It could be because people with poor ability to plan are likely to end up poor; people have a tendency to conform with their surroundings, and poor people tend to be surrounded by people whose circumstances keep them poor.

Many of these nudge solutions have been tested in poor countries by development economists such as Esther Duflo of MIT, and some have been found quite effective.

The idea that poverty is a state of mind that tends to perpetuate “poor” decisions is a productive insight. But the idea that the reason for this is stress, rather than habit, does not seem as promising.

ethics-at-work@besr.org

Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).

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