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.
Pictures 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.
Results 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”.
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.