Even though the dynamics of economic power in the world keep shifting, world income and wealth inequality increase in a gradual manner, causing not only a decrease in the wealth and income of the bottom 50% of people globally but also resulting in a higher number of people living in poverty. As of 2024, almost 700 million people, a number equal to 8.5% of the global population, have been living in extreme poverty, meaning that they live on less than $2.15 per day. Furthermore, 3.5 billion people, approximately 44% of the global population, meet the requirements to be considered as poor by the standards of an upper-middle-income country (World Bank, 2024). Both anecdotal experience and decades of academic research indicate that the economic decision-making of people living in poverty does not alleviate their financial situation. However, the reason behind poor economic decision-making is not common knowledge.
Decision-making can be understood in terms of the focus on immediate or distant goals. This approach helps us explain why people in poverty take high-interest loans, have a higher tendency to be a member of a gang, or have lower academic goals and motivation to learn. The approach to decision-making, according to the focus on immediate or distant goals, is formed by the construal level theory (CLT), a model from social psychology. According to CLT, the mind tends to process information according to its psychological distance from the person. The “distal” information is about the future, hypothetical, or physically distant places. In contrast, the “proximal” information is the one about the present and here. Theoretical perspectives that have come out in the last 13 years about the impact of poverty on decision-making are getting closer to the characterization of behaviors as distal and proximal.
This also could explain why those at lower socioeconomic standing perform worse academically, possibly because they intuitively prefer to focus on actual barriers and threats, rather than dreams and possible rewards (Oyserman et al., 2011), in other words, the hypothetical and distal. Just like how poverty affects academic performance, the reason why people in poorer areas form and join neighborhood gangs is a decision that, even though it pushes the person from society, is affected by the proximal approach because of the sense of belonging and bonding with the socially close people (Thornberry, 2003).
Decision-making depends on psychological mechanisms that we use to understand information with the aim of shaping our attitudes and behaviors. These specific types of psychological mechanisms are called cognitive processes. Lower socioeconomic status affects decision-making through the alternation of cognitive processes, specifically: weaker selective attention (what allows a person to put their focus on relevant information rather than getting distracted by relevant distractions) and inhibitory control (the ability to suppress tempting or habitual responses).
It was observed in 2015 that the quality of selective attention of a child at the age of entering elementary school is positively correlated with the child’s parents’ socioeconomic standing (Bernier et al., 2015). Moreover, it was found that the better the socioeconomic status of a student entering secondary school, the better their selective attention was when they graduated (Boelema et al., 2014). As for the correlation of inhibitory control and socioeconomic status, it has been found in medium and large samples that those who are exposed to financial scarcity perform worse on inhibitory control tasks in both early ages and at the ages of moving from elementary to high school. Interestingly, even the neighborhood in which the child has grown up affects the inhibition skills in the same way as living in a family of low socioeconomic status does (Sheehy-Skeffington et al., 2017).
The power of cognitive processes, selective attention & inhibitory control, directly affects the behavioral patterns of people. For instance, a lack of selective attention leads to the focus on immediate problems rather than long-term goals and consequences, and an inhibition-oriented personality leads to a lower ability to resist impulses, leading to focusing on short-term instead of what the person could achieve if they put long-term goals above their impulses.
One of the three essential behavioral patterns for the investigation of the effect of poverty on decision-making, approach orientation, is directly influenced by the cognitive processes. Approach orientation refers to a person’s behavioral stance towards their goals. As people become less approach-oriented, they are less motivated to act with the aim of achieving their goals and focusing on the rewards, the distal. The lack of approach orientation is directly linked to how much the person is inhibition-oriented, meaning that they focus on the threats and possible rewards in the environment rather than future potential achievements. The lack of approach orientation directly links with poor academic achievements, leading to difficulty in escaping poverty.
Another essential behavioral pattern, risk-taking, has a more complicated relationship than others. In contrast with the general assumption of low socioeconomic status to being risk-loving, it has been found that the lower the income of a person, the more they choose safer careers with lower unemployment and lower pay or with less ambition than the careers that are more ambitious and riskier, even if they provide higher compensation (Caner et al., 2010). Overall consensus in academic papers suggests a strong correlation between lower socioeconomic status and risk-averse behavior (Sheehy-Skeffington et al., 2017).
Lastly, self-regulation is a behavioral attribute that refers to the value of importance a person assigns to their goals. People with stronger self-regulation skills prefer to act in line with long-term goals. They are able to resist the urge to achieve an immediate benefit for the greater reward in the future. An example of this is conspicuous consumption and the tendency to spend more among people who come from a lower socioeconomic background and achieve a higher economic status later in their lives. Such people generally choose proximal opportunities over the distal, such as investing and opening a savings account for financial security.
All in all, the economic decision-making of individuals coming from a low socioeconomic background cannot be understood as a result of a lack of effort and poor judgment. Rather, it reflects a shift in cognitive processes and behavioral mechanisms shaped by financial scarcity. Reduced selective attention and inhibitory control, with the combination of lower approach orientation, altered risk preferences, and poorer self-regulation, leads to the prioritization of proximal concerns over distal and long-term outcomes. Understanding decision-making in the context of poverty, thus, requires an approach beyond individual blame.
References
World Bank (2024) Poverty, Prosperity, and Planet Report 2024: Pathways Out of the Polycrisis. Washington, DC: World Bank. https://www.worldbank.org/en/publication/poverty-prosperity-and-planet
Oyserman, D., Johnson, E., James, L. (2011) ‘Seeing the destination but not the path: effects of socioeconomic disadvantage on school-focused possible self content and linked behavioral strategies’, Self and Identity, 10(4), pp. 474–492
Thornberry, T. P. (2003). Gangs and delinquency in a developmental perspective. Cambridge: Cambridge University Press
Bernier, A., Beauchamp, M. H., Carlson, S. M. and Lalonde, G. (2015) ‘A secure base from which to regulate: attachment security in
toddlerhood as a predictor of executive functioning at school entry’, Developmental Psychology, 51(9), pp. 1177–1189
Boelema, S. R., Harakeh, Z., Ormel, J., Hartman, C. A., Vollebergh, W. A. M. and van Zandvoort, M. J. E. (2014) ‘Executive functioning shows differential maturation from early to late adolescence: longitudinal findings from a TRAILS study, Neuropsychology, 28(2), pp. 177–187
Sheehy-Skeffington, J. and Rea, J., 2017. How poverty affects people’s decision-making processes.
Caner, A. and Okten, C. (2010) ‘Risk and career choice: evidence from Turkey’, Economics of Education Review, 29(6), pp. 1060–1075
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