The Informational Stress of Being Poor
One of the things that perplexes those with money about the poor is why, being so close to the edge, the poor make irrational decisions with their money that contribute to staying impoverished: using payday loans with sky-high interest rates, for example. If you have money, and all the complications that go with it—where to put a 401(k) based on the performance of the stock market versus returns from municipal bonds, for example, or the complexities of a progressive tax structure—the questions that arise from not having much money, while difficult, might seem conceptually simple. Freedom's just another word for not having as much to lose.
Anuj Shah, a new assistant professor of behavioral science at the University of Chicago, took an interesting approach to this dilemma by trying to abstract the question of scarcity (via Megan Cottrell), from the "ecosystem" of poverty—payday lenders, pawn shops, food deserts, and the like (PDF). If time is money, it should function sort of like money, so Shah and his co-authors took a sample of Princeton students and subjected them to time impoverishment to simulate what people do when they don't have enough. First up: let's play the Family Feud! Not kidding:
Participants played Family Feud, where they tried to guess the five most popular responses to survey questions such as Name things you take on a picnic, which previously had been posed to a panel of 100 people. Participants earned one point per correct response (a maximum of five points per round). These points were converted into lottery entries for the gift certificates; chances of winning increased with points earned.
Shah gave participants a budget of time, which earned them points towards winning a $50 gift certificate.
Participants had an overall time-budget, broken into budgets for each round. “Time Poor” participants had 300 seconds overall and 15 seconds per round. “Time Rich” participants had with 1000 seconds overall and 50 seconds per round. All participants could “bank” time by exiting a round early. The option to bank time became available after 6 seconds and 20 seconds for Time Poor and Time Rich participants, respectively.
Some contestants were allowed to borrow time, either with no interest (borrowing time would simply detract from the 300 seconds) or with interest (every second borrowed subtracted two seconds from their overall budget). Borrowing gave them more flexibility, but it also added another variable that they had to keep in their heads while trying to play the game. And the subjects who couldn't borrow, over a couple iterations of the test, did better than those that could.
In another instance, participants were given a "windfall" of time. That didn't help, either:
Time Rich participants were immune to the type of budget they had, they did equally well regardless. Time Poor participants, however, did significantly better with consistent budgets than with the occasional windfall. Moreover, Time Rich participants saved a much greater proportion of their windfalls than did Time Poor participants. These results parallel how inconsistent income adversely affects the poor.
Nor did switching to Angry Birds help:
When the students played versions of Angry Birds, a computer game where players use a slingshot to fire birds at targets, and Family Feud, where they try to guess the most popular answers to certain statements, they were sometimes allowed to borrow shots or numbers of guesses from future rounds, and in some cases, they had to pay steep "interest" by borrowing two shots from the future to get one in the present, for instance.
Not only did "poor" students borrow more often, but they performed worse when they did so, Mr. Shah said, and they often borrowed proportionately more as the game went on -- not very different from a person taking out a second payday loan to pay off the first one.
Scarcity means that each decision a person makes is more critical, and critical decisions come at a cost of time, pressure, and complexity. The decision tree created by one purchase, if it causes a need to borrow or to shift other purchases, grows in complexity with scarcity. Even if it's an information-rich environment, Shah's research suggests, that itself can contribute to being money poor.
Photograph: dno1967b (CC by 2.0)