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Seeing things differently

November 9, 2012

Why do many poor people spend money in ways that seem to squander their already limited resources, like buying lottery tickets? It’s not necessarily that they’re less savvy about financial matters, but a lack of funds appears to affect the way people think, according to new research.

The poor often make decisions that deepen their poverty, such as borrowing money at exorbitant interest rates. Sociologists and behavioral researchers have several explanations for this, including a “culture of poverty” that makes it seem normal to be poor, undermining efforts to join the middle class.

But a study published this week in the journal Science offers another explanation: No matter who you are, having severely limited resources alters the way you make decisions about them.

When money is no object, people handle groceries, gas and rent without a second’s thought, the theory goes. But when there aren’t enough funds to easily meet all these expenses, payers may spend a lot of mental energy focusing on the grocery bill but will then miss a credit card payment, even though they’ll accrue penalties.

…The results add a layer of complexity to economic theories of poverty, Shah said. It’s not that people living in poverty don’t save or tend to ignore the future; they just see things differently.

From an article in the Los Angeles Times by Amina Khan.

Studies like this should make us stop and think about how we have perceived and judged the poor (or anyone for that matter) and the decisions they make. We fault them for making what we would consider “dumb decisions” without understanding that their circumstances directly affect the way they make these decisions.

Hopefully these results will go a long way towards dispelling many of the misconceptions about poverty and the poor that we hold to and they should definitely change the way we engage with the poor.

HT Marginal Revolution

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