Poverty from the Behavioral Economics Perspectives

Standard theorizing about poverty falls into two camps. Social scientists regard the behaviors of the economically disadvantaged either as
calculated adaptations to prevailing circumstances or as emanating from a unique “culture of poverty,” rife with deviant values. The first camp presumes that people are highly rational, that they hold coherent and justified beliefs and pursue their goals effectively, without mistakes, and with no need for help. The second camp attributes to the poor a variety of psychological and attitudinal short-fallings that render their views often misguided and their choices fallible, leaving them in need of paternalistic guidance.

I propose a third view. The behavioral patterns of the poor, I argue, maybe neither perfectly calculating nor especially deviant. Rather, the poor may exhibit the same basic weaknesses and biases as do people from other
walks of life, except that in poverty, with its narrow margins for error, the same behaviors often manifest themselves in more pronounced ways and can lead to worse outcomes. In what follows, I illustrate the kinds of insights that might be gained from a behaviorally more realistic analysis of the economic conditions of the poor, and I propose that alternative policies for alleviating poverty be considered.

Behavioral research has documented the persistent yet shocking capacity of simple situational factors to influence behaviors typically
presumed to reflect deep dispositions or preferences. Consider Stanley Milgram’s (1974) well-known obedience studies, in which decent
people administered purportedly dangerous levels of shock to innocent others, or J. M. Darley and C. D. Batson’s (1973) study, where seminarians, late to deliver a practice sermon on the Good Samaritan, failed to stop to help a person in need. As it turns out, the pressures exerted by situational factors can create restraining forces hard to foresee and to overcome, as well as driving forces that can be harnessed to great effect. As Lee Ross and Richard E. Nisbett (1991) point out, where standard intuition would hold the primary cause of a problem to be human frailty or the particular weakness of a group of individuals, the social psychologist would often look to situational barriers and ways to overcome them.

Indeed, contrary to major interventions that often prove ineffectual, apparently minor situational details, referred to as “channel factors,”
can have great impact. The opening up of a channel (such as an a priori commitment, or a first step) may facilitate some behaviors,
whereas other behaviors can be blocked by closed channels. In one classic study, college seniors were given persuasive messages about the value of an inoculation against tetanus. While the messages were effective at changing the students’ beliefs and attitudes, few actually took the step of getting a tetanus shot. By contrast, when other students received the same messages but were also given a map of the campus with the infirmary circled and asked to decide on a particular time, the percentage of students getting the inoculation increased by an order of magnitude. A more recent study of the utilization of public-health services found that show-up at a counseling center was better predicted by people’s distance from the closest center than by other individual differences. Thus, simple channel factors, such as a map or mere physical proximity, seem to trump the supposedly great significance of important health messages.

The above examples concern behavior in a social context of a system, the human information processing system, that is quite idiosyncratic and complex. Among other things, the psychological carriers of value appear to be gains and losses, rather than final wealth, and diminishing sensitivity yields conflicting risk attitudes for losses and gains. People are loss averse (the loss associated with giving up a good is greater than the utility associated with obtaining it), which yields “endowment effects” and a reluctance to depart from the status quo (Daniel Kahneman and Amos Tversky, 2000).

Also, contrary to standard fungibility assumptions, people compartmentalize wealth and spending into distinct budget categories, such as savings, rent, and entertainment, and into separate mental accounts, such as current income, assets, and future income (Richard H. Thaler, 1999). People typically show different propensities to consume from their current income
(where marginal propensity to consume [MPC] is high), current assets (where it is intermediate), and future income (where it is low). In addition, people often fail to ignore sunk costs or to consider opportunity costs and have trouble predicting their future moods and tastes or learning from past experience (Kahneman and Tversky, 2000).

In what follows, I consider the relevance of psychological insights to anti-poverty policy, by focusing on two specific examples: financial choices and welfare participation.

Between 10 and 20 percent of all households in America are without bank accounts (John P. Caskey, 1997). Not surprisingly, nearly all of the unbanked are poor. The material costs of not having a banking account appear to be quite high. The un-banked face very high costs to cash their checks and pay their bills. Also, they have to save through “cookie-jar” channels that

yield no (and sometime negative) interest income. Why then do the poor fail to have bank accounts? Under the rational model, the large costs of not having an account must be offset by the presumably large costs of having one. For example, the fixed fees of bank accounts and, in particular, the marginal fees of small-balance accounts may be prohibitively high. The culture-of-poverty account invokes the poor’s negative attitudes toward formal financial institutions. Thus, the poor may not understand the benefits of banking or may simply distrust banks.

The rational as well as deviant models require large interventions to alter behavior. Large financial subsidies to banks and community groups may be used to create low-cost bank accounts, and legislation may be passed to force banks to maintain or reopen branches in disadvantaged neighborhoods. Financial education may be encouraged to overcome cultural stereotypes and misdirected attitudes.

While these approaches certainly have merit, they focus on “major” factors. Instead, we suggest that small situational barriers often play adecisive role in preventing the opening of a bank account despite huge benefits. These barriers might be a testy bus ride, challenging hours, or the reluctance to face a contemptuous bank teller. Such barriers are not unlike the embarrassment and anxiety that impede many people, including medical doctors, from administering medical self-exams which they know to be highly valuable.

Mental accounting studies suggest that unlabeled and easily available money will be spent more freely than money that is “accounted for,”
leading to very low saving rates among the un-banked, who may then resort to negative-interest saving vehicles, such as layaway plans or rent-to-own, which are immediately available and less subject to the adoption barriers that come with bank accounts.

Social Programs
The poor have access to a myriad of transfer programs, which nevertheless show a remarkably low take-up rate. Again, economists’ answer to this puzzle has been to look for large economic costs that might enter into the cost–benefit analyses of the poor when they decide not to participate. One oft-cited big cost is the “stigma” attached to such programs.

Other factors could also help explain low program take-up. First, various “small” hassles that can dissuade action appear especially salient in this context. A recent comprehensive study of food-stamp applications found dramatic hassle costs. State applications reach up to 36 pages and often include incomprehensible questions. The application process often cues negative identities and can induce guilt and alienation. People are finger-printed (to verify that they are not double-dipping in other locations), they encounter perjury threats, they undergo home visits to verify that they are “really poor,” and they are often condescended to. Such treatment is likely to reinforce the alienation and hopelessness that often discourage this pop-
ulation. As discussed earlier, such hassle factors may appear negligible in standard cost-benefit analysis, but they are the kind of barriers whose removal may open channels for desirable behaviors.

Finally, just as people procrastinate on medical checkups or signing up for 401(k)’s, the poor may procrastinate in signing up for welfare programs. This is likely exacerbated by some of the factors discussed above and by the knowledge that, even if they present themselves at the welfare office today, chances are they will not get “all signed up” today. The apparent cost of procrastination may also appear lower if, for a person not currently enrolled, nonparticipation is viewed as a foregone gain rather than a loss. Finally, procrastination may be enhanced by wishful thinking. If people believe they will soon get out of poverty or get a job, not applying for the program could be perceived as bearing a low cost since it will soon no longer be needed.

Standard economic-policy thinking attributes to people preferences and motivations that they often lack and ignores psychological factors that can be highly consequential. Deterrence, for example, plays a key role in the legal determination of punishment but appears to be relatively ineffective because those who violate the law often tend not to engage in the presumed cost–benefit analyses. Similarly, policies geared toward the poor are often driven by normative assumptions, rather than empirical facts, in ways that may miss the intended beneficiaries. Standard thinking naturally assumes that big effects are due to big causes and, thus, merit major intervention. If the poor are deeply hurt by their failure to have a bank account, then there must be compelling reasons for that failure. Behavioral research, on the other hand, has shown that highly consequential behaviors often are triggered by what are deemed to be minor causes.

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