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Friday 24 February 2012
The psychological poverty trap

Shafir has proved that anyone faced with adverse conditions will consistently make bad economic decisions. An experiment he conducted with Mullainathan and Zhao placed financially-savvy Princeton students from prominent families under the stressful and rushed conditions that poor people face every day. They were given questions to answer in a series of timed rounds, but were permitted to “borrow” time from a subsequent round.

“My students at Princeton are well-to-do and intelligent,” Shafir says. “They are the sons and daughters of senators and other highly successful people. And yet these brilliant students took precisely 10 minutes to start borrowing too much; they were tending to the present without any thought to leaving something for the future.

“Given enough time, a person will consider the future cautiously. He won’t engage in nonsense and won’t borrow at high interest he can’t afford. But if you put him under strict deadlines and pressure him, he’ll start behaving foolishly. We all put off for tomorrow things that need to be done today, and pay high interest because we didn’t pay on time. All the mistakes poor people make with money we make with time - but for them the price is too high. A person probably doesn’t seem intelligent when he doesn’t have enough time to consider the future, but if he did have enough time he would start acting intelligently. Poverty is an emotional state.”

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