Psychology of poverty and temptation

Some people are impulsive and impatient; they prefer a dollar or a donut today far more than a dollar or a donut tomorrow, so much so that they’re willing to give up shocking amounts of dollars and donuts tomorrow for just one today. This is one reason, some say, that we see such high interest rates for short-term borrowing, from New York to Calcutta.

Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.

Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.

Or not. Abhijit Banerjee presented a new paper here yesterday, written with MIT colleague Sendhil Mullainathan. They look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say. The impatience approach also requires the poor think differently than the rest of the population.

Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income. If you’re even somewhat wealthy, they are not. Temptations are declining in income.

The paper runs through half a dozen perplexing patterns of behavior, and shows that these simple assumptions can explain a great deal.

This approach has a great deal in common with hyperbolic discounting, but is empirically distinct (and has very different policy implications). Parsing out and testing these subtleties strikes me as one of the most important frontiers in the study of poverty. Declining temptation, if true, could explain all sorts of odd behaviors. With more than a few Uganda and Liberia surveys on the horizon, I’m now scheming ways to test whether it’s true.

It’s a difficult paper, especially for those uninitiated in micro-economic theory. Even if that sounds like you: the subtle points are worth the slog.

For an intro to the subfield, see Senthil’s essay, Development economics through the lens of psychology. Another great resource is Stefano Dellavigna’s recent JEL article on evidence from the field. Both are ungated.

15 thoughts on “Psychology of poverty and temptation

  1. It is a slog and the subtle implications are very interesting–if only I had more confidence I actually understood it. Can I humbly request a future blog post that delves into some of the subtleties and policy implications, for instance on CCTs and commitment devices? Is this a possible explanation of the Duflo/Banerjee et. al. findings that microfinance clients spend less on temptation goods–they’ve lowered their temptation tax by smoothing their consumption?

  2. Sorry to go off topic – but just out of interest Chris, why did you choose not to mention the unrest in Uganda over the past week? Just curious, there is of course no obligation to do so.

  3. @Joe: I thought about it, but have little to add. I emphasize analysis rather than news, and when I do bring up unusual items, they are usually things not captured in the mainstream press. In this case the press seemed to have a good sense of what was going on and there weren’t too many mysteries to untangle.

  4. Thanks for posting this Chris. I’m actually taking Sendhil’s Psychology & Economics class this semester, and this, I believe, will be up for discussion.

  5. I tried reading it on Monday but found it rather impossible to follow – it’d be great if he had a section explaining it English and not Greek.

  6. “Temptation” I think is a misleading term. Exigency might be a better word.

    I used to live in a very poor neighbourhood in my college days. The corner store had individual rolls of toilet paper for $1.20, and most people reading this list would wonder why anyone would pay that price when an 8 or 12 pack could be gotten for 40 cents each.

    The answer is exigency, since a 12 pack at $5.95 might as well be on the moon if you only have a $2 bill.

    Other overcostly payments fill one of two niches — the “kicking away the wolf” payment, to keep the rent paid or the car going just one more week, and the “seizing the day” payment, grasping a small luxury at the expense of a necessity because the income will never be large enough to cover all the necessities, no matter how frugal the person is.

    Two friends of mine on welfare (both for medical reasons) demonstrate the latter — one of them used to dress up once a month and go to a good restaurant, have steak and a glass of wine and a relaxed and civilized evening. This took about a quarter of his food allowance for the month, but that quarter if used for staples would not have bought him a standard middle class diet for the month. He kept his contact with civilization and the rest of the time ate a lot of rice and beans and cabbage.

    The other friend would take a small chunk of her cheque and buy a piece of semiprecious jewelry each month — turquoise, amber, Swarovski Crystal, snowflake obsidian, and such. The cheque, she explained to me, would never be enough, and would disappear like rain on the desert unless she purchased something solid — something that would giver her lasting pleasure, something that would remain with her even if she became homeless.

    Both these people are back on their feet now, both working, one married. The insufficient payments I was describing were from 15 years ago — things are much worse now. Put that in your pipe and chew it.

    Noni

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  9. I am in tax business and what’s astonishing to me is that people are willing to pay significantly higher amounts of money to get their refund the next day. I mean, why not wait 14 days to get the money?

    Your article explains the phenomenon but I am personally still amazed…

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  13. Thanks for the link to Senthil’s essay “Development economics through the lens of psychology”. Seems to be a very interesting and succinct summary.

  14. In George Orwell’s Road to Wigan Pier (a report on poverty amongst English miners in the 1930’s) he points out that the poor he lives amongst often blow money they can ill afford on little luxuries.

    He then points out the incredible depressive effects of endless poverty and postulates that the “three penn’orth of chips” serves as an emotional palliative in a dismal existence. He argues that these people know that it would be better to spend the money on whole wheat bread and seasonal veg. but that they simply cannot do it bc. there is no future where the luxury will then become attainable. It is a really plausible explanation to me and jibes with everything I have ever seen of long term, entrenched poverty.

    It is v. easy to sacrifice these tiny indulgences for a goal that is a) attainable and b) imminent (while in grad school, for example) but not when you live at the poverty level always and forever.

    Road to Wigan Pier is the most underrated book of the thirties: it is Orwell at his absolute non-fiction best. Go read it everyone.

    VML

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