Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday
Leandro S Carvalho1, Stephan Meier2, Stephanie W Wang3
1University of Southern California, Center for Economic and Social Research, 635 Downey Way, Los Angeles, CA 90089-3332.
The American Economic Review
|December 23, 2016
Summary
Financial resource availability impacts decision-making. Low-income households show increased present bias for monetary choices before payday, but not for real-effort tasks, suggesting financial scarcity affects economic decisions.
Area of Science:
- Behavioral Economics
- Cognitive Psychology
- Household Finance
Background:
- Financial scarcity is prevalent among low-income households.
- Resource availability can influence cognitive function and decision-making processes.
- Understanding these effects is crucial for designing effective financial interventions.
Purpose of the Study:
- To investigate the causal effect of financial resource availability on decision-making.
- To examine how proximity to payday influences economic choices and cognitive performance.
- To differentiate the impact of financial resources on monetary versus non-monetary decisions.
Main Methods:
- Randomized controlled trial assigning low-income U.S. households to complete surveys before or after payday.
- Assessment of cognitive function, risk-taking, and intertemporal choice tasks.
- Measurement of financial indicators like cash balances and expenditures.
Main Results:
- Participants surveyed before payday exhibited greater present bias in intertemporal choices involving monetary rewards.
- No significant differences were observed in present bias for non-monetary real-effort tasks.
- No before-after differences were found in risk-taking, decision-making quality, cognitive function, or heuristic judgments.
Conclusions:
- Financial resource scarcity, particularly the anticipation of payday, can induce present bias in economic decision-making.
- The effect of financial scarcity on decision-making appears specific to monetary contexts.
- These findings highlight the nuanced impact of financial constraints on economic behavior.
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