Why the poor do better on these simple tests of financial common sense
Joyce Park stashed this in Economics
It's easy to concern-troll the poor about their seemingly irrational financial decisions -- lotteries! payday lenders! paying bills late! -- but a University of Chicago researcher shows they actually are MORE attuned to money.
Because being poor forces a person to focus on every financial decision more carefully.
What I learned from these tests is that a dollar is a dollar.
As opposed to a dollar being worth different amounts relative to the price.
"The poor spend a lot more time on mundane, everyday expenses. They're focused on money," said Anuj Shah.
Anuj Shah is a psychologist at the University of Chicago and one of the authors of the research, which was published last year and presented earlier this month at the American Economic Association's annual meeting.
The group's findings are an interesting caveat to the conventional wisdom about poverty. Conservative experts on poverty often argue that it is a result of personal failings and bad choices, including financial choices, on the part of the poor. The liberal counterargument is typically that poverty itself causes intense stress that impairs sound decision-making.
Shah's collaborators on this project, Princeton University psychologist Eldar Shafir and Harvard University economist Sendhil Mullainathan, have produced compelling evidence for the liberal view. Their latest work, by contrast, suggests that poverty actually forces people to become better with money, at least in some respects.
"Having to focus on everyday expenses is an exhausting thing," Shah said. Yet perhaps because of that focus, Shah and his colleagues found that the poor performed better on tests they administered to participants in a series of studies.
These results don't necessarily show that the poor are better with money in practice. Managing personal finances effectively in the real world involves reading plenty of fine print. If you didn't receive a good education, or if working a second job leaves you with no time to do the research, all of that is much harder.
Shah's collaborators have shown that worrying about money makes it more difficult for people to complete puzzles that have nothing to do with money. Other research suggests that when people lose money, they become more focused on the short term, even to the detriment of their long-term finances.
"Having to focus on everyday expenses is an exhausting thing," Shah said.
Situation: You see two different prices for the same product that you buy often — regular and bulk size. But you don't have the 'extra' money to lay out for bulk, so you end up spending more money per unit. (Same thing when items are on sale... there's no stocking-up for you.)
Situation: Drive further to get a better price, but spend more on gas, plus add to your "miles driven" low car insurance rate?
When you take into account storage costs and spoilage costs, buying in bulk may not actually save money.
When you take into account wear and tear on your car, plus the extra time and energy you spend, driving further might not make the most economic sense.
Yes, Adam, and unfortunately it takes having some discretionary money to be able to make the wisest decisions. Many people dont have it.
And therefore many people cannot make the wisest decisions.
Not sure how our society can fix this. It's one of the big challenges of our lifetime.
The demeaning attitude our society in general has against "poor" people is separate from the economics. I'm hoping that this part of the equation will be fixed. Working toward this goal are specialized non-profits offering donated business clothes and hair styling to people going on job interviews. If a person can't afford to buy the larger package of toilet paper, being able to dress for the business world is totally unrealistic.