The Psychology of Poverty: Is There Evidence for a Trap?

It seems plausible that being poor will have psychological effects.

It seems at least possible that some of these psychological effects could, in turn, make it harder to escape poverty. Johannes Haushofer and Daniel Salicath explore the evidence on these and related issues in “The psychology of poverty: Where do we stand?” ( Social Philosophy and Policy, 2024, 40:1, 150-184; a pre-print draft is also available as NBER Working Paper 31977). The paper is part of a 12-paper symposium on this issue on topics of “Poverty, Agency, and Development.”

The evidence that lower-income people feel better-off when given money is pretty clear. The harder question is whether poverty has particular psychological effects that affect decision-making in a way that may cause one to remain in poverty. This thesis was put forward with force and clarity in a 2013 book by Sendil Mullainathan and Eldar Shafir, Scarcity: Why Having Too Little Means So Much. I wrote about this line of argument here at the Conversable Economist about a decade ago, mentioning work at the time by Haushofer and Mullainathan and Shafir, and also quoting some passages from George Orwell’s 1937 book, The Road to Wigan Pier, in which he describe (with frustration and empathy) how many poor and working-class people have become accustomed to living on a “fish and chips” standard that combines unhealthy food, cheap luxuries, gambling, and electronic entertainment (in his day, the radio), in a way that helps to offset their limited economic prospects.

In the more recent essay, Haushofer and Salicath describe the earlier hypothesis by Mullainathan and Shafir in this way:

The authors posit that poverty consumes cognitive resources, including attention, executive control, and working memory, thereby impairing decision-making. Specifically, they suggest that scarcity both reduces overall mental bandwidth and redirects attention toward salient, income-relevant features of a decision problem at the expense of less salient but potentially important other aspects. Two landmark studies accompanied publication of the book. Anuj Shah, Mullainathan, and Shafir showed in a series of lab experiments that participants experiencing scarcity in terms of their experimental “budgets” (of points or time) tended to “over-borrow” from their experimental budgets. Anandi Mani and coauthors primed low- and high-income participants in a mall in New Jersey with financial scenarios and reported reduced executive control and fluid intelligence when low-income participants thought about difficult financial problems. They also report lower performance on similar tasks among sugarcane farmers in India before the harvest (when resources are scarce) relative to after the harvest.

Haushofer and Salicath review a wide range of literature since then on how poverty or negative shocks to income affect psychological behaviors especially relevant to economic outcomes like cognitive functioning, short time horizons, trust, or excessive risk-taking. The evidence comes from a wide array of contexts: real-world evidence from shocks related to harvests for farmers in low-income countries; laboratory experiments where people work through structured games and scenarios in a classroom; natural settings where people experience greater or lesser stress on incomes and finances; and others. Alternatively, there are studies that try to affect the aspirations of poor people (many of these studies are in low-income countries), sometimes by showing videos or presenting seminars that emphasize the possibilities for work and achievement, as well as by treating mental health issues more directly.

The authors summarize the evidence this way:

There has been significant progress in recent years, in particular, in establishing causality in the effect of income on psychological well-being; elucidating the precise functional form of psychological well-being with respect to income (satiation); and improving our understanding of the importance of relative income. Most saliently, the causal effect of income on psychological well-being is now robustly established. Research on the effects of scarcity and stress on economic decision-making has also made great strides in the past few years. However, the picture that emerges from these literatures is not as clear; individual studies are often statistically weak, provide conflicting evidence, and replication efforts have not always been successful. While the last word has perhaps not been spoken, in our view, the case for a poverty trap that operates through the effects of poverty on stress, decision-making, and cognition is currently not strong.