Respecting the preferences of the poor

One feature, in particular, stands out. The life of the rural poor is extremely boring, with repetitive back-breaking tasks interrupted by periods of enforced idleness; it is far removed from Marie-Antoinettish idylls of Arcadia. As the authors remark, villages do not have movie theatres, concert halls, places to sit and watch interesting strangers go by and frequently not even a lot of work. This may sound rather demeaning to the poor, like Marx's comment about “the idiocy of rural life”.
 
But it is important to understand because, as the authors remark, “things that make life less boring are a priority for the poor”. They tell the story of meeting a Moroccan farmer, Oucha Mbarbk. They ask him what would he do if he had a bit more money. Buy some more food, came the reply. What would he do if he had even more money? Buy better, tastier food. “We were starting to feel very bad for him and his family when we noticed a television, a parabolic antenna and a DVD player.” Why had he bought all this if he didn't have enough money for food? “He laughed and said ‘Oh, but television is more important than food.'”
 
Nutritionists and aid donors often forget this. To them, it is hard to imagine anything being more important than food. And the poorer you are, surely, the more important food must be. So if people do not have enough, it cannot be because they have chosen to spend the little they have on something else, such as a television, a party, or a wedding. Rather it must be because they have nothing and need help. Yet well-intentioned programmes often break down on the indifference of the beneficiaries. People don't eat the nutritious foods they are offered, or take their vitamin supplements. They stick with what makes life more bearable, even if it is sweet tea and DVDs.
 

From a piece at the Economist kicking off a discussion of the book Poor Economics by Abhijit Banerjee and Esther Duflo. When people throw around the phrase “first world problem” the presumption is that the poor are so many rungs down on Maslow's Hierarchy of Needs that they couldn't possibly have the mindshare to contemplate such a frivolous dilemma. In fact, though, the marginal value of something we consider frivolous may be greater for the poor than for the wealthy. This has been one of the greatest breakthroughs in my understanding of the poor and how they think about where to allocate their next dollar.

I've written about this previously in The Psychological Poverty Trap and The Persistence of Poverty. The latter looked at the work of Charles Karelis, who believes our economic models of the poor are broken.

When we're poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where the bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems.
 
Poverty and wealth, by this logic, don't just fall along a continuum the way hot and cold or short and tall do. They are instead fundamentally different experiences, each working on the human psyche in its own way. At some point between the two, people stop thinking in terms of goods and start thinking in terms of problems, and that shift has enormous consequences. Perhaps because economists, by and large, are well-off, he suggests, they've failed to see the shift at all.
 
If Karelis is right, antipoverty initiatives championed all along the ideological spectrum are unlikely to work - from work requirements, time-limited benefits, and marriage and drug counseling to overhauling inner-city education and replacing ghettos with commercially vibrant mixed-income neighborhoods. It also means, Karelis argues, that at one level economists and poverty experts will have to reconsider scarcity, one of the most basic ideas in economics.
 

Karelis' thinking is summarized in his book The Persistence of Poverty: Why the Economics of the Well-Off Can't Help the Poor.

Karelis' ideas are one possible explanation behind the effectiveness of Sam Tsemberis' approach towards solving chronic homelessness. Pathways to Housing, the organization Tsemberis founded, believes in giving the homeless housing first, no strings attached, rather than forcing the homeless to jump through a series of hoops before they qualify.

Housing First was developed to serve the chronically homelessness who suffer from serious psychiatric disabilities and addictions. Traditionally, the chronically homeless live in a cycle of surviving on the street, being admitted to hospitals, shelters, or jails and then going back to the street. The stress of surviving each day in this cycle puts a tremendous amount of pressure on the individual’s psychiatric and physical health. “Living in the street,” one Pathways to Housing client said, “It makes you crazy.”
 
The traditional structures in place to “help” the homeless population often make things worse, particularly for those who suffer from mental illness. Shelters and transitional living programs often require people to pass sobriety tests and other hurdles before they can be considered for housing programs. Housing is considered a reward for good behavior instead of a tool to help stabilize a homeless-person’s mental health. This attitude cuts out the people who need the support the most, effectively punishing them for their conditions. 
 

Respecting the preferences of the poor means understanding that the logic behind many of their purchase decisions may be very rational under a happiness-maximization framework. That we judge them to be otherwise is more a failure of empathy than anything else.

Attention scarcity

Poor people often do things that are against their long-term interests such as playing the lottery, borrowing too much and saving too little. Shah, Mullainathan and Sahfir have a new theory to explain some of these puzzles. SMS argue that immediate problems draw people’s attention and as people use cognitive resources to solve these problems they have fewer resources left over to solve or even notice other problems. In essence, it’s easier for the rich than the poor to follow the Eisenhower rule–”Don’t let the urgent overcome the important”–because the poor face many more urgent tasks. My car needed a brake job the other day – despite this being a relatively large expense I was able to cover it without a second’s thought. Compared to a poorer person I benefited from my wealth twice, once by being able to cover the expense and again by not having to devote cognitive resources to solving the problem.

SMS test the theory with small experiments in which people are asked to play simple games. Poverty is simulated by giving some players fewer game resources. Players in the “poverty” conditions are then shown to devote more attention to the current round and less attention to future rounds, including borrowing more from future rounds.

More here at Marginal Revolution.  Most people have a problem of tending to the urgent over the important, but it may be that poverty exacerbates the effect. This and an earlier post on The Persistence of Poverty strike me as having advanced our understanding of the harmful effects of poverty.

I understand now why my grandmother and mother always told me to tend to my health when I was younger. It was years of accumulated wisdom on their part as to the attention-depleting effects of being ill. 

The psychological poverty trap

Shafir and Mullainathan tested the intelligence of sugarcane growers in India during two different periods: after selling the harvest, when they enjoy relative prosperity, and before the harvest, when times are tightest. The farmers had better IQ results during the season of plenty. Before the harvest they had problems making fateful decisions, because of stress. The study concluded that poverty generates a psychology of its own.

Most of us judge poor people, viewing them at worst as lazy, at best as suffering from deficient financial behavior. We've gotten used to thinking that being poor is their fault: If they were smarter or more industrious they surely would have overcome their poverty.

Shafir, however, claims that the real culprit isn't lack of ability but problems created by poverty. "These problems are distracting and cause mistakes," he told Markerweek in an interview.

"When you're poor you're surrounded by bad decisions of people around you," he says. "You're so concerned about the present that you can't begin thinking about the future, and that's the big irony: People with the greatest need to think about the future don't have the leisure or emotional capacity to do so. The very essence of poverty complicates decisions and makes immediate needs so urgent that you start making wrong choices. These mistakes aren't any different from anyone else's, but they occur more frequently due to the element of stress, and their implications are much greater."

More of this insight into the psychological impact of poverty, all interesting, from poverty expert Eldar Shafir.

Clearly, fundamental attribution error when it comes to the poor is dangerous, especially as it comes to crafting policy to combat it. I hope a better understanding of the psychological and decision-making impact of poverty will lead to greater empathy on the part of those more fortunate.

Studies like this also point to some of the potential advantages of behavioral economics over classical economics, built around the concept of rational actors. Put someone in a situation of comfort and wealth, and they'll tend to behave more rationally than someone in poverty who has a staggering array of challenges weighing on them.

Previously posted here, also related: the persistence of poverty.

Follow-up on the persistence of poverty

After coming across my post on his book The Persistence of Poverty, Professor Karelis wrote me a note. I'm including it here for those who might not revisit that post.

Thanks for blogging my book on poverty. I couldn't figure out how to comment on your post so am trying this route. There has been empirical work supporting my theory. Here is one reference, from October 2010 journal Frontiers in Neuroscience. Experimental subjects were (as I predicted, without knowing about the lab work) risk loving when they started in pain and were confronted with the choice of remaining in their original state and taking a bet that would either alleviate their pain by a certain amount or make it worse by that amount. I have to say I consider that pretty obvious and unsurprising, and as I argued in my book it has only escaped economists because the accidents of intellectual history caused them to pose the question in a misleading way. 

Regards, Charles

I agree with Karelis that the idea that those in painful situations might become more risk-loving rather than risk-averse is not surprising. You don't need to have lived in poverty to understand the impulse. Anyone who has taken a few bad beats at the poker or blackjack table and then started pressing has launched themselves off of the optimal risk-reward curve in a fit of emotion.

At Marginal Revolution, Alex Tabarrok points to a study (abstract) that also attempts to explain why the poor engage in economically self-destructive behavior. The abstract:

Poor individuals often engage in behaviors, such as excessive borrowing, that reinforce the conditions of poverty. Some explanations for these behaviors focus on personality traits of the poor. Others emphasize environmental factors such as housing or financial access. We instead consider how certain behaviors stem simply from having less. We suggest that scarcity changes how people allocate attention: It leads them to engage more deeply in some problems while neglecting others. Across several experiments, we show that scarcity leads to attentional shifts that can help to explain behaviors such as overborrowing. We discuss how this mechanism might also explain other puzzles of poverty.

The study's approach to poverty reminds me of the theory that we all have a finite amount of discipline to expend each day, and after it's gone, we turn into self-indulgent pleasure-seekers. Anyone who has collapsed on their sofa after a brutally long day at work and popped a beer and watched an hour of Sportscenter or Here Comes Honey Boo Boo instead of going for a workout can attest to the explanatory power of this idea.

I rely on Tabarrok's summary since the study's findings are behind a paywall.

SMS argue that immediate problems draw people’s attention and as people use cognitive resources to solve these problems they have fewer resources left over to solve or even notice other problems. In essence, it’s easier for the rich than the poor to follow the Eisenhower rule–”Don’t let the urgent overcome the important”–because the poor face many more urgent tasks. My car needed a brake job the other day – despite this being a relatively large expense I was able to cover it without a second’s thought. Compared to a poorer person I benefited from my wealth twice, once by being able to cover the expense and again by not having to devote cognitive resources to solving the problem.

Both this study and Karelis' work reframe the behavior of the poor in a way that is still logical instead of pinning it on the personalities of those in poverty. That's important, and as Tabarrok notes, we must be especially vigilant to guard against fundamental attribution error in analyzing the behavior of those in poverty.

The persistence of poverty

A long-standing economics puzzle is why people who are less well off engage in behaviors that cement them to that condition: dropping out of school, doing drugs, committing crimes, having children in their teen years. By the law of marginal utility, the benefits of going to college, for example, would be worth far more to someone in poverty than someone really well off.

Charles Karelis believes it's because our economic models of poverty are incorrect.

When we're poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where the bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems.

Poverty and wealth, by this logic, don't just fall along a continuum the way hot and cold or short and tall do. They are instead fundamentally different experiences, each working on the human psyche in its own way. At some point between the two, people stop thinking in terms of goods and start thinking in terms of problems, and that shift has enormous consequences. Perhaps because economists, by and large, are well-off, he suggests, they've failed to see the shift at all.

If Karelis is right, antipoverty initiatives championed all along the ideological spectrum are unlikely to work - from work requirements, time-limited benefits, and marriage and drug counseling to overhauling inner-city education and replacing ghettos with commercially vibrant mixed-income neighborhoods. It also means, Karelis argues, that at one level economists and poverty experts will have to reconsider scarcity, one of the most basic ideas in economics.

Karelis theory has interesting implications for welfare programs. Rather than robbing the poor of their motivation to work, the primary concern of many welfare critics, welfare programs can shrink the list of problems faced by the poor, creating a greater incentive to work.

Much of Karelis' ideas are based on intuition rather than data, so his work has come under its share of criticism. His ideas are covered in depth in his book The Persistence of Poverty: Why the Economics of the Well-Off Can't Help the Poor.

Does the marginal utility curve slope the other way in poverty? The idea is an interesting one. I'm reminded of something I heard once which has always felt true: being rich doesn't necessarily make you happy, but being poor can make you unhappy. Karelis' idea deserves more empirical stress testing.

ADDENDUM: Professor Karelis wrote me a note after reading this post. I'll tack it on here at the bottom. I agree that the idea that those in painful situations might become more risk-loving rather than risk-averse feels very intuitive. I don't think you need to have lived in poverty to understand the impulse, either. Anyone who has taken a few bad beats at the poker or blackjack table and then started pressing has hoisted themselves off the optimal risk-reward curve in a fit of emotion.

Thanks for blogging my book on poverty. I couldn't figure out how to comment on your post so am trying this route. There has been empirical work supporting my theory. Here is one reference, from October 2010 journal Frontiers in Neuroscience. Experimental subjects were (as I predicted, without knowing about the lab work) risk loving when they started in pain and were confronted with the choice of remaining in their original state and taking a bet that would either alleviate their pain by a certain amount or make it worse by that amount. I have to say I consider that pretty obvious and unsurprising, and as I argued in my book it has only escaped economists because the accidents of intellectual history caused them to pose the question in a misleading way. 
Regards, Charles