The psychology of poverty

Imagine this: You’re at your child’s baseball game. You’ve got a deadline coming up tomorrow and its been a hard day. You want to focus on your child’s game, but you can’t. To some, you may seem like a bad parent, but you can’t shake the fact that you have things to do. This is something we can all relate to. Harvard professor Sendhil Mullainathan claims that poverty has a similar effect on people’s minds.

“When faced with financial scarcity, people’s minds keep coming back to concerns such as -- how will I pay rent this month,” Mullainathan said.

But doesn’t this apply to everyone? If you have to make a bunch of decisions, aren’t you going to be somewhat distracted? What’s so different about poor people being psychologically affected? Mullainathan said the difference is in the magnitude and intensity of that effect.

“You and I can be busy and we take a vacation from work. You can’t take a break from being poor. You can't say, 'Hey I've had enough of worrying about money, I'm just going to be rich for a couple of weeks until I've recovered,'" Mullainathan said.

However, some poor families do spend their money on things they don't especially need sometimes, like televisions. Mullainathan said a big part of this is happiness, which he claims is a scarcity for a poor household. And the things people look for to provide that happiness are individualistic.

"If someone who is poor says, 'I may not have much money, but for me what's really important is to have a good television so my family can enjoy and watch,' we should be a little careful and recognize that just like we all have individual liberty to make the choices we want, that we not judge too much on that," Mullainathan said.

He also said that poor people have less room for error when making bad financial decisions.

"Think of yourself when you're very busy. Even in those busiest moments you spent an hour procrastinating, when you knew full well you should be working," Mullainathan said.

He said we all make mistakes, the only difference is that some people have the slack to make them and not suffer the consequences.

Mullainathan said that a lot of the psychological problems poor people face come from lack of planning.

“Organizations talk about spending their lives firefighting -- dealing with the next problem without having the bandwidth to deal with what is down the pipeline. I think most of the poor have that problem,” Mullainathan said.

Mullainathan claims that although planning is a central part of poverty, poor people are better at making financial decisions than the rich and middle class.

“If you go and stop people at a supermarket and ask them for their receipt and say, ‘Hey how much did you just spend,' middle class shoppers have no idea. The poor know what they just spent," he said.