Being Poor Changes Your Thinking

7/29/2019 Being Poor Changes Your Thinking

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Being poor changes your

thinking about everythingBy Harold Pollack, Updated: September 13, 2013

Sendhil Mullainathan and Eldar Shafir are two leading figures in the hot(if occasionally oversold) field of behavioral economics. Mullainathanteaches economics at Harvard and is a MacArthur Fellow. Shafir teachespsychology and public policy at Princeton. This week, they released anaccessible short book titled "Scarcity: Why Having Too Little Means SoMuch," which summarizes some of the best behavioral economicswork.

I caught up with Mullainathan this week. An edited transcript follows.

Harold Pollack: What are you trying to do with this book?

Sendhil Mullainathan: Were really trying to do two things. As youknow, I've been interested in poverty for a long time. This book is anoutgrowth of me simply trying to understand U.S. poverty, poverty inthe developing world, and another form of poverty, which we don'treally call "poverty" but you might want to call just "financial distress,"

which many Americans are actually feeling because of this recession.As our introduction discusses, theres been a left turn in my thinking.That left turn was the realization one day that, maybe, when Ive beenlooking at poverty, I've been looking at it too narrowly. Maybe poverty isa special case of something else. That something else is scarcity, andanyone who has the experience of having very little experiences thesame psychology.

To me, that insight was both stupid -- obviously the poor are differentfrom the busy but also, if true, profound. Things at the edge of stupid

and profound always interest me because that's usually where somegood ideas sit. So much evidence started to come in that really mademe feel, "Wow, maybe this is more on the profound end than on thestupid." That's what led to the book.

The second thing I'm trying to do here is a little more subversive. It'shard to get people to empathize with the poor. You can get some peopleto sympathize with the poor, but to empathize is actually very hard,because most people are not poor. I realized that scarcity gives you athread. You can understand some behaviors of your own that youexperience under scarcity, and you can almost follow that thread andsay, "I can at least imagine what that scarcity must be like if it werereally unrelenting. This allows you to almost project yourself more intopeoples shoes, and therefore to gain a richer understanding of a worldwhich many of us don't otherwise have access to.

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Harold: Many poverty researchers are ambivalent about behavioraleconomics. There's this sense that behavioral economics focuses toonarrowly on individual decisional pathologies: mistakes by poor people,mistakes by workers who dont put money in their 401(k) accounts, andthat the subject neglects larger factors such as mass unemployment.

Sendhil: I think there's a tension between macro and micro. One cansay: "Why are you worrying about these microbehaviors? Let's worryabout these big institutional things." I think it's not an either/or, Sure,there's stuff to be done on the macro level, but if you peel the onion andsay, "Let's just look at tuberculosis, it kills so many people." And thenumbers are astonishing, and then you say, "Well, why is tuberculosiskilling people? At the heart of this is some behavior. You give peopleantibiotics. Compliance is pretty good for a while, but then drops off.That's behavior.

Why does poverty persist intergenerationally? Part of the answer has todo with parenting; we know that. Well, what is parenting, but a

behavior that a person must undertake? It's something you must doevery second of the day, every minute of the day. I don't think this bookhas much to say about aggregate growth dynamics, innovation,technological change. Those matter, undoubtedly. On the other hand,there's another half of life. All these individual behaviors really do addup to something very big.

Harold: This work may also help us understand in a different way whygood programs and interventions actually help people. Why are tightlabor markets good for people? By sparing millions of people situations

of prolonged scarcity and insecurity, we're helping them lead lesschaotic lives that are less decisionally challenged. In addition to theother benefits of sustained employment, we make it easier for people tomake smart long-term decisions.

Sendhil: That's right. To take another example, it's very unclear howto think about economic instability. Unemployment is one issue, butconsider the increase in hours-variability. People face a lot of variabilityin hours. The macroeconomist might think: Well, whatever. Laborincome goes up. Labor income goes down. But thats not all. You makea lot of decisions when your wages are tight and when your hours are

low that have big consequences.

To take another example, consider the big financial recession we justhad. Here we really saw individuals' behavior and choices meet up withthe macroeconomy. Here are people sitting on houses that might ormight not be foreclosed. They must take loan modifications. They haveto make decisions. They must do all of this under conditions of financialdistress.

Some people examine the situation solely in terms of interest rates andbailouts. Yes, these matter, but so does the behavior of these millions ofhomeowners. It's very hard to reach people when they are in conditionsof financial distress. That is a fundamental problem. I think it issomething that well face again and again.


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Harold: That raises another issue. One persons decisional challengescreate a predatory opportunity for someone else. If you werent writingyour book, but one about marketing dicey financial products, one majorstrategy would be to approach people when they're ill-equipped to makegood decisions and then take advantage of them.

That happens a lot. Your team did one experiment that isnt actually inyour book. You showed that a very large proportion of financial advisersgave people biased and self-interested advice about retirement savings.In the housing crisis, one can cite many examples where homeownerson the verge of foreclosure were victims of similar or worse frauds andexploitative arrangements.

Sendhil: That's right, and its a more common problem. Forget aboutforeclosure. Imagine that your finances are very tight, and you need tomake ends meet. Somebody offers you a solution to that problem:Here's a loan.

Like any human being, in that moment, you're really tunneling thatproblem. You're going to try and solve it. You're not going to askquestions like, "Okay, but what are all the strings that are attached?"Its as if you are fighting a fire, and someone hands you a bucket ofwater. You're going to take the bucket and fight the fire.

When you look at payday loans, when you look at all these predatorylending products, they all have that feature going for them. They reallyare that bucket of water that helps you with the fire that you're fighting.They come with all these strings attached. But that's not what you'relooking at in the moment.

Regarding our audit studies of financial advisers, I was astonished bywhat advisers did when we sent actors who literally had what textbookfinance should say is the optimal portfolio -- low cost, index fund,perfectly diversified. The advisers said: "This is good, but I've got thisfund over here that you really ought to look to move into..." That wasastonishing to me. It's one thing to take someone from cash to anotsogood fund. It's another to actually take someone from theperfect fund to this other thing.

Harold: Tell me about the scarcity trap, and why it's so insidious.

Sendhil: The scarcity trap captures this notion we see again andagain in many domains. When people have very little, they undertakebehaviors that maintain or reinforce their future disadvantage. If youhave very little, you often behave in such a way so that you'll have littlein the future.

In economics, people talk about the poverty trap. We're generalizingthat, saying this happens a lot, and we've experienced it. For example,sometimes you get really busy. Then you're stuck, and you just can't

seem to climb your way out. Dieters experience this, too. It's very hard

Another tragic example concerns lonely people. The lonely areinteresting because its so tempting to say: "Oh, lonely people. Yeah,those are just losers, or whatever. Those are people who can't make


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friends." Actually, the data suggests that the vast majority of lonelypeople don't lack any social skills at all. It's just they found themselvesin lonely situations.

You move to a new town and you don't really know anybody. How doyou meet people? It's hard to meet people. The longer that persists,now the longer you've been lonely, and then this is the key part withthe lonely and the busy and the money and the poor now that you'rein that state, your behavior changes, and the way your behaviorchanges seems to keep you in that state.

There are, I think, a few ways in which your behavior changes. Scarcitydraws a lot of attention to itself. That's the key finding that I thinkmotivates everything. When you're experiencing scarcity, your mindautomatically focuses on that thing. That focus brings benefits, whichwe talk about. But it has some costs, too, which help create the scarcitytrap.

One cost, for the lonely: If you want to be interesting, the one thing youshouldn't do is really focus on the fact that I want this person to likeme. That's going to make you very uninteresting. But the lonely, they

just can't help but focus on that.

There's this beautiful study in which subjects speak into a microphoneand they either think that someone else listening to them, or they thinkthey're just talking. Among the non-lonely, there's very little differencein how third parties would rate subjects responses. A third party ratessubjects as equally interesting in both conditions. Yet lonely peoplebecome less interesting when they think someone is listening. It's sortof a choking effect. That's one kind of scarcity trap.

Harold: That's a painful example for many academic nerds.

Sendhil: You and I wouldn't know anything about that, but yes

In a different way, this focus is a bit like firefighting. You become sofocused on solving this or that problem, that you do so at all costs. Youbecome singleminded. That inevitably leads you to borrow. "How am Igoing to solve this problem? Well, I've got to make this deadline, finishthis project. You know what? I'll put off this other stuff." Yet by puttingoff this other stuff, what are you doing but putting tomorrow's self in adeeper time debt?

Poor people face similar traps. They often find some creative solutionsthat don't involve borrowing. Yet credit is always this very attractivething; it looks good when you're tunneling.

One of our studies really convinced me that we were onto something.We took this scarcity trap that you find with borrowing among the poor,and we said: "Well, if this is true, we should be able to recreate that

exact scarcity trap with borrowing something else." So we had theseundergrads come in and play games, like "Family Feud," round afterround. We made some of them poor they had very few seconds foreach family feud and some of them rich.


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When they could borrow, the rich didn't do any worse than when theycouldn't borrow. Yet give the poor the ability to borrow, and they doexactly like the poor in the world. They borrow seconds. They findthemselves in the scarcity trap, and they get stuck. Of course the word

poor here is funny. These are all Princeton undergrads, randomlyassigned to having fewer seconds to play a game.

It was astonishing how we could re-create all of the financial behaviorsof the poor, but with blueberries, in this game we invented called "AngryBlueberries," or with guesses in "Wheel of Fortune." That's what reallymade us feel like maybe there was something more to scarcity and thescarcity trap, because it's not about poverty and money. Thatborrowing, I think, is the key feature of the scarcity.

Harold: Somehow there's this combination of tunneling leading toneglect of longterm consequences. You give another poignant exampleof Indian street vendors. Every morning, they borrow 1,000 rupees tosell fruit. They earn maybe 1,100 rupees by the end of the day, and they

have to pay back the loan. They pay an interest rate of 5 percent perday, half of their profit. Why is it so hard for them to get out from underthat apparently insane situation?

Sendhil: Before we get to the vendor example, which seems extreme,lets go back to what we talked about earlier, about empathy, and howwe can all be stuck in that same inefficient time trap. I know that it'sinefficient for me to prepare my class at the last minute. I know that.But yet somehow, I'm stuck just like the vendors. I'm doing it onborrowed time, every time, and I can never get out.

What's ironic about these scarcity traps is that, with money and time,they all have this funny feature. People think they're in the scarcity trapbecause they have too little money, or too little time. That's sort of true,but its not exactly true. Its not exactly true because you're alwaysaccomplishing the same work. You're just accomplishing it later. If youcould just somehow get one step ahead, that's it. It's not that you havetoo little time. You have the same amount of time; you're just one stepbehind.

The vendors face similar challenges. It's not that they have too little

money. It's that they're in this debt cycle. If they did the same activity,but did it out of their own money, then they would be one step ahead,

just like we could be one step ahead.

I think it's worth introspecting, why do we constantly get stuck? I thinkit's similar to the vendors' reason. Imagine someone came to you andsaid, "Harold, here's this gift of time," and now all of a sudden you'refree. You have this miraculous feeling of being one step ahead now. Butthen, slowly, you'll feel yourself creeping back in and a week later, twoweeks later, you're back to where you were.

For the vendors, it's exactly the same thing. We went and gave themthe gift of money. We bought them out of their debt, and they're notmyopic idiots. They didn't fall back the next day. But just like you, ittook them like six months, and then they all fell back in.


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Harold: If just giving money doesnt fully help people over the longrun, what should we do?

Sendhil: First, we should recognize that the structure of the choiceenvironment itself is often the problem. What keeps you and me in ourtime debt trap? We're stuck in time debt traps because we have twoweeks to do something. Classes start September 3rd, it's only August15th. I have two weeks to prepare my lectures. Weirdly, you have toomuch abundance. So that task is not really crying out for your attention.It only cries out for your attention when you get too close. Intuitivelygood time managers know how to address this problem. They find waysto make these distant deadlines more immediate.

I think the right response to the money trap is similar. A good policyresponse finds ways to make the inadvertent negative consequences ofdebt -- which otherwise fall outside our tunneled thinking -- immediatelyfelt back inside the tunnel.

Let me say it differently. Suppose you have a savings account and youexperience a financial crunch. This money feels like it's just sitting there.Dipping into it can really help you solve it. The consequences happenoutside your tunneled view. We could do a better job of protecting yoursavings by making you feel the pain of when you spend it. People talkabout commitment accounts, but commitment accounts are almost toostrong, because what they do is they really mean for you to neveraccess your money. I think there are softer versions.

For example, imagine that you have a savings account and 401(k)shave a little bit of this feature -- in which you can put money in and youcan't withdraw from it. Only you can borrow from it. The catch is thatyou can borrow from it at a high interest rate, paid back into your ownaccount. Its as if you say: "Yes, you really want the money now. Great.You can take it out as a loan which you have to repay. And when yourepay you're just rebuilding the savings, plus some."

Harold: So my future self commits usury against my current self.

Sendhil: That's perfectly put. Effectively, what the money lender or thepredatory lender is doing is to be the middle man between you and your

future self, and to taking the rents. But why shouldn't your future selfcome immediately and say, "Look, you want to borrow? Fine. Borrow athigh rates, but let's pay me. Don't pay that dude." That type of productis not so different from predatory lending. We know it's going to do wellbecause predatory lending does well. Only the consequences arefundamentally different. Instead of all of that stuff going outside of yourown system, it's sticking in your system, and a savings account is beingbuilt.

Harold: Similar behavioral insights exist in other interventions. Forexample, something called contingency management treatment is pretty

effective for substance users. You say to a client: "Ill pay you $10 ifyoure able to produce a clean [monitored] urine sample on Thursday."That turns out to be impressively effective, especially in combinationwith other help. Steve Higgins and his colleagues have done terrific


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work helping pregnant women reduce their smoking with suchapproaches.

Sendhil: That example is terrifically right. Many intervention designersdon't understand the logic of tunneling. So they provide incentives, butmost of the incentive falls outside the tunnel. So youll see limitedbenefits. But give $10 right now, the entire incentive falls inside thetunnel.

I think such examples help us understand a broader puzzle in theliterature: How is it possible that so many incentives fail big incentives-- yet some tiny incentives seem to work insanely well? I think theanswer is often: Did you get something immediately in the tunnel, ordid you not?

Harold: The same reasoning underlies Mark Kleimans work regardingthe effectiveness of swift and certain (but relatively mild) sanctions inthe criminal justice system.

Sendhil: Kleimans work is very interesting. It's terrific, but the tunnelis so narrow. Think about swift and certain; you might be able to doeven better if you can reach people within that 10second tunnel. That'sthe moment where there is a heated argument. In that sense,punishment and other long-run consequences are so outside the tunnel.It might even be more of an opportunity to think about how we, inthose 10 seconds, might intervene when the dude is really in a hotstate. How do you inject incentives right into that moment?

Harold: Wow, that is hard to do.

I have one final thing. Welfare reform imposed a five-year cumulativelifetime limit on receipt of federally funded cash aid. Im uncomfortablewith the current lifetime limits for broader policy reasons. Even if youbasically accept the incentive argument in welfare reform, that lifetimelimit seems specifically nondesigned to deal with the issues that you'retalking about.

How would you rejigger these policies to be more effective? To raise asimilar example, how should we design unemployment insurance? Italso has a pretty sharp long-term deadline that people often hit

Sendhil: This concept of scarcity allows me to go back and forthfruitfully between examples. When I think of the welfare example, Ioften think of our PhD students. Imagine how bad our PhD studenttheses would be if we said, "It's year two. Course work is done. Comeback in three years with a thesis, and if you want you could alwayscome and ask me questions, but otherwise that's it. You're off." Ofcourse it would be awful. Thats just too distant a deadline.

Harold: You realize you're describing the experience of 30 percent of

all graduate students in the United States.

Sendhil: [laughs] Right, exactly. Even in the worst places, though,think of the institutions you set up, such as a lunch where you mustmake a presentation. Something as simple as that helps to partition the


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three-year task into a three-month task. At least a student needs tomake progress for this lunch.

If we wanted to implement the fiveyear lifetime limit, effective policywould start by making this limit more salient, bringing into the tunnelhow much of that lifetime limit is left. For example, you could say, "I'mgoing to send a letter every month that very saliently says, 'You will runout of benefits by this time, at the rate you're going,' or 'At your rate, bythe age of 28 you won't have benefits.' " We can play with those, butliterally it's almost like what I would like to do is to create this bright,flashing light about the deadline that's in the distance, that comes in.

With graduate students, the same thing is true. If you went to them andsaid, "You know, you don't have that much time left to finish a thesis,"and you can almost even break it into parts. "Students," you would say,"to get to the thesis, you first have to get a paper, and you need to havea paper by year one, and to get a paper you need a project..."

You could do the same thing with the unemployed. You could say,"Look, to get a job you need to have a good resume, and have thatprepared. Are you at the resume stage? Now have you done...?" Takethe big thing and break it into little parts. I'm not saying this is theentire solution, but it's a lowhanging fruit because we don't needlegislative change.

Harold: One of the tragedies of unemployment insurance is there's thisincredible stigma for being out of the workforce for any length of time.Yet the way the system is structured, you're in the tunnel in the earliestperiod before the stigma is so apparent to you. For your first couple ofmonths that you are jobless, you may be thinking: "I want a job that'slike my old job." Unfortunately, in an economy like ours right now, thereisn't a job like your old job. Then four months later, prospectiveemployers start saying, "Hey, he's been out of the workforce awhile.What's wrong with him?" All of a sudden, the employer who might haveinterviewed you three months ago is no longer as interested.

Sendhil: Larry Katz, Linda Babcock, Bill Congdon and I have a paper onbehavioral labor policies. We propose one trick that might overcome allthis. Suppose we had a UI system that says to people: "Look, whatever

job you find, we're going to provide a benefit that ensures you will getwages to match your last job. " We'll do that for three months, fivemonths, six months. Now, to somebody who's worried about wage loss,it's easier for them to say, "Great. I'll take this job and that will at leastgive me full replacement, much higher than what I'm gettingunemployed." Thats a real carrot within the tunnel.

And people may tell themselves: "I'll start looking for another job whileI'm in that job." If they find a better job, great! If they don't, well atleast we've now moved them into a job rather than continuedunemployment.

Harold: I should note that everything were talking about would workso much better with better macro policies and a low-unemployment-rateeconomy.


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Sendhil: Right.

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Being Poor Changes Your Thinking