POVERTY’s BRAIN DRAIN: How financial stress affects IQ

POVERTY’S BRAIN DRAIN: HOW FINANCIAL STRESS AFFECTS IQ

Anandi Mani

Poverty & Its Puzzles

The Poor tend to care less for their health Use less preventive healthcare Comply less with treatment regimes (Case et al AER 2004)

The Poor are less attentive parents Better off parents read more to their kids, engage them in more

conversations, take them to cultural/educational events more often, regulate the amount of TV that their kids watch more…

The Poor pass up on productive investment opportunities… …despite having resources and knowledge to do so (Duflo et al

2010)

STYLIZED FACT: Poverty is Correlated with “Bad” Behavior WHY ??

Possible Explanations

Good things cost money Ex: drugs cost money

Factors associated with poverty Poor are less knowledgeable

The poor are just different people Care less about the future, less intelligent

(cognitive capacity)

Possible Explanations

Good things cost money Ex: drugs cost moneyCosts do not matter for many behaviors

Factors associated with poverty Poor are less knowledgeableDoesn’t quite explain many behaviors of the poor

The poor are different people Care less about the future, less intelligent

(cognitive capacity)

Poor are Worse Decision Makers

One explanation for poverty: (Bad) Decision-Making Poverty

Our Alternative Explanation: Poverty (Bad) Decision-Making

There’s something about Scarcity

The Poor must manage sporadic income, juggle expenses, and make difficult financial tradeoffs.

Mental Bandwidth is limited Our Hypothesis: Concerns about

(Financial) Scarcity are taxing… They capture attention (mental bandwidth)

and trigger intrusive thoughts… … leaving less for other important, but less

urgent tasks Why should the mind be structured like

this? Capture is Involuntary

Control condition

Food condition

Search times by condition and group

Non-dieters Dieters8.75

8.8

8.85

8.9

8.95

9

9.05

9.1

Food conditionControl condition

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Interaction: p=.074 (more data coming)Controlling for search times on 3

practice trials

EXPERIMENTAL STUDY: • Trigger thoughts about Financial

concerns by presenting hypothetical scenarios to mall shoppers …

• Give them IQ tests as they’re thinking about how they would deal with the scenario

FIELD STUDY: • Farmers financially stretched

before harvest, richer after they’re paid.

• Compare IQ test performance of the same farmer before harvest versus after harvest (when he is richer)

Evidence for the Hypothesis

Cognitive Tests

Respondents shown a string of (identical) numbers; Task is to count the number of digits, not the number itself

333 666666 22 11 4

Raven’s Tests Number Stroop Tests

1 2 3

4 5 6

Findings

Financial Stress results in a drop of 10-13 IQ points…which is the equivalent of IQ lost From loss of a full night’s sleep From becoming a normal drinker to an

alcoholic Going from 45 to 60 years of age

Conclusions & Policy Implications

Bottom Line: Poverty is not just about material resources, but also about lower mental resources

Policies should be created in a way to reduce the cognitive demand in the poor

Set up the right default in retirement plans, health insurance, bank accounts

Simplify forms, application procedures Set up commitment devices & Timely Reminders

Thank you!

Special thanks to:

Eldar Shafir

Sendhil Mullainathan

Jiaying Zhao

Interpreting the Results

Our Hypothesis: Concerns about Financial scarcity are taxing on Cognitive Ability

Other Factors could potentially affect outcomes too Greater Physical Effort & Exhaustion during

Harvest Anxiety about Harvest, Overall “Stress” Nutrition Other?

Learning Effects

Study in a NJ mall

Your car breaks down and requires $X to be fixed. You can pay in full, take a loan, or take a chance and forego the service at the moment...

How would you go about making this decision?• “Easy” Condition: X = 200

• “Hard” Condition: X = 2000

Cognitive control task

Results

*

**

**

***

* p < .05** p < .01

*** p < .001

Accu

racy

Accu

racy

Raven’s Matrices Cognitive Control

Challenging financial scenarios impeded cognitive abilities of the

poor

Anxiety about Math?

Suppose you are on the board of a national organization that is hoping to increase membership by at least X members. You can conduct a campaign and decide which cities, or rely on word-of-mouth...

How would you go about making this decision?

ResultsA

ccu

racy

Raven’s Matrices Cognitive Control

Not because of anxiety in math

Accu

racy

With Monetary Incentives

a financial problem

Raven’s matrices

cognitive control task

respond to the financial problem

Time

incentives: $.25 for every correct response

Results

*

*** ***

* p < .05*** p < .001

Accu

racy

Accu

racy

Raven’s Matrices Cognitive Control

The poor performed worse, and earned less, $0.71 (or 18%)

*

Summary

The poor exhibited diminished cognitive abilities when financial problems were challenging, but were comparable to the rich when problems were benign

Field & Lab evidence suggests that Financial Scarcity presents challenges that consume cognitive resources, leaving less for other tasks, hence impeding other basic cognitive functions

Conclusions & Policy Implications

A new explanation for why the poor appear less capable: The State of Poverty hurts Mental Capacity

Policies should be created in a way to reduce the cognitive demand in the poor

Set up the right default in retirement plans, health insurance, bank accounts

Simplify forms, application procedures Set up commitment devices Reminders

More Than Poverty

Scarcity more broadly

Studies on the lonely

Studies on dieters

Experimentally constructed scarcity

Future Work

Conceptual “replication” 2008 replication of harvest study

What constitutes “poverty”?

Show link to behavior

Long term effects

Overall “Stress”

Effects of Stress on outcomes are not always negative Yuen et al(PNAS, 2009): Enhances Working Memory

Our 2009 Study in neighboring areas of Tamil Nadu: Significant effects on Biological markers of stress Heart rate, pre vs. post: (78.36 vs. 76.19; p=0.065, N=187) Diastolic blood pressure (78.70 to 74.26, p<0.001, N=188) Systolic blood pressure (128.64 vs. 121.56, p<0.001, N=188)

Significant post-harvest improvement in Cognitive Test outcomes, robust to controls for above biological markers.

Suggests that the impairment in cognitive functions was not solely driven by stress.