This post, co-authored by Crystal Huang (Economist at IDinsight) and Kristina Hallez (Program Manager at the Center for Effective Global Action), is cross-posted on the CEGA blog.
Girls reading at a primary school in Ethiopia. ©Nuru International
On May 17th 2019, CEGA’s second annual Psychology and Economics of Poverty Convening brought together psychologists and economists to share research on how poverty affects cognition, decision-making, individual bias, and health in low- and middle-income countries. The day started with lightning talks presented by current PhD students and proceeded into four sessions on areas of intersection between the disciplines. Presentations spurred interesting discussions about how psychological scales and tools can be used and validated in behavioural economics and across cultural contexts; the relationship between poverty and cognitive bandwidth; and how best to conceptualize and measure dimensions of scarcity. Read on for brief session summaries, some key takeaways, and reflections from the day.
In development economics, the prevailing paradigm for understanding and addressing the root causes of poverty focuses on external constraints. After all, external factors — such as low wages, bad credit markets, or limited access to education — determine individual preferences under standard economic theory, which assumes people will always do what is best for themselves given the information they have. At the convening, researchers added to a new and growing body of literature that departs from this framework. Their presentations explored and modelled the internal, psychological factors that affect preferences, including how people form beliefs — whether about themselves, others, or even technology. Key takeaways from this session include:
Scarcity occurs when resources are more limited than people’s need for them. People in conditions of material scarcity will need to sacrifice certain things they need in order to afford the most important things. However, scarcity affects poverty beyond a direct income or price effect. This session explored how material scarcity can affect cognitive or psychological scarcity, potentially resulting in lower mental bandwidth to devote to other cognitively-intensive tasks, such as remembering immunizations and adhering to medications. These poor decisions can perpetuate the cycle of poverty. Key takeaways from this session are as follows:
Income shocks — positive or negative changes to income caused by an unexpected external source — and resource scarcity can influence cognition and individual choices through a variety of mechanisms. Using experimental methods, researchers explored how both expected and unexpected financial strain impacts personality traits, parent-child interactions, and worker productivity, among other outcomes. They also discussed processes for systematically replicating studies on the psychological effects of scarcity and the implications of this work. Key takeaways include:
Alleviating financial strain makes people work harder (and smarter)! Supreet Kaur (UC Berkeley) described results from a field experiment in which factory workers in India were given piecemeal rates for each woven plate they produced. Some were randomly assigned to receive an early payout for their work; others received the payout on the last day of the study. Initial results found that early cash group increased productivity by 5 percent, with larger increases seen among poorer workers. This increase was driven by workers making fewer mistakes, suggesting that reducing financial worry boosted productivity via increased attention and focus.7
Replicating studies on scarcity presents interesting and particular challenges. Ruthe Foushee (UC Berkeley) and colleagues shared results from an ongoing systematic analysis and attempt to replicate results from studies on the psychological effects of scarcity. Adding to the conversation on open science and replicability, they found that some results were replicable, while others were not. Their findings lead us to further questions about how to measure scarcity as well as avenues for continued study replication and the interpretation of those results. 8
In addition to the takeaways above, the convening has illuminated some important open questions at the intersection of psychology and development economics. For example:
We look forward to seeing how CEGA’s new Psychology and Economics of Poverty initiative — and the related body of evidence — continues to evolve.
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