Too little money, too much borrowing

Scarcity — of money, time, food or anything else — focuses the mind on immediate concerns and discourages taking a broader perspective. This “scarcity mindset” helps to explain why poor people often save too little and borrow too much, and it presents policy makers with an opening to encourage better financial decisions among low-income individuals, a new study concludes.

Some researchers, however, regard these findings as vague and far from ready for policy prime time. They suggest that the study’s lab-based results may have little relevance in the real world. And with a nod toward the recent financial meltdown, some note that inadequate saving by the poor ought to be of less concern than financial recklessness on the part of the wealthy.

When money is scarce, each current expense looms large and draws attention away from less pressing expenses, say psychologist Anuj Shah of the University of Chicago and his colleagues. For instance, poor people tend to focus on how to pay for groceries today while neglecting to budget for their next rent payment, the researchers propose in the Nov. 1 Science.

For the study, the group tested volunteers who received generous or limited amounts of time and numbers of tries on lab games. Participants, most in their late 20s and early 30s, were recruited from an online site for job seekers.

“Poor” players spent more time on each choice or action in a game, resulting in lower scores on tests of alertness afterward. Given the opportunity during games, these players borrowed a larger proportion of time or tries against their starting amounts than “rich” players did.

In one experiment, players received 15 seconds or 50 seconds of time per round in a trivia game. Each round consisted of guessing the five most popular survey responses to questions such as “Name things you take on a picnic.” Some participants could borrow additional seconds while playing, but lost the same number or double the number of borrowed seconds later in the game.

Rich players outscored poor players. Having an option to borrow didn’t affect rich players’ scores. Poor players scored lower when they could borrow, especially if they returned twice what they borrowed.

The results of the tests suggest that scarcity of any kind creates a tendency to borrow a needed resource without thinking through the costs and benefits of that strategy, Shah’s team reports. This effect lies behind the popularity of short-term, high-interest loans among the poor, he says.

Poor people do save for the future, but tend to do so for specific purchases, Shah says. Well-publicized reminders about the need to save for specific expenses should be explored as ways to increase saving in low-income households, he proposes.

“The same attention mechanism might drive borrowing and saving when resources are scarce,” Shah says.

The findings suggest that extremely poor people often refuse to pay small amounts for basic health services because they focus so intently on price that they overlook their own health concerns, writes Alix Zwane, a senior program officer at the Bill and Melinda Gates Foundation in Seattle, in the same issue of Science.

But it’s hard to know what to make of Shah’s attention-narrowing model of scarcity, says economist Glenn Harrison of Georgia State University in Atlanta. “Poor” participants in the experiments were presumably relatively well off in real life and not representative of poor people in non-Western countries.

The financial crisis of 2008 and many previous economic calamities involved overborrowing by the rich, not the poor, says economist Nathan Berg of the University of Texas at Dallas. Rich players in Shah’s experiments borrowed greater absolute amounts than poor players, Berg points out. Policies aimed at encouraging responsible borrowing should target major financial firms (SN Online: 10/8/12) and politicians, he suggests.