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Sunday, October 22, 2006

Poor Choices

Are the poor "perfectly rational, just like everyone else" or should we "attribute the behaviors of the poor to a unique “culture of poverty,” rife with deviant values"? This research proposes a third view that lies between these two extremes where the poor, just like everyone else, are "neither perfectly calculating nor especially deviant":

Researchers seek to incorporate street psychology into economics by Chad Boutin, Princeton Weekly Bulletin: Adjusting his laptop, Eldar Shafir punches up a table of figures that represents the financial decisions of lower-income families in Trenton... In the neighborhoods Shafir visits, though working people have the option of going to a bank to manage their money, they also are surrounded by cashing services that process checks for much higher fees. On his computer screen are numbers comparing how many people visit each kind of institution.

“It’s astonishing. Most of the people we have met are willing to spend a lot more to cash their checks at a service, because they feel that banks are intimidating and unwelcoming,” says Shafir, a professor of psychology and public affairs. “These are people who are not earning high incomes, but still would rather spend more at a business where they are welcomed by a clerk who remembers their mother’s name.” ...

Shafir and his fellow behavioral scientists are trying to ... change the field of economics from within. Their goal is simple: to ensure that businesses and the government take into account the way people actually think and behave when making financial decisions. ...[S]tudents of economics ... have been trained to idealize consumers as completely rational and impervious to psychological factors... “It is commonly believed that people are responsible for most of their own behavior, but research demonstrates the substantial influence of situational factors on the way we think and act,” says Shafir...

Standard thinking about poverty falls into one of two camps. Some regard the behaviors of the economically disadvantaged as calculated adaptations to prevailing circumstances. According to this camp, the poor are perfectly rational, just like everyone else. Others attribute the behaviors of the poor to a unique “culture of poverty,” rife with deviant values.

“We propose a third view,” Shafir says. “The behavioral patterns of the poor, we argue, just like those we observe among the comfortable and the educated, are neither perfectly calculating nor especially deviant. Rather, people in difficult circumstances such as poverty often exhibit the same basic quirks and weaknesses as do people from other walks of life, except that in poverty, with its narrow margins for error, the same behaviors can easily lead to substantially worse outcomes.

“What we find is that minor nuances can make a big difference,” he continues, “but such nuances are bound to appear trivial in the cost-benefit analyses that our policy-makers conduct. After all, how much ‘cost’ can plausibly be attributed to the fact that someone is not nice to you for a few minutes? The impact of that ... psychological barrier ... behaves very differently from a standard cost. In a sense, we train our experts to ignore some of the things that might matter the most.”

No shortage of examples exists of how assumed and observed behaviors differ, and they are not limited to any single socioeconomic group. This, according to Shafir, is the more pervasive lesson of his research, which has covered subjects as varied as Medicare, financial loans, bank accounts, shoppers’ decisions, and medical decisions made by expert nurses and physicians.

“Social programs are often devised by well-meaning policy-makers who have simply not learned how to consider behavioral factors,” he says. “An example from recent history that involved many Americans was Medicare Part D’s application package.” ...

“The program’s creators were quite proud of the fact that they offered so many options, but participation levels were disastrously low,” Shafir recalls. “Seniors felt overwhelmed and did nothing, even though it meant they were avoiding a program that could have saved them money. This effect is an example of what my colleagues and I have dubbed the ‘hassle factor.’”

The hassle factor, he says, often affects people presented with multiple alternatives that all seem to offer some advantages. For example, economists assume that if a shopper is given a choice between, say, two styles of shirts, the consumer essentially assigns a value to each shirt and chooses the one with the highest value. Increasing the number of styles to 12 should, in theory, make the customer happier because of the increased chance that one will satisfy his or her taste.

“Instead, it turns out that having more options actually deters people from buying anything, because too many options can be intimidating,” Shafir says. “People feel conflicted — ‘hassled’ — with too much to think about, and they defer making a decision until later. And often, ‘later’ never arrives.” ...

“For lower-income individuals, much of what the rest of us take for granted can become an intimidating experience, or worse,” Shafir says, pulling up another slide on his laptop that shows a page taken from a food stamp application. “Can you imagine how you would react if you saw these words staring back at you?”

On the screen is a warning that anyone who does not follow food stamp rules may receive fines of up to $250,000 and a jail term of up to 20 years. This warning is among the closing lines of a 13-page application that rivals the complexity of an income tax form. Shafir says most of its intended audience has the equivalent of less than a ninth-grade reading level... “The psychological effect on the applicant is probably to stop them from applying in the first place...

One of Shafir’s group members, Crystal Hall, takes a weekly trip to Trenton and impoverished neighborhoods in Philadelphia to gather data... “I’ve found that trust plays a much greater role in these neighborhoods than a traditional theorist might have been taught,” says Hall, a fourth-year doctoral student in psychology. “I talk to a lot of people at soup kitchens and train stations, and the difference in mindset is amazing.”

Hall and her research assistant often mingle with people in these areas to determine what matters most when choosing between two financial contracts with, for example, cable companies or auto mechanics.

“I’ll offer them two different choices on their cable services, one of which they’ve heard of, the other of which is new to them,” she says, “but I’ll also offer them different financial options that should, in theory, make one company more attractive than the other.”

These conversations have shown repeatedly that while upper-middle class people always choose the better financial option, the poor will choose the company they know. “They would rather pay more for the familiarity and the trust,” she says. “The relationship is what is important to them.” ...

The claim is that the poor are not substantially different from anyone else, yet the research also identifies trust and familiarity as important factors in economic transactions for lower-income individuals. What isn't completely clear from the write-up is how poverty leads to a higher demand for trust and familiarity if people in poverty "exhibit the same basic quirks and weaknesses as do people from other walks of life." One answer could be that the downside risk is larger for the poor because, with fewer resources to fall back on and more difficulty redressing wrongs through the legal system, they cannot afford to risk losing even relatively small amounts of money through deceitful or ill-advised transactions. Thus, although they pay a higher price for some goods and services, the insurance value gained from trust and familiarity is a compensating factor that makes the higher price worth it. Or, perhaps transactions costs are substantially higher due to lack of transportation, information (e.g. less internet access), time (e.g. long inflexible work hours), and so on giving firms local monopoly power. Perhaps there are sociological factors that play a role (e.g. feeling out of place, intimidated, or unwelcome when shopping at places outside observers see as the rational choice). Any other ideas?

    Posted by on Sunday, October 22, 2006 at 01:17 AM in Economics, Policy | Permalink  TrackBack (0)  Comments (11)

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