I'd like to start with a simple question: Why do the poor make so many poor decisions? I know it's a harsh question, but take a look at the data. The poor borrow more, save less, smoke more exercise less, drink more and eat less healthfully. Why? Well, the standard explanation was once summed up by the British Prime Minister, Margaret Thatcher. And she called poverty "apersonality defect."A lack of character, basically.
Now, I'm sure not many of you would be so blunt. But the ideathat there's something wrong with the poor themselves is notrestricted to Mrs. Thatcher. Some of you may believe that thepoor should be held responsible for their own mistakes. Andothers may argue that we should help them to make betterdecisions. But the underlying assumption is the same: there'ssomething wrong with them. lf we could just change them, if wecould just teach them how to live their lives, if they would onlylisten. And to be honest, this was what I thought for a long timelt was only a few years ago that I discovered that everything lthoughtIknew about poverty was wrong.
It all started when I accidentally stumbled upon a paper by a few American psychologists. They had traveled 8,000 miles, all theway to India, for a fascinating study. And it was an experimentwith sugarcane farmers. You should know that these farmerscollect about 60 percent of their annual income all at once, rightafter the harvest. This means that they're relatively poor one part of the year and rich the other. The researchers asked them todo an IQ test before and after the harvest. What they subsequently discovered completely blew my mind. The farmers scoredmuch worse on the test before the harvest. The effects of livingin poverty, it turns out, correspond to losing 14 points of IQ. Now, to give you an idea, that's comparable to losing a night's sleep or the effects of alcoholism.
A few months later, I heard that Eldar Shafir, a professor atPrinceton University and one of the authors of this study, wascoming over to Holland, where I live. So we met up inAmsterdam to talk about his revolutionary new theory of poverty. And I can sum it up in just two words: scarcity mentality. lt turns out that people behave differently when they perceive a thing to be scarce. And what that thing is doesn't much matter -- whether it's not enough time, money or food.
You all know this feeling, when you've got too much to do, orwhen you've put off breaking for lunch and your blood sugartakes a dive. This narrows your focus to your immediate lack -- to the sandwich you've got to have now, the meeting that's starting in five minutes or the bills that have to be paid tomorrow. Sothe long-term perspective goes out the window. You could compare it to a new computer that's running 10 heavy programs atonce. lt gets slower and slower, making errors. Eventually, it freezes -- not because it's a bad computer, but because it has toomuch to do at once. The poor have the same problem. They're not making dumb decisions because they are dumb, but becausethey're living in a context in which anyone would make dumb decisions.
So suddenly l understood why so many of our anti-povertyprograms don't work. Poverty is not a lack of knowledge. Arecent analysis of 201 studies on the effectiveness of money_x0002 management training came to the conclusion that it has almost no effect at all. Now, don't get me wrong -- this is not to say the poor don't learn anything -- they can come out wiser for sure. But it's not enough. Or as Professor Shafir told me, "lt's like teaching someone to swim and then throwing them in a stormy sea."
i still remember sitting there, perplexed. And it struck me that we could have figured this all out decades ago. I mean, thesepsychologists didn't need any complicated brain scans; they only had to measure the farmer's lQ, and lQ tests were invented more than 100 years ago. Actually, I realized I had read about thepsychology of poverty before. George Orwell, one of the greatest writers who ever lived, experienced poverty firsthand in the1920s. "The essence of poverty," he wrote back then, is that it"annihilates the future." And he marveled at, quote, "How people take it for granted they have the right to preach at you and pray over you as soon as your income falls below a certain level."
Now, those words are every bit as resonant today. The bigquestion is, of course: What can be done? Modern economistshave a few solutions up their sleeves. We could help the poorwith their paperwork or send them a text message to remindthem to pay their bills. This type of solution is hugely popularwith modern politicians, mostly because, well, they cost next tonothing. These solutions are, I think, a symbol of this era inwhich we so often treat the symptoms, but ignore the underlying cause.
