Pragma Synesi – interesting bits

Compendium of interesting bits I come across, with an occasional IMHO

Scarcity lowers IQ and self-control

Having read the article below, which is adapted from the book Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir, I was struck by several points. For one, it is amazing how much scarcity affects our decisions and actions, on a level we don’t even notice.  But more importantly, the effect scarcity has on IQ and self-control sheds new light on the plight of the poor.  If you don’t have time to read the whole book, makes sure you read these articles highlighting different aspects of the book: Scarcity: Why Having Too Little Means So Much and Scarcity changes how we think.

If you are really pressed for time, below is an excerpt from the first article:

Scarcity: Why Having Too Little Means So Much (excerpts)

by

In this exclusive excerpt of Scarcity: Why Having Too Little Means So Much, Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir explore the concept of scarcity: its ubiquity, its challenges, and its silver lining.

Mental Bandwidth

Imagine that you are surfing the web on your laptop. On a reasonably fast computer, you easily go from page to page. But imagine now that there many other programs open in the background. You have some music playing, files downloading and a bunch of browser windows open. Suddenly you are crawling, not surfing, the web. These background programs are eating up processor cycles. Your browser is limping along because it has less computing power to work with.

Scarcity does something similar to our mental processor. By constantly loading the mind with other processes, it leaves less “mind” for the task at hand. Scarcity directly reduces bandwidth — not a person’s inherent capacity, but how much of that capacity is currently available for use.

It may strike you as odd that a person’s “capacity” can be so easily affected, but that is precisely the point—we are used to thinking of cognitive capacity as fixed, when in fact it might change with circumstances.

To see the effect of scarcity on fluid intelligence, an aspect of mental bandwidth, we ran some studies with our graduate student, Jiaying Zhao, where we presented people in a New Jersey mall with simple hypothetical scenarios, such as this one:

Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make?

We then followed this question with a series of Raven’s Matrices problems, which are used to measure fluid intelligence and are common on IQ tests. Using self-reported household income we divided subjects, by median split, into rich and poor. In this set-up we found no statistically significant difference between the rich and poor mall-goers. Of course, there may been some difference but it was not big enough for us to detect in this sample. The rich and the poor looked equally smart.

For other mall-goers, we ran the same study but with a slight twist. They were given this question instead:

Imagine that your car has some trouble, which requires an expensive $3,000 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make?

All we have done here is replace the $300 with $3,000. Remarkably, this change affected the two groups differently. Coming up with a half of $300 or $3,000 was easy for those who were well off. They could just pay out of savings or put it on a credit card. For the less well off, finding $150 for an important need was not too hard either. Not enough to make them think too much about scarcity and their own finances.

Not so for the $3,000 car expense: finding $1,500 was going to be hard for those with low incomes. A 2011 study found that close to half of all Americans reported that they would be unable to come up with $2,000 in thirty days even if they really needed it. Of course the question we gave the mall respondents was hypothetical. But it was realistic, and it likely got them thinking about their own money concerns. They may not have a broken car, but experiencing money scarcity would mean they had monetary issues close to the top of mind. Once we tickled that part of the brain, the all too real non-hypothetical thinking about scarcity would come spilling out. Coming up with $1,500 would be hard. My credit cards are maxed out. Already the minimum payment due is so large. How will I make the minimum payment this month? Can I afford to miss another payment? Should I take a payday loan this time instead? A little tickle could raise a racket in the brain.

And this racket affected performance. The well-off subjects, with no racket, did just as well here as if they had seen the easy scenario. The poorer subjects, on the other hand, did significantly worse. A small tickle of scarcity and all of a sudden they looked significantly less intelligent. Preoccupied by scarcity, they had lower fluid intelligence scores.

Our study revealed that simply raising monetary concerns for the poor erodes cognitive performance even more than being seriously sleep deprived.

There is another way to understand the size of our findings. Because the Raven’s test is used to measure fluid intelligence, it has a direct analogue with IQ. Our effects correspond to between thirteen and fourteen IQ points. By most commonly used descriptive classifications of IQ, thirteen points can move you from the category of “average” to one labeled “superior” intelligence. Or, if you move in the other direction, losing thirteen points can take you from “average” to a category labeled “borderline deficient.” Remember: these differences are not between poor people and rich people. Rather, we are comparing how the same person performs under different circumstances. The same person has fewer IQ points when she is preoccupied by scarcity than when she is not. This is key to our story. The poor responded just like the rich when the car cost little to fix, when scarcity had not been rendered salient. Clearly, this is not about inherent cognitive capacity. Just like the processor that is slowed down by too many applications, the poor here appear worse because some of their bandwidth is being used elsewhere.

…..

Adapted from the Book SCARCITY: Why Having Too Little Means So Much. Copyright © 2013 by Sendhil Mullainathan and Eldar Shafir. Reprinted by arrangement with Times Books, an imprint of Henry Holt and Company LLC.

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December 31, 2013 - Posted by | behaviour, decision making, economics, psychology | , , , , , ,

1 Comment »

  1. […] buy lotto tickets, and a host of other behaviors that are not prudent. Causality runs both ways: poverty causes bad decisions and bad decisions cause […]

    Pingback by Thoughts on Basic Income | azmytheconomics | July 14, 2016 | Reply


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