{"id":97128,"date":"2023-03-25T08:06:00","date_gmt":"2023-03-25T12:06:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=97128"},"modified":"2023-03-29T15:56:11","modified_gmt":"2023-03-29T19:56:11","slug":"economic-decision-making","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/economic-decision-making\/","title":{"rendered":"How a Lack of Money Impacts Economic Decision-Making"},"content":{"rendered":"\n

How does a lack of money affect economic decision-making<\/a>? Why are poor people more rational decision-makers?<\/p>\n\n\n\n

According to behavioral science researchers Sendhil Mullainathan and Eldar Shafir, financial scarcity<\/a> forces people to become experts at making a dollar stretch further. As a result, poor people tend to make more rational economic decisions. <\/p>\n\n\n\n

Here’s how a lack of money affects economic decision-making. <\/p>\n\n\n\n\n\n\n\n

Using Scarce Money Efficiently<\/strong><\/h2>\n\n\n\n

In their book Scarcity<\/em>, Mullainathan and Shafir explain that poor people tend to make more rational economic decisions because scarcity forces them to make every dollar count.<\/strong> With each purchase, they have to consider what else they\u2019ll have to give up to cover the cost. On the other hand, when we have enough money that we don\u2019t have <\/em>to analyze every dollar spent, we\u2019re more susceptible to biases and inconsistencies. <\/p>\n\n\n\n

(Shortform note: Although the authors don\u2019t explicitly mention this nuance, their argument here only seems to apply to economic decision-making with short-term consequences, like buying a cheaper item in a grocery store, which results in immediate savings. Later, the authors argue that poor people make worse<\/em> economic decisions in situations where there are long-term consequences to consider, like taking out loans.)<\/p>\n\n\n\n

For example, wealthy people (those who don\u2019t experience scarcity when it comes to money) are more susceptible to relativity bias. This is the phenomenon where someone is willing to go out of their way to save $5 on a $20 purchase, but not willing to do so to save $5 on a $100 purchase. The savings are the same in both situations, but the lower relative<\/em> savings as a proportion of the total cost makes wealthier people feel like it\u2019s not worth the effort. <\/p>\n\n\n\n

(Shortform note: Relativity bias causes people to make irrational economic decisions in many different types of scenarios where we assess how good a deal is based on comparisons. In Predictably Irrational<\/em><\/a>, Dan Ariely explains that retailers often take advantage of this tendency by presenting a decoy product<\/a> with a much higher price than another similar product. By comparison, the cheaper product is much more appealing to customers<\/a>, regardless of its actual value.)<\/p>\n\n\n\n

Mullainathan and Shafir write that poor people are also more aware of the prices they\u2019re paying, they\u2019re conscious of when they save or lose money by buying a larger volume, and they\u2019re more likely to factor in the opportunity cost<\/a> of an activity (what you lose by not<\/em> doing something different). For example, they\u2019re more likely to be aware that commuting a long distance to purchase an item on sale may not be worth the time they could spend doing other things, like working, if they purchase it somewhere closer.<\/p>\n\n\n\n

(Shortform note: Contrary to the authors\u2019 research, one study showed that people of all income levels tend to neglect opportunity costs<\/a>. However, the researchers noted that aspects of the study design may have skewed the data. For example, the participants may not have been poor enough<\/em> for there to be a significant difference in the groups. Furthermore, the study involved a hypothetical situation that may have caused low-income people to neglect the opportunity cost more than they would in a real-life scenario.)<\/p>\n","protected":false},"excerpt":{"rendered":"

How does a lack of money affect economic decision-making? Why are poor people more rational decision-makers? According to behavioral science researchers Sendhil Mullainathan and Eldar Shafir, financial scarcity forces people to become experts at making a dollar stretch further. As a result, poor people tend to make more rational economic decisions. Here’s how a lack of money affects economic decision-making.<\/p>\n","protected":false},"author":7,"featured_media":93592,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,9],"tags":[944],"class_list":["post-97128","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money","category-psychology","tag-scarcity","","tg-column-two"],"yoast_head":"\nHow a Lack of Money Impacts Economic Decision-Making - Shortform Books<\/title>\n<meta name=\"description\" content=\"According to behavioral scientists Mullainathan and Shafir, poor people tend to make more rational economic decisions. 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