POVERTY’s BRAIN DRAIN: How financial stress affects IQ

1. POVERTY’s BRAIN DRAIN: How financial stress affects IQ Anandi Mani

2. Poverty & Its Puzzles • The Poor tend to care less for their health • Use less preventive healthcare • Comply less with treatment regimes (Case et al AER 2004) • The Poor are less attentive parents • Better off parents read more to their kids, engage them in more conversations, take them to cultural/educational events more often, regulate the amount of TV that their kids watch more… • The Poor pass up on productive investment opportunities… • …despite having resources and knowledge to do so (Dufloet al 2010) • STYLIZED FACT: Poverty is Correlated with “Bad” Behavior WHY ??

3. Possible Explanations • Good things cost money • Ex: drugs cost money • Factors associated with poverty • Poor are less knowledgeable • The poor are just different people • Care less about the future, less intelligent (cognitive capacity)

4. Possible Explanations • Good things cost money • Ex: drugs cost money Costs do not matter for many behaviors • Factors associated with poverty • Poor are less knowledgeable Doesn’t quite explain many behaviors of the poor • The poor are different people • Care less about the future, less intelligent (cognitive capacity)

5. Poor are Worse Decision Makers • One explanation for poverty: • (Bad) Decision-Making  Poverty • Our Alternative Explanation: • Poverty  (Bad) Decision-Making

7. There’s something about Scarcity • The Poor must manage sporadic income, juggle expenses, and make difficult financial tradeoffs. • Mental Bandwidth is limited • Our Hypothesis: Concerns about (Financial) Scarcity are taxing… • They capture attention (mental bandwidth) and trigger intrusive thoughts… • … leaving less for other important, but less urgent tasks • Why should the mind be structured like this? • Capture is Involuntary

8. Control condition

9. Food condition

10. Search times by condition and group * Interaction: p=.074 (more data coming) Controlling for search times on 3 practice trials

11. Evidence for the Hypothesis • EXPERIMENTAL STUDY: • Trigger thoughts about Financial concerns by presenting hypothetical scenarios to mall shoppers … • Give them IQ tests as they’re thinking about how they would deal with the scenario • FIELD STUDY: • Farmers financially stretched before harvest, richer after they’re paid. • Compare IQ test performance of the same farmerbefore harvest versus after harvest (when he is richer)

12. 1 2 3 4 5 6 Cognitive Tests Raven’s Tests Number Stroop Tests • Respondents shown a string of (identical) numbers; Task is to count the number of digits, not the number itself • 333 • 666666 • 22 • 11 • 4

13. Findings • Financial Stress results in a drop of 10-13 IQ points…which is the equivalent of IQ lost • From loss of a full night’s sleep • From becoming a normal drinker to an alcoholic • Going from 45 to 60 years of age

14. Conclusions & Policy Implications • Bottom Line: Poverty is not just about material resources, but also about lower mental resources • Policies should be created in a way to reduce the cognitive demand in the poor • Set up the right default in retirement plans, health insurance, bank accounts • Simplify forms, application procedures • Set up commitment devices & Timely Reminders

15. Thank you! Special thanks to: Eldar Shafir Jiaying Zhao Sendhil Mullainathan

16. Interpreting the Results • Our Hypothesis: Concerns about Financial scarcity are taxing on Cognitive Ability • Other Factors could potentially affect outcomes too • Greater Physical Effort & Exhaustion during Harvest • Anxiety about Harvest, Overall “Stress” • Nutrition • Other? • Learning Effects

17. Study in a NJ mall Your car breaks down and requires $X to be fixed. You can pay in full, take a loan, or take a chance and forego the service at the moment... How would you go about making this decision? • “Easy” Condition: X = 200 • “Hard” Condition: X = 2000

18. Cognitive control task

19. Results Raven’s Matrices Cognitive Control * ** *** ** Accuracy Accuracy Challenging financial scenarios impeded cognitive abilities of the poor * p < .05 ** p < .01 *** p < .001

20. Anxiety about Math? Suppose you are on the board of a national organization that is hoping to increase membership by at least X members. You can conduct a campaign and decide which cities, or rely on word-of-mouth... How would you go about making this decision?

21. Results Raven’s Matrices Cognitive Control Accuracy Accuracy Not because of anxiety in math

22. With Monetary Incentives a financial problem incentives: $.25 for every correct response Raven’s matrices cognitive control task Time respond to the financial problem

23. Results Raven’s Matrices Cognitive Control * * *** *** Accuracy Accuracy The poor performed worse, and earned less, $0.71 (or 18%) * p < .05 *** p < .001

24. Summary • The poor exhibited diminished cognitive abilities when financial problems were challenging, but were comparable to the rich when problems were benign • Field & Lab evidence suggests that Financial Scarcity presents challenges that consume cognitive resources, leaving less for other tasks, hence impeding other basic cognitive functions

25. Conclusions & Policy Implications • A new explanation for why the poor appear less capable: The State of Poverty hurts Mental Capacity • Policies should be created in a way to reduce the cognitive demand in the poor • Set up the right default in retirement plans, health insurance, bank accounts • Simplify forms, application procedures • Set up commitment devices • Reminders

26. More Than Poverty • Scarcity more broadly • Studies on the lonely • Studies on dieters • Experimentally constructed scarcity

27. Future Work • Conceptual “replication” • 2008 replication of harvest study • What constitutes “poverty”? • Show link to behavior • Long term effects

28. Overall “Stress” • Effects of Stress on outcomes are not always negative • Yuen et al(PNAS, 2009): Enhances Working Memory • Our 2009 Study in neighboring areas of Tamil Nadu: Significant effects on Biological markers of stress • Heart rate, pre vs. post: (78.36 vs. 76.19; p=0.065, N=187) • Diastolic blood pressure (78.70 to 74.26, p<0.001, N=188) • Systolic blood pressure (128.64 vs. 121.56, p<0.001, N=188) • Significant post-harvest improvement in Cognitive Test outcomes, robust to controls for above biological markers. • Suggests that the impairment in cognitive functions was not solely driven by stress.