how financial insecurity eats away at your iq and decision-making skills

Poverty isn't just a socioeconomic state, it's also a state of mind. And when tasked with making important decisions on a shoestring budget, your brain will sabotage your wallet.

people being drained

As income inequality around the world becomes a yawning chasm, a number of really bad side-effects are rapidly beginning to appear. People aren’t being trained for new jobs as automation inevitably ramps up, and can’t afford to retrain themselves with soaring education costs and no guidance from employers. Entire countries are now stuck in poverty traps because as more and more robots and computers take over stepping stones to a knowledge economy, the necessary investment into developing them begins to rise nearly exponentially. Not only are more spoils going to the victor, they’re staying in the victor’s bank accounts longer, and in greater quantity, as everyone else’s existence becomes more finically precarious. Meanwhile, politicians shrug and tell the struggling to either get a job or a better one, and stop being poor.

But aside from macroeconomic indicators, there are subtler ways financial insecurity messes with you. For example, simulated poverty drops your IQ score by 13 points, the same as a bad night when you toss and turn with little in the way of decent sleep, leading you to make worse decisions. While IQ tests aren’t good indicators of actual intelligence, they are a handy proxy for the state of your mind while making decisions, especially when it comes to money. According to the researchers, poorer subjects were working from a so-called scarcity mindset in which they were focused intensely on immediate problems, exhausting themselves in the process as their decisions grew more and more important as money dwindled. And while this mental state does help to solve short term problems more creatively, it’s detrimental to long term planning.

how a scarcity mindset corrupts financial decisions

For example, someone with a scarcity mindset is more likely to make dollars stretch on a trip to the grocery store or find the best discount on an oil change. But in the study, when given $50 off on a $1,000 tablet if they travel an extra 30 minutes, they often failed to factor in the travel cost and wear and tear on their cars, unlike the wealthier participants. In other words, they had solid reasoning when it came to absolute costs but failed to account for relative ones. In their minds, $50 off a $300 tablet and $50 off a $1,000 tablet was $50 they could save on a device, while a socioeconomically better off subject looked at these as a 16.7% discount versus a 5% discount and started wondering if the additional travel costs cancel out the savings.

Little things like that are very important in financial matters where one really bad decision can put you in a bad spot, especially if you have little in the way of emergency reserves. Remember that those in more dire economic straights are operating with the cognitive equivalent of a lost night of sleep every day and mistakes that can quickly add up to a few hundred dollars can very easily pile up. When we consider that nearly half of Americans don’t have $400 in the bank to cover emergencies and poverty is surprisingly expensive, you see how this can quickly snowball into a lifelong cycle of debt, causing more cognitive overload as questions of where to buy food or change your oil become make-it-or-break-it-this-month decisions, which makes the situation even worse over the long haul.

an ominous sign of things to come

When you consider that the poor and struggling are getting meager pay that refuses to rise to meet inflation, which automatically puts them behind every year, and the gig economy is only furthering the unpredictability and insecurity that comes with their working conditions and job security, the fact that our brains are very ill suited to be under constant pressure in a scarcity mindset should be yet another klaxon blaring even more trouble to come. People are going to get more and more frustrated as day to day life for anywhere between 60% to 80% of people in the post-industrial world get more and more difficult and mentally taxing, and we’re going to see more political upheaval, and elections based on short, or even immediate term thinking rather than planning for long term consequences.

And while you may ask why people aren’t being taught how to manage their finances better or think in longer terms, when faced with survival or having to skip meals while politicians deny that poverty is anything but a symptom of laziness, all that goes out the window. Even worse, those who run the economy are just as guilty of myopic, short term thinking as the poor which shows very clearly across all economic sectors. As they focus on how to get more and more of the economic pie, even as they grow it, leaving table scraps for everyone else, they refuse to even entertain the thought of what happens if one day, the pie stops growing or shrinks. They may be making their daily financial choices with an abundance mindset, but their behavior on the macroeconomic stage seems to resemble that of a bear readying for hibernation.

In case of a recession, with their own survival mode kicking in because they think of wealth in relative terms, the 1% and the well-off will start making even worse long term economic and financial decisions in response, adding to the spiral of reciprocal misery. This is why unless we start prioritizing stability, poverty alleviation programs meant to put people back on their feet and keep them there until they can handle emergencies without backsliding into debt, not just until an arbitrary cutoff point, and invest in educating societies about financial health and long term planning while making career development in the post-industrial world more accessible and innovative, science says that we’re on track for a very rough few decades.

# science // behavioral economics / poverty / psychology


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