On the record: ‘Poverty is a cognitive tax, it depletes our resources’
Policymakers needn’t throw everything they’ve learned out of the window — usually, when prices go up, people demand less of a product; we’re not arguing with that.
Written by Varun Gauri | Updated: June 22, 2015 12:27 am
The World Development Report 2015, ‘Mind, Society and Behaviour’, argues for policymakers to take a more realistic view of how people think and behave. The lead author of the report, VARUN GAURI, spoke to Parth Phiroze Mehrotra about how these insights can help arrive at small tweaks in policy that could generate big results:
The assertions that people are not individual maximisers, that they have cognitive blindspots, that they value social reputations, seem to upend traditional economic assumptions. Do economists have to go back to the drawing board?
In the traditional approach to economics, people are computers that can process all available information. They make decisions by and for themselves. What we say is that people actually think automatically much of the time, they think socially — other people are factors in their preferences — and they also have mental models that filter information. In the report, we focus on areas where policy interventions can reduce poverty in important ways. There may be other ways in which people are not maximising in the broader markets. Policymakers needn’t throw everything they’ve learned out of the window — usually, when prices go up, people demand less of a product; we’re not arguing with that. But these findings may affect some of our elasticities. The evidence now is fairly strong that people have cognitive limitations that lead them not to process all the available information. Poor people in particular suffer from a lot of cognitive constraints. And even you and I typically think automatically.
The report points out that because the cognitive limitations on poor people might be greater, changing the time at which they have to make a decision, say about schooling, to when they have more “bandwidth”, like post-harvest, might actually help them make better decisions. It sounds almost too good to be true.
This could be a cost-effective way to influence outcomes. A lot of pioneering work on this is by Sendhil Mullainathan and Eldar Shafir. They developed the idea of a “scarcity mindset”. The key finding is that poverty is a cognitive tax; it depletes our resources. We can “induce poverty” even in you and me — if we’re playing a videogame and make decisions quickly, we’ll act as if we’re poor, we’d be focused on the short term. The policy implication is that people should be supported when they make decisions. That could take the form of resources transferred at the time of decision-making or actual people, social workers, helping individuals to take decisions. Or it could take the form of simplification. Too many programmes are too complicated to sign up for — that itself is a cognitive tax. In Tangier, there was a credit for a water hook-up, but only 10 per cent signed up for it. When researchers went to people’s houses, they realised that people had the documentation, they just didn’t get around to signing up. After that intervention, the sign-up rate went up to 69 per cent. The hassle factor can be huge.
