FAIR MONEY

Face to Face with Inequality


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Reflection as a Luxury Good

Maria Konnikova has an excellent article in the New York Times today, entitled “No Money, No Time: The Poor Are Under a Deadline that Never Lifts.” She sums up the experimental work of Sendhil Mullainathan and Eldar Shafir on the effects of poverty and works her way backwards to reality, applying their conclusions to the lives of the people at the bottom of the heap. In the lab, people in artificially induced states of poverty perform worse than people operating under conditions of abundance. Mullainathan and Shafir also conclude that they tend to solve for the present moment more–meaning they borrow, handicapping their future performance.

Mullainathan and Shafir decompose poverty into three components: lack of money, lack of time, and lack of bandwidth (by which the mean the ability do dedicate sufficient mental resources to any given problem so as to make good decisions). Their argument is that a lack of money correlates with a lack of time in the real world, and that both conspire to reduce available bandwidth for decision-making.

Shafir recommends designing programs to reduce bandwidth demands and uses the FAFSA as an example:

“If I give people a very complicated form, it’s a big demand on cognitive capacity,” Mr. Shafir says. “Take something like the Fafsa” — the Free Application for Federal Student Aid — “Why is pickup for the low-income families less than 30 percent? People are already overwhelmed, and you go and give them an incredibly complicated form.”

To him, the obvious conclusion is to radically change our thinking. “Just like you wouldn’t charge them $1,000 to fill out a form, you shouldn’t charge them $1,000 in cognitive complexity,” he says. One study found that if you offer help with filling out the Fafsa form, pickup goes up significantly.

Interestingly, their work also seems to support one of the tentative findings from FAIR Money’s Payday loan study, that talking about one’s situation, even if only to a researcher who offered no comment, seemed to have an effect on decisions about how to handle one’s financial dilemmas. By paying people to participate in our study and talk about their situation, we paid them to take time to reflect, alleviating some of the pressure on two of those three dimensions of poverty.

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Good with Money

I always thought that anybody might want financial advice, not only people with bulging money bags, but people with flat wallets. Folks with modest means might perhaps like more assistance?

Not so. It’s just the wrong way to look at things. Everybody we’ve talked to in the FAIR Money project turns out to be really good with money, no matter the state of their finances. They might be exceptionally good at getting amazing deals. Or they have spreadsheet they faithfully track their expenses in, down to the very last penny. Or they really know how to negotiate government services. Or they always, always pay their bills on time. Without a doubt, these are higher-order skills seems to have at least one.

For sure, if you zoom out a little, you might see that the spreadsheet contains some outsize purchases (such as a two-inch Tasmanian devil charm paved in diamonds and onyx). You might notice that the bills got paid with a payday loan. That the grocery savings were blown completely out of the water by a visit to the casino. All true. And it’s true that it would be really helpful to zoom out before disaster strikes and you run out of options; true that thinking about what you’re good at could act as a smokescreen for the possibility that you’re heading for a financial abyss.

Nevertheless, it’s important to pause over the fact that competence is almost a given. It’s easy to point out where there might be shortcomings, but surely it’s more useful to start with the strengths and build from there. And maybe then advice could be more sought after.