Is poverty the chicken or the egg of our ability to think well? The conclusion used to be simple: lower intelligence leads to less wealth and greater poverty. But today we know (thanks to scientists like economist Sendhil Mullainathan and psychologist Eldar Shafir) that poverty itself actually leads to an average loss of 14 IQ points.
This loss of intelligence compares to one night of sleep deprivation or to the negative impact of alcoholism on your mind. This means poverty is an additional factor that ensures how good or bad your decisions are.
In other words: the poorer you are, the less likely you are to take your medicine. (Sendhil Mullainathan, 2013)
The effect of poverty on dealing with life tasks
Rich people are very time conscious: time is money. But what was the exact price of the toilet paper they had bought in the store yesterday? A euro more or less does not matter to them. Poor people, on the other hand, know the price down to the last cent.
The economist Mullainathan explains that those who are poor have to focus on the moment itself: rent for the month, bills, food for the week. Therefore, when you are poor, there is less mental capacity available for financial planning or comparing job offers, generally. This is in turn can have a bad impact on your overall financial situation and ability to make good decisions.
“Scarcity captures the mind,” Mullainathan and Shafir write. Starving people have food on their mind to the point of irrationality. But we all act this way when we experience scarcity. “The mind,” they write, “orients automatically, powerfully, toward unfulfilled needs.” This literally happens at the level of milliseconds. For example, someone who is thirsty perceives the word water faster, than someone who is not thirsty.
Because of poverty, your thinking power is reduced and because of that you are more likely yo make rather short-term decisions. People have ‘too much on their mind’. The acute money problems take hold of you. Therefore, there is less attention to the long term and one is only concerned with his or her primary needs.
The growing complexity of our financial life
Until a short time ago, the financial life for most people was simpler and rather straightforward. These days, it tends to grow more complex, and you have to be much smarter financially. To give an example: Everyone requires a bank account, cell phone, bank apps, and more people need a mortgage and a car loan than before.
Moreover, you also need to file tax returns every year, arrange insurance, assess deductibles, your pension, arrange contracts, and so on. The number of rules and complexities only seems to increase. Not to mention other difficult financial topics such as marriage, divorce, death, and inheritance.
Moreover, we are only receiving more mail and more bills than ever before. There is simply more and more to arrange and organize. What’s more, if you happen not to arrange something properly. Or if you forget to pay a bill, never received it even, or you were sick in hospital, then next you know are collection agencies or even bailiffs ringing your doorbell. Now you have to arrange even more. And before you know it, you are extra indebted, and none of it even because of your own fault.
Criticism of the intelligence quotient
While the theory of IQ is widely accepted, there are, of course, criticisms. Some even call the test a largely pseudoscientific hoax. Researcher Nassim Nicholas Taleb even claims that IQ simply does not work as a measurement method. Moreover, he says, the method is immoral because it sometimes pigeonholes entire groups (or even countries) for the rest of their lives.
Apart from that criticism, there is something to be said for using an IQ test to determine the effect of poverty on our level of thinking. Additionally, what we see is that IQ shows an upward trend through the generations. IQ scores rise every generation in industrialized countries. But life’s challenges, including financial ones, are also increasing. The financial budget is becoming more and more of a thing to manage. So even if we are already getting smarter, complexity is rising just as fast.
So even as we get smarter, the complexity rises just as fast.
Poverty: a vicious circle
Logically, for many people, financial housekeeping is a lot of hard work. For this, most people are simply not educated. In high school, for example, you get economics lessons, but relatively little guidance in the intricacies of financial housekeeping.
Yet, everyone is expected to participate and have their financial affairs in order. The poorer, the more stressed to make ends meet, the less ability to make good decisions. And thus the greater the risk of falling further into poverty. A vicious cycle that is difficult to break.
Even if help is available, you have to be able to ask for it, then find help and finally get help. Either way, the first step is to recognize that you have a problem. From such a step, you can certainly move forward again.
I am more in favor of simplifying the products. And to provide reliable help to people who don’t have time to read contracts for hours because of two jobs and children. If someone is sick, they also go to the doctor —and don’t try to diagnose themselves. (Eldar Shafir, 2017)
We at FiFi Finance like to take this to heart. We are happy to help improve financial literacy by demystifying financial management for everyone.