How lack of money impairs intelligence and affects decisions

It’s a familiar picture these days: the budget is tight and going into the red has been a constant. Here comes an unexpected expense. The car broke down and the repair will cost much more than we thought: R$ 3,000.

The brain needs to find a way out: delay some bills to guarantee the mechanic’s money? Do you only make the minimum credit card payment in the month? Do you ask for a loan to help finances that were already under pressure?

Regardless of the path chosen, efforts to get out of financial trouble — or simply survive, in the case of more and more Brazilian families — have significant consequences for cognition.

It’s something explained by behavioral scientist Eldar Shafir, from Princeton University, in the United States, and economist Sendhil Mullainathan, from Harvard, in a 2013 book called Scarcity – A New Way of Thinking about the Lack of Resources in the Lives of People and Organizations. (Best Business publisher).

The pair use the term “mental bandwidth” to illustrate brain capacity in such situations. A computer with many programs open will have difficulties processing information. The internet is slow. Videos will crash all the time.

Likewise, a head full of financial problems will suffer performance: it will become overloaded and lead to bad decisions.

“Mental bandwidth is very limited. Often you need to focus on the urgency of the now and you do it competently: it solves the problem. But if this movement happens all the time it will never be enough. It will neglect other areas of your life”, says Israeli Shafir to BBC News Brazil.

To measure the impact on intelligence, Shafir and Mullainathan performed an experiment similar to the situation presented at the beginning of the text. They went to a mall in the US city of New Jersey and selected people of different economic conditions.

First, the participants were faced with the need to incur a cost of US$ 300 (R$ 1,419) for the car that broke down. Subsequently, Raven tests were applied, which measure the fluid intelligence of the participants. The results showed no significant differences between rich and poor.

However, when the value was changed from US$ 300 to US$ 3,000 (R$ 14,190) in the hypothetical situation presented, they found that the poorest had a very considerable drop in the score (-13) measured in the method.

Impaired intelligence, of course, can be decisive in decision-making — especially in a social context with little room for missteps.

“If I make a mistake, if I make a bad investment, if I forget to pay a fee, it’s just an irritation. But life goes on. If you’re poor and you make those same mistakes, the price in life will be much higher. less room for mistakes, so life becomes more complicated, more difficult”, says the psychologist.

Poverty and debt are often attributed to a lack of financial responsibility and the discipline to save. It’s something echoed by influential financial coaches and even the economy minister. In an interview with SheetPaulo Guedes said that “the rich capitalize on their resources. The poor consume everything”.

7 out of 10 use supermarket credit

A recent survey by Serasa, however, showed that 70% of those in debt with a credit card used this form of payment to buy food at the supermarket. In other words, most got a dirty name to guarantee something basic for everyday life.

In 2019, a survey by the CNDL (National Confederation of Shopkeepers) and the SPC Brasil (Credit Protection Service) indicated that 67% of Brazilian consumers are unable to save anything they earn.

Of this total, 40% justified that the very low income did not allow saving. But many may wonder: where does individual effort, personal responsibility, come in to get out of poverty? “Personal responsibility is important. But it’s not enough if the context works against you,” says Shafir.

“We always set the example of airline pilots. If the cockpit is well designed, well built, and the pilot is responsible and has good knowledge of the role, the pilot will go well. If there are structural problems in the cockpit, very capable pilots and responsible can shoot down a plane.”

The behavioral scientist claims that low-income people, in fact, develop a wisdom of survival against adverse conditions. “But it’s only a matter of time, bad luck or circumstances before the tumble comes again.” The brain will make a misstep at some point.

impulsive decisions

Flavia Ávila, a specialist in behavioral economics and founder of the consultancy InBehavior Lab, says that “one of the key points of poverty is that in times of scarcity, whether of money or time, you tend to make impulsive, instinctive and less rational decisions in the general”.

“It used to be said that the poor person lacked information. But I say that information alone is not enough to generate action. If it did, everyone would be a millionaire. We have too much information. Rarely will information generate behavior change.”

Ávila cites Nobel laureate Daniel Kahneman, author of Fast and Slow: Two Ways of Thinking (Objetiva Publishing, 2011), who popularized a decision-making model in which scarcity leads to hasty judgments — and eventually bad decisions.

She says the model is a simplification of a more complex brain process, but explains that “in system one there is the idea of ​​making more instinctive decisions, and in system two, slower and more reflective. % of the time is system one”.

Shafir often illustrates the situation with the image of “a fire, where you don’t ask how much the bucket of water you need to put out the fire that is consuming your house costs.”

present bias

Fernando Fonseca, economist and professor at the Federal University of Tocantins, investigated in his doctoral thesis the ability to save (or not) of people in extreme poverty in Bico do Papagaio, a region in northern Tocantins.

In October 2021, Brazil had 27 million people in poverty (income up to R$290 per month), according to a survey by FGV Social. The interviewees in the Fonseca study had unstable economic incomes and had difficulty accessing education and basic sanitation.

The researcher analyzed the “impatience rate” of this population in questions such as “would you rather receive R$100 today or R$150 a week from now?”. One of the perceptions was that decision-making is guided by the “present bias”.

“These very poor and hardworking people have a very short time horizon, they don’t see themselves in the future. So it’s not that these expenses are irrational, but given the excess of concerns they have, from food, housing and precarious situations, these people don’t manage to have any kind of planning”, says Fonseca.

Even so, some saving effort was made. As it is a sector without access to banks, “unbanked”, families in the north of Tocantins tried a kind of non-monetary savings: raising medium and small animals.

“To meet an immediate need. The animal has liquidity, although it may be sold at a lower value than expected. This is forced by the period of hunger, of intense drought, in this region.”

How to relieve ‘mental bandwidth’

Shafir, from Princeton, says that “in a way, our lives would be easier if it were true that the poor deserve to be poor because they don’t try hard enough or don’t have the ability. But no: thinking that there are people who end up in poverty even who have merit, ability and intelligence, life seems unfair”.

“The data we have shows that the poor are very focused and have great knowledge of buying, of how to get the lowest price. But if you are focused on securing the next day or the next week, you will never think about next year. . And then everything becomes a big challenge”, he says.

The Israeli psychologist considers that findings about behavioral economics provide an “optimism that public policies can make a difference, with actions in education, transport or even a minimum income”.

In other words, ensuring minimum standards of living alleviates the burden on “mental bandwidth”.

“And it doesn’t even have to be through the government alone. Large corporations could understand that providing better conditions for their employees leads to fewer mistakes being made in the workplace. In other words, it helps the company itself at the corporate level provide minimum acceptable standards of work.”

For Flavia Ávila, from InBehaviour Lab, poverty and extreme poverty affect “society as a whole: it influences economic, climate and even less palpable issues. .