Why the Poor See Financial Decisions More Clearly

People often assume that the poor are less competent than the wealthy. Some even suggest that the poor have flawed values or ways of thinking. But my colleagues and I have recently found that the poor outperform the rich at some financial decisions. Under poverty, people develop a unique expertise.

To appreciate this expertise, we should first come to terms with a mistake nearly everyone makes. Consider this question, which I regularly pose to my MBA students: imagine you are buying a $300 tablet, but the salesman says the same tablet is available for $50 less at a store 20 minutes away. Would you travel for the discount? Almost certainly. Now imagine that the tablet costs $1,000. Would you still travel the 20 minutes to save $50? Now you might hesitate.

You are not alone. People are far more likely to say “no” to the second question than the first, even my MBA students, whose jobs are to make good financial decisions. This is a common response. It is also irrational. If you value 20 minutes of your time at $50 in one case, then you should in the other case as well. The price of the tablet has nothing to do with it. Puzzles such as this one lie at the root of behavioral economics, which in exploring human decision-making often highlights errors in the way nearly everyone makes decisions. But as common as this mistake is, one group is relatively immune to it: the poor.

Across two studies, more than 2,500 participants responded to the tablet scenario. Eldar Shafir, Sendhil Mullainathan, and I compared responses from wealthy and poor participants, defined respectively as those earning more than and less than our sample’s median household income (which was $55,000) and adjusted for household size (the median was three people). The wealthy showed the usual pattern. When the tablet was cheaper, they were more likely to travel for the discount. But the poor were equally willing to travel regardless of the tablet’s price.

Why does this happen?

To decide whether $50 is worth the hassle of traveling, people need a clue. For the wealthy, that clue is the tablet’s price. They forgo the discount when it seems small relative to the tablet’s price. But the poor see the discount through a different lens. They compare the $50 to what it can buy—perhaps a tank of gas or a week’s groceries. Those expenses are a more stable clue to the discount’s value because those trade-offs do not change based on the tablet’s price. This is a profoundly different approach to making the decision.

In a deep sense, the poor get it right. Arguably, we should all think about trade-offs before deciding whether to buy an item or forgo a discount. But people living comfortably rarely face such trade-offs. For the poor, they are common and unavoidable.

As a result, the poor are more attuned to the cost of everyday experiences. They think of money even in situations where many other people do not. For example, read the following list of words quickly: rent, grocery, gas, utilities, coin, bills, phone, pay, dollar, expense, cash, loan. Now close your eyes and try to recall as many of the words as you can.

For some people, lists such as this one create a false memory. People mistakenly remember seeing a “lure word” that connects all of the other words. Do you see the lure word?

Remarkably, your income affects whether you do. The wealthy see this as a collection of random words. But the poor see a common thread running through it. In a study with 125 participants, we find that 15 percent of poor participants remembered seeing the word “money,” but only 2 percent of wealthy participants did. The poor saw something that was not there. For them, each word represented a meaningful expense and a reminder of the money needed to make ends meet. (In this study, the median household income was $35,000 and the median household size was two people.)

Under poverty, everyday moments carry the residue of money. In another study, participants imagined seeing the doctor and finding out they were seriously ill. Participants named the first three thoughts that came to mind. Naturally, most participants mentioned emotions they would feel and the people in their lives who mattered. But poor participants mentioned a practical concern more often: the cost of being sick. Illness and mortality are fundamental equalizers. But the poor experience them differently. In one ear they hear the doctor describing their health; in the other, they hear the cost of treatment.

This expertise creates burdens. Financial decisions are more mentally taxing for the poor. This leaves less available bandwidth for other tasks. Sometimes this even leads the poor to make mistakes, such as overborrowing. Oddly enough, these decisions that signal a lack of “competence” among the poor might be a consequence of their expertise.

There are, of course, many material differences between the rich and the poor. But these results suggest that the most profound difference might be in perspective. The poor and the rich cannot look at the same situation without seeing something different. The poor focus on the trade-offs that small decisions entail. They see the costs of daily living that most other people ignore. And this difference is woven through every thought and perception.

Anuj K. Shah is assistant professor of behavioral science at Chicago Booth.

From Slate, © 2015 The Slate Group. All rights reserved. Used by permission and protected by the copyright laws of the United States. The printing, copying, redistribution, or retransmission of this content without express written permission is prohibited.