Poverty and Irrational Financial Behavior Lecture PDF

faculty of economics and business Poverty and irrational financial behavior Guest lecture 29 December 2024 Dr. Martijn Keizer Assistant Professor, Department of Marketing  faculty of economics and business Lecture overview › Descriptive research – Wh...

faculty of economics and business Poverty and irrational financial behavior Guest lecture 29 December 2024 Dr. Martijn Keizer Assistant Professor, Department of Marketing  faculty of economics and business Lecture overview › Descriptive research – What does typical debtor behavior look like? › Link to theory – how can we explain this behavior? › Room for questions and comments  faculty of economics and business My own research: Debtor behavior in NL › Research focuses on understanding and changing debtor behavior › Collaborations with debt collection agencies, debt relief organizations, insurance companies… › Problematic debts big and growing problem  How to motivate debtors to seek help?  faculty of economics and business Interview study Ministry of Social Affairs › Indebted consumers typically postpone seeking financial help  Avoid debt collection agencies, refuse debt relief services… › Debts tend to accumulate  one or two missed payments escalate into big, overwhelming issue  faculty of economics and business Interview study Ministry of Social Affairs Primary barriers Underestimating Feelings of shame the issue Secondary barriers Perceived lack of control Denial Unreasonable optimism Misinformation Drivers for action Sense of urgency (often Encouragement result of external by others pressure)  faculty of economics and business Characterization of ‘the typical debtor’ › Interviews suggest consumers with problematic debts typically go through two phases 1. Carelessness/optimism  ‘All will be fine’ 2. Powerlessness/defeatism  ‘Nothing I can do anyway…’ › Typical thoughts and behaviors fit each phase  faculty of economics and business Phase 1: Carelessness/Optimism › In many cases, consumers pay little attention to a growing problem › Unreasonably optimistic: ‘I will pay it all off, everyting will be ok’ › Denial: I am not one of those people who.. › If financial problem is tackled soon, it can usually be resolved relatively easily (smaller number of lower debts) › If problem is allowed to grow out of hand, optimism is likely to turn into defeatism  faculty of economics and business Phase 2: Powerlessness/defeatism › Learned helplessness (Seligman, 1965)  Lethargic, playing the victim › Tendency to blame others › Perceived lack of control over one’s own financial situation › External stimulus typically required to instigate change Direct threat Encouragement  faculty of economics and business What do these phases have in common? › Both unreasonable optimism and defeatism lead to irrational financial behavior. › Rational cost-benefit analysis is replaced by strong tendency to act on short-term impulses and to disregard alternative information.  faculty of economics and business Some background on poverty research One line of research posits that the poor are mired in a “culture of poverty” in which biased preferences and deviant values such as myopia and increased risk-seeking cause them to become, and remain, poor (Banfield 1970; Lewis 1970).  faculty of economics and business Some background on poverty research One line of research posits that the poor are mired in a “culture of poverty” in which biased preferences and deviant values such as myopia and increased risk-seeking cause them to become, and remain, poor (Banfield 1970; Lewis 1970). However, recent work suggests that it is the state of living in poverty that changes individuals’ preferences and behavior (Mani et al. 2013; Vohs 2013).  faculty of economics and business Poverty impedes cognitive function › ‘The poor are not less capable because of inherent traits, but because the very context of poverty imposes load and impedes cognitive capacity.’ › Importantly, poverty is defined subjectively: It is not about earning less than a particular amount, it is about the perception that you have less than you need. › Two sets of studies, both using cognitive tests as DV’s to assess whether a relationship exists between having too little and cognitive function.  faculty of economics and business Poverty impedes cognitive function  faculty of economics and business Poverty impedes cognitive function  faculty of economics and business Poverty impedes cognitive function › Results show clear and consistent effect of poverty on cognitive function. › Alternative explanations?  Stress  Hunger › ‘Poverty captures attention, triggers intrusive thoughts, and reduces cogntive resources’. › Relatively abstract studies (cognitive tests, non-natural situation) but clear implications for real behavior and policy.  faculty of economics and business Financial constraints affect behavior › Hamilton and colleagues provide framework for understanding the effects of financial constraints on consumer behavior. › Review of recent literature, focusing on different processes through which financial constraints may affect behavior. › Four perspectives, three behavioral stages… Ambitious paper. › Any questions right now?  faculty of economics and business Financial constraints affect behavior › Three behavioral stages  faculty of economics and business Financial constraints affect behavior › Literature perspective 1: Financial constraints › Focuses on the question how financial constraints (the sense of having too little) affect consumer behavior › Main take-aways: Having too little…  Impedes cognitive function  Results in present bias  Decreases self-control › Coping and adapting: using resources more efficiently (but...)  faculty of economics and business Financial constraints affect behavior › Other literature perspectives focus on how financial constraints…  Limit the availability of options - Frustration, wanting what you cannot have  Appreciating what is available more  Limit the availability of favorable social comparisons - Lower self-esteem, conspicious consumption  feeling like you belong, caring for others  Limit predictability of the environment - Lack of control, desire to re-establish it  adapting to uncertain future by focusing on present  faculty of economics and business Financial constraints affect behavior › Returning to the starting point of this lecture › Hamilton and colleagues suggest that initial reactions to financial constraints tend to be irratonal. › When adapting to constraints, behavior tends to become more rational and consumers try to maximize resources. › However… this feels overly optimistic. Behavior change is hard, and many debtors relapse after debt relief help.  faculty of economics and business Poverty and consumer behavior › Poverty affects consumer behavior in several ways. › This is not the result of ‘hard’ economic rules causing people to purchase less when they have less money to spend. › Social psychology is essential to understand seemingly irrational responses to financial difficulties and to help solve the societal issues associated with poverty. › Wide-open field of study: lot of research still to be done.  faculty of economics and business Thank you for your attention! › Any questions? › [email protected]