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You're right, there have been several economics studies showing that poverty causes stress which makes it more difficult to make decisions that are "rational" i

You're right, there have been several economics studies showing that poverty causes stress which makes it more difficult to make decisions that are "rational" in a classical economics sense, such as sacrificing in the short-term for a long-term pay off. Searching "behavioural economics poverty" turns up a lot of good articles, here's an overview: http://www.economist.com/news/finance-and-economics/21635477-behavioural-economics-meets-development-policy-poor-behaviour http://www.economist.com/news/finance-and-economics/21635477...

clavalle 11y ago
That is interesting but seems to put too much onus on the poor individual. >poverty makes people feel powerless and blunts their aspirations What if it is more than a feeling? What if they are not irrational but seeing quite rationally what transactions await them? Let's assume that two sides of a potential transaction are rational, and further assume that each side will maximize the value they have after the transaction. The poor person comes to the table with a value of 100 units but that they cannot eat and cannot be transferred directly for edible widgets -- lets call them time units. They must trade for 25 edible widgets or starve. You can buy each edible widget for one liquid currency unit. They sit across from a person that can pay them in liquid currency units for their time units knowing they can make 120 liquid units using those time units. That person knows they're poor and at risk of starvation if they do not trade their time unit for liquid units quickly. Being cold, rational actors they start the negotiation low. 1 liquid unit for all 100 time units. The poor person will starve anyway and thus refuses. Negotiation continues until they hit the magic number of 25 liquid units and an agreement is struck. The poor trades 100 time units to the person that can make 120 liquid units with it for 25 liquid units...they lose, but don't lose it all through death. The employer makes a profit of 95 liquid units. Let's run through the same scenario with someone who's not desperate. The employer needs that employee knowing they can make 120 units with those time units in their possession. With no other players in sight, they might negotiate all the way up to 119 liquid units for those time units knowing they will profit. The employer's profit is 1 liquid unit and the employee gets 94 more than the poor person who was facing a complete wipe out if they refused the offer. Competition changes things obviously and this is a simplistic model but the fundamental point is that one is negotiating against loss and is willing to take any loss above total loss while the other is negotiating to increase value. The second can afford to have aspersions and has every reason to feel like they have a good measure of power -- while the other is truly powerless and they live at the whim of others and have no rational right to have aspirations because they have no way to improve their negotiating position nor any expectation for that to change since every transaction they enter into is to reduce loss rather than increase their possessed value.
- icebraining 11y ago
  Yes, a non-poor person has a better BATNA, therefore they can demand more from the other party. But I think the studies show that the poverty has an effect even beyond that.
  - clavalle 11y ago
    I guess my problem with studies that show the other effects of poverty is that they seem to paint the poor as just hapless, irrational, creatures; subhuman and deserving of their plight since they can't reason their way out of it. And, who knows, they may be, but I'm going to have to see a lot more proof than what I've seen so far which tend to be of the vein 'well, look at their circumstances. You wouldn't make that decision that led them there. I wouldn't make that decision that led them there. Obviously they are not rational like you or me'. It is very strange that everyone in the economic model of the world is assumed to be rational but the poor.
    - icebraining 11y ago
      While your concern is valid - patronizing and disrespecting the poor is rampant - I don't think that's a consequence of observing this effect; there's usually a prior belief. After all, the evidence is actually against the "subhuman" hypothesis - it shows that the reduced quality of the decisions is specifically a result of the environment, not an innate deficiency of some individuals. Also, the assumption that everyone is rational is no longer unquestionable, ever since behavioral economics started gaining prominence.

clavalle 11y ago

That is interesting but seems to put too much onus on the poor individual. >poverty makes people feel powerless and blunts their aspirations What if it is more than a feeling? What if they are not irrational but seeing quite rationally what transactions await them? Let's assume that two sides of a potential transaction are rational, and further assume that each side will maximize the value they have after the transaction. The poor person comes to the table with a value of 100 units but that they cannot eat and cannot be transferred directly for edible widgets -- lets call them time units. They must trade for 25 edible widgets or starve. You can buy each edible widget for one liquid currency unit. They sit across from a person that can pay them in liquid currency units for their time units knowing they can make 120 liquid units using those time units. That person knows they're poor and at risk of starvation if they do not trade their time unit for liquid units quickly. Being cold, rational actors they start the negotiation low. 1 liquid unit for all 100 time units. The poor person will starve anyway and thus refuses. Negotiation continues until they hit the magic number of 25 liquid units and an agreement is struck. The poor trades 100 time units to the person that can make 120 liquid units with it for 25 liquid units...they lose, but don't lose it all through death. The employer makes a profit of 95 liquid units. Let's run through the same scenario with someone who's not desperate. The employer needs that employee knowing they can make 120 units with those time units in their possession. With no other players in sight, they might negotiate all the way up to 119 liquid units for those time units knowing they will profit. The employer's profit is 1 liquid unit and the employee gets 94 more than the poor person who was facing a complete wipe out if they refused the offer. Competition changes things obviously and this is a simplistic model but the fundamental point is that one is negotiating against loss and is willing to take any loss above total loss while the other is negotiating to increase value. The second can afford to have aspersions and has every reason to feel like they have a good measure of power -- while the other is truly powerless and they live at the whim of others and have no rational right to have aspirations because they have no way to improve their negotiating position nor any expectation for that to change since every transaction they enter into is to reduce loss rather than increase their possessed value.

icebraining 11y ago
Yes, a non-poor person has a better BATNA, therefore they can demand more from the other party. But I think the studies show that the poverty has an effect even beyond that.
- clavalle 11y ago
  I guess my problem with studies that show the other effects of poverty is that they seem to paint the poor as just hapless, irrational, creatures; subhuman and deserving of their plight since they can't reason their way out of it. And, who knows, they may be, but I'm going to have to see a lot more proof than what I've seen so far which tend to be of the vein 'well, look at their circumstances. You wouldn't make that decision that led them there. I wouldn't make that decision that led them there. Obviously they are not rational like you or me'. It is very strange that everyone in the economic model of the world is assumed to be rational but the poor.
  - icebraining 11y ago
    While your concern is valid - patronizing and disrespecting the poor is rampant - I don't think that's a consequence of observing this effect; there's usually a prior belief. After all, the evidence is actually against the "subhuman" hypothesis - it shows that the reduced quality of the decisions is specifically a result of the environment, not an innate deficiency of some individuals. Also, the assumption that everyone is rational is no longer unquestionable, ever since behavioral economics started gaining prominence.