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Poverty, discount rates, and “impatience” September 22, 2009

Posted by jasonized in study.

When we look at poor people, in general we observe behaviors that at first blush suggest that poor people have different discount rates–that is, that they greatly value money today over more money tomorrow, whereas non-poor people put less value on money today compared to more money tomorrow. High interest loans are an obvious example, but also the way in which households allocate resources, or the spending upon receiving an unexpected windfall have led past observers to wonder aloud about the “myopia” of the poor–and not incidentally, an effort to “educate” the poor on savings behavior.

Abhijit Banerjee of the MIT Poverty Action Lab might lead us to believe that this is the myopia of the economist. In his latest paper, The Shape of Temptation: Implications for the Economic Lives of the Poor, Banerjee uses some smart microeconomic modeling to show that temptations–the activities that provide immediate benefit but with large later costs–are declining with income–that is, that the intensity of temptation is related to one’s economic status. Stated another way, CONTEXT MATTERS. (Um, duh, but we are dealing with economists, after all.) And I quote:

…two individuals with identical discount rates but with different initial wealth levels can end up with very different levels of apparent patience: the initially poor agent will appear to be impatient and the initially rich one will appear to be patient.

Beyond striking a blow for the “context matters” approach to behavior, Banerjee is making a second point: we shouldn’t expect systematic differences in discount rates among culturally and geographically homogeneous populations–that is, economic status does not shape our “inherent preferences,” but rather the interaction of those inherent preferences with the environment.

Which, in my book, is a good argument: that the poor are not so “different” than you or I.

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