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Financial Problems Impair Cognitive Abilities

This article was written by in Financial Literacy. 4 comments.


Need more evidence that the financially disadvantaged are in a worse position to succeed in education and work than those without financial concerns? A new report published in the journal Science shows how financial constraints, particularly poverty, impede cognitive functioning.

I find one of the experiments interesting not only because of the results, but because the methodology involved visiting my local shopping mall. In fact, I may have even been asked to participate in the experiment on a recent shopping trip, but I generally ignore people with clipboards at malls asking me questions. This mall is a great location to find experiment subjects; the center is in the process of a renovation, bringing in “higher class” shops (because the businesses can pay higher rent, naturally).

Yet, the mall’s proximity to low-income communities provides one of the only locations in the area where you can find people of all social statuses going about their business. In other words, to complete this experiment and find a good mix of participants, the researcher from Princeton University had to get off campus and out of town.

The researchers’ hypothesis was that being poor prevents people from concentrating on the tasks and goals they need in order to get out of poverty. The concept sounds like it would be true. After all, we are aware that financial problems cause stress, and stress prevents success, but that’s not good enough for scientists — in order to determine what is true, you need to test hypotheses and measure the results. The results were surprising in the magnitude of the effect financial concerns have on cognitive ability.

In a series of experiments, the researchers found that pressing financial concerns had an immediate impact on the ability of low-income individuals to perform on common cognitive and logic tests. On average, a person preoccupied with money problems exhibited a drop in cognitive function similar to a 13-point dip in IQ, or the loss of an entire night’s sleep.

The results show that it’s not necessarily the fact of poverty that causes cognitive distress. It’s the concern about poverty. Low-income individuals who had no concern for their financial well-being were just as competent as they might be if they were not in poverty. In a sense, ignorance is bliss, and I’ve found this to be true in my own life. It’s much easier emotionally to avoid problems, like I avoided taking care of my accumulating speeding violations and like I avoided thinking about my increasing debt load in the years following college. I was protecting my sanity and my emotional functioning my pretending there were no problems and things would work themselves out.

It turns out I was most likely protecting my cognitive functioning, as well, although the idea that “things can work themselves out” might indicate my cognitive abilities were not at their highest levels.

My first assumption was that there’s a third-party variable standing in between concern for financial stability and cognitive functioning: stress. There seems to be something else at play, according to the experiments by Eldar Shafir, a psychologist at Princeton University.

The mental tax that poverty can put on the brain is distinct from stress, Shafir explained. Stress is a person’s response to various outside pressures that — according to studies of arousal and performance — can actually enhance a person’s functioning, he said. In the Science study, Shafir and his colleagues instead describe an immediate rather than chronic preoccupation with limited resources that can be a detriment to unrelated yet still important tasks.

“Stress itself doesn’t predict that people can’t perform well — they may do better up to a point,” Shafir said. “A person in poverty might be at the high part of the performance curve when it comes to a specific task and, in fact, we show that they do well on the problem at hand. But they don’t have leftover bandwidth to devote to other tasks. The poor are often highly effective at focusing on and dealing with pressing problems. It’s the other tasks where they perform poorly.”

And it’s been clear to me over the last several years writing about personal finance, change, and other topics of personal development that the lack of financial resources specifically — that is, not stress — created restraints on what people can focus on. You can’t plan for the retirement if your primary concern is getting through the day. You can’t achieve financial independence if you are stuck when trying to satisfy the lowest level of needs, like shelter and food.

The fallout of neglecting other areas of life may loom larger for a person just scraping by, Shafir said. Late fees tacked on to a forgotten rent payment, a job lost because of poor time-management —- these make a tight money situation worse. And as people get poorer, they tend to make difficult and often costly decisions that further perpetuate their hardship, Shafir said.

In a nutshell, this is why financial literacy doesn’t work. We as a society, or the middle-class or upper-middle-class segment of American society, seems to think that if only we could provide education about money management to the neediest communities, and if only they would take our advice and make better decisions, we would no longer have a problem with poverty.

Education, especially education pertaining to an idea like financial independence, is useless to someone who is dealing with day-to-day financial difficulties. There’s no cognitive capacity to consider the idea of saving even just one percent of income when every cent goes towards food for the children and there isn’t enough left for rent, so month after month you have to find a new place to live.

The larger topic of study for researchers is the scarcity of cognitive resources; that is, the human brain has a limited ability to process issues. Financial problems provide a convenient topic for use in experiments dealing with cognitive limitations.

“When you’re poor you can’t say, ‘I’ve had enough, I’m not going to be poor anymore.’ Or, ‘Forget it, I just won’t give my kids dinner, or pay rent this month.’ Poverty imposes a much stronger load that’s not optional and in very many cases is long lasting,” Shafir said. “It’s not a choice you’re making -— you’re just reduced to few options.

You can read more about the study or read the research directly in the journal Science.

Photo: Flickr

Published or updated August 30, 2013. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 4 comments… read them below or add one }

avatar DonnaFreedman ♦90 (Newbie)

When I was a broke single mother it was very hard for me to think about the future. Just keeping us fed and clean and housed took up all my energy. I don’t ever remember thinking, “What will I do in three years when she’ll need to go to school and then I’ll have to find afterschool care?” I just focused on the day at hand.
I wasn’t stupid. Just overwhelmed.

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avatar Simon Elstad

The vicious cycle of poverty: “set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention.” Only in this case it goes even deeper onto an emotional level. It puts one into a loop that all you can think of each day is surviving just for the day and makes it hard to make strategic decisions that may pull you out.
Poverty isn’t easy and I think it would require a multi-pronged strategy and some outside intervention to break out of the loop.

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avatar Paul @ The Frugal Toad

I just read an article that cited research by Connecticut College Psychology Professor Stuart Vyse about why people make poor financial decisions. In one study MIT students were presented an opportunity to buy Celtics tickets at auction, half were told they must pay in cash the other half were told they could use a credit card if they wished. The group that chose to use a credit card overpaid. The reasoning is that the loss of cash was immediate while the credit card presented a loss that was “delayed and diminished”. Emotions and behavior have much more of an impact on how we make decisions than we would like to admit!

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avatar Ivan Widjaya

Could it have something to do with food or health? I don’t think that it their status make them have lower cognitive capabilities. I think that by having less money, they are able to buy less nutritious foods and cannot fight certain diseases. In effect, they cannot perform at their optimum.

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