Financial Strains Reduces Cognitive Abilities, Study


Financial pressure affects poor people's aptitude to perform well in cognitive and logic tests, according to a new study conducted by a team of international researchers.

Researchers from Harvard, Princeton, Britain's University of Warwick and other universities in North America, claimed that when all the mental energy is directed towards worries such as paying bills and monthly expenditures, the brain is left with little power to concentrate on other areas of life.

As a result, poor people's Intelligence Quotient (IQ) points reduces drastically by 13 points which results in errors and bad decisions that indirectly increases their financial adversities.

"Our results suggest that when you are poor, money is not the only thing in short supply. Cognitive capacity is also stretched thin," said Harvard economist Sendhil Mullainathan, part of the international team.

The findings are also relevant for people living on tight budgets. Their brain power becomes limited due to the stress.

"Previous views of poverty have blamed (it) on personal failings, on an environment that is not conducive to success," said Jiaying Zhao, an assistant professor of psychology at the University of British Columbia in Canada."We are arguing that the lack of financial resources itself can lead to impaired cognitive function," she said.

Eldar Shafir, a professor of psychology and public affairs at Princeton who worked on the research team said that financial worries, reduces poor people's ability to make good decisions.

"The poor are often highly effective at focusing on and dealing with pressing problems," Shafir said. "But they don't have leftover bandwidth to devote to other tasks. So, if you live in poverty, you're more error prone and errors cost you more dearly -- it's hard to find a way out."

The researchers arrived at the conclusion after studying two very different groups of subjects - shoppers at a mall in New Jersey in the United States, and sugarcane farmers in rural India.

At the mall, dozens of low and middle-income shoppers underwent a series of tests to measure their IQ and impulse control.

Half of the participants were first asked what they would do if their car broke down and the repair cost was $1,500. These people reflected poor performance.

 On the other hand, in India, the researchers observed that farmers showed lower cognitive performance before selling their harvest. However, their performance improved after they got paid for their harvest.

"One month after the harvest, they're pretty rich, but the month before - when the money has run out - they're pretty poor," Mullainathan said."What we see is that IQ goes up, (when they are rich)... errors go way down, and response times go way down."

Mullainathan said that the effect observed in India was about two-thirds the size of the effect in the mall study.

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