How Extremely Poor Deal with Unexpected Earnings

Imagine yourself walking in the desert without water for hours. Suddenly you find 1 liter bottle of water. Would you drink it all at once or react rationally, drinking just 200 ml and keep the rest for tomorrow? This is exactly what is happening to the poor when they find endowments or unexpected earnings. In this article, I want to present a specific point which is the behavioral deviation from rationality by the poor due to the desire of spending. We all know the theory of marginal utility which dwindles by the extra use of the good or a service. In my opinion, this is what happens to the majority of poor people when they obtain unexpected endowment such as heritance, gift, lottery, helping hand, or money. Their problem is that they observe how rich people use money for luxury stuff, feeling incapable to do so. This desire makes them dream about being rich, even if it’s just for a day or a week, because the first money to spend has high marginal utility. In addition, it would take long time to reach the wealth of the rich acting rationally or it might be even impossible, so it seems a good idea to enjoy the current moment and to get an equal happiness even temporarily. For this reason I believe that the poor have high discount rate of the future because they are so disappointed by the future. “I live miserably in poverty for years and suddenly I could be happy this week, so I want to get that feelings rich people have, I want to try it just once”, a poor man said. We can see this phenomenon among homeless poor people. When they get an amount of money and start to spend it the way rich people do. But yet, such a behavior might be considered rational if we take into account the amount of basic requirements they need, which could be impossible to fulfill with the endowments they might have received, so no option to save money as their psychology need is to enjoy the moment.
On the other hand, it was estimated that the poor are more generous than the rich. According to many surveys, Americans with a lower income give proportionally more to the charity than Americans with an upper-income. This view suggests that the poor are poor because they are generous and rich are rich because they are more selfish and focus on their own benefits only. According to Dr. Ken Eisold*, the poor image themselves rich and act generously. Moreover, some experimental games show that poor children are more generous and altruistic than the wealthier ones. In an altruism experiment at the University of California, 74 children under the age of four played a game in which they earn tokens and then they were asked secretly to donate to the other children who couldn’t play. They found that children from the poor families donated the most. In general, the poor know what deprivation exactly means and can feel others’ suffering even from the childhood. Feelings are more important to them than material considerations.
Poverty is a vicious circle trapping poor people. They cannot provide their children good nutrition nor prepare them mentally and cognitively. Consequently, those children are not able to study and obtain sufficient knowledge. As a consequence poor children become poor adults. In this regard, it seems that in the genes of the poor occurred a mutation which doesn’t account money too much, especially unexpected earnings. In my opinion, the poor got used to be poor and try to compensate the financial shortage socially to have solidarity and strong network around them which make them feel better. This might be an answer to why a three year old poor child is more generous than the rich one.
Another view suggests** that when households grow financially, their needs and ambitions grow with them as well. For instance, they need a better education for their children, good housing, health insurance etc. But since it would be much more difficult for the poor to achieve the same goals, trying to get unobtainable targets often turns out to be waste of time for them. In other words, nothing to lose. In conclusion, unless you have adequate and durable financial resources, you shouldn’t think about obtaining luxurious goods and services.
To summarize, many factors have affected poor lives and changed their routines, understanding, decisions and cognitive abilities. Deprivation comes as the first factor to make these effects. We still have lot to do to enhance the poor understanding and improve the way of decision taking. Education comes in the crown of the problem solution. Financial programs should be run and guide the poor in the financial management fields. This will be useful also in schools of children to grow up with an idea about how to deal with the financial difficulties and how to draw priorities before taking any financial decision. Nudges are also important to improve the efficiency of the poor spending especially in prosperity periods. We can use the media, advertisements, SMS etc. which usually function as a reminders of the crucial needs about health, nutrition, education and other durable goods. These are important factors in the demand side. But we should enhance the supply side as well. Employment is a central factor which creates incomes and provide the basic needs for poor. Policy makers should focus on jobs creation without forgetting the minimum rate of wages that allows the poor to get at least the basic needs. Also microfinance projects are vital to enable poor people to get in the entrepreneurship and rescue from the poverty trap. Moreover, the enterprises that take into account the constrained abilities of the poor such as residential and industrial enterprises are also crucial to give the poor hope of achieving some important goals they could be hopeless to achieve.
*Psychology Today, group of renowned psychologists, Why Are the Poor More Generous?, New York City, Available from:
https://www.psychologytoday.com/blog/hidden-motives/201008/why-are-the-poor-more-generous
** Fast Company, the world’s leading progressive business media brand, Infographic: How The Poor Spend Their Money Vs. The Middle Class
Available from:
http://www.fastcodesign.com/1670463/infographic-how-the-poor-spend-their-money-vs-the-middle-class

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