Abstract
This review focuses on the issue of poverty affecting economic decision-making. By critically evaluating existing studies, the authors propose a structural model detailing the cognitive mechanism involved in how poverty negatively impacts economic decision-making, and explores evidence supporting the basis for the formation of this model. The suggested mechanism consists of a relationship between poverty and four other factors: (1) cognitive load (e.g., experiencing negative affect and stress); (2) executive functions (e.g., attention, working memory, and self-control); (3) intuition/deliberation in decision-making; and (4) economic decision-making (e.g., time-discounting and risk preference), with a final addition of financial literacy as a covariate. This paper focuses on shortfalls in published research, and delves further into the proposed model.
Highlights
Poverty is a global socio-cultural phenomenon usually examined from an economic perspective
We suggest that a circular relationship might exist between the causes and consequences of poverty, with the consequences of poverty simultaneously acting as poverty triggers, creating a poverty cycle known as a poverty trap
While emotional well-being or cognitive evaluation of situations are directly related to poverty, we argue that the resulting cognitive load can impede crucial executive processes, attention, working memory, self-control, and decision-making
Summary
Poverty is a global socio-cultural phenomenon usually examined from an economic perspective. It is clearly of importance to further examine the factors that may potentially help to unveil underlying reasons for poverty perpetuation These factors include specific aspects of an individual’s perception of issues, personal experiences, behaviors, and individual abilities, which can either contribute to, or attenuate poverty. According to Mani et al (2013), poverty perpetuation is likely the outcome of the interplay of various forms of nonproductive behaviors such as inappropriate economic decision-making, or lack of own healthcare. These factors, in particular those related to economic decisions, are often labeled as causes of poverty. We suggest that a circular relationship might exist between the causes and consequences of poverty, with the consequences of poverty (e.g., negative affect, stress, or impeded cognitive functions) simultaneously acting as poverty triggers, creating a poverty cycle known as a poverty trap
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