Abstract
Research on economic behaviour of individuals in different financial statuses such as being in a good financial standing or in a threatening financial situation are inconclusive. Some evidence suggest that the culture of poverty may shape and dominate the economic preferences of those who are poor and even make them being prone to trembling and making mistakes thereby making decisions that do not maximize their utility. Other evidence suggest that the poor exercise extra caution and fail to maximize utility. This study investigates the association between self-reported financial status and economic preferences in a developing country setting using data from an incentivized experiment and a survey. Extended random effects panel probit regression models are employed as an analytical strategy. The study established a positive association between being financially broke or very broke and being risk averse. In addition, a positive association is found between being financially ‘very broke’ and impatient. Such findings illustrate the importance of psychology of poverty in economic preferences and in decision-making in general, even as poverty is temporary as represented by self-reported financial status.
Highlights
People make decisions that involve risk and time preferences in their day-to-day life.The decisions made are across spectrum of activities and in most cases with some degree of uncertainty
The quest to establish the association between financial status and economic preferences is driven by the zeal to advance knowledge on the views to explain decision-making processes identified as rational choice, pathological, and bounded rationality (Bertrand et al 2004; Mullainathan and Shafir 2013)
The current study aims to establish the relationship between self-reported financial status and economic preferences using experimental data in a developing country setting
Summary
People make decisions that involve risk and time preferences in their day-to-day life. Haushofer and Fehr (2014), for instance, stated that economic and social conditions that poor people live in influence their discount rates and risk taking behaviours. This suggests that the differences in risk and time preferences between the poor and the non-poor is not intrinsic. The quest to establish the association between financial status (an economic condition) and economic preferences is driven by the zeal to advance knowledge on the views to explain decision-making processes identified as rational choice, pathological, and bounded rationality (Bertrand et al 2004; Mullainathan and Shafir 2013). The current study aims to establish the relationship between self-reported financial status and economic preferences using experimental data in a developing country setting.
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