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Decision biases don't explain why the poor are poor and the rich are rich

The study debunks the idea that economic success is solely due to better decision-making

Mihai Andrei
July 6, 2023 @ 11:22 am

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A new study debunks the idea that affluent people become affluent by making good decisions — and the less affluent stay so because of their worse decisions. In fact, according to the research, poor decisions seem to be the same across all income groups. Decision-making alone does not explain economic success.

wealth and poverty

Meritocracy is a strange concept. People seem to believe that meritocracy works (or doesn’t) based on how well they do. Oftentimes, people who enjoy success seem more inclined to believe it was their perceived merits that got them where they are. We’re rich because we deserve it, because we’ve made the right decisions . Meanwhile, on the other hand, those who are less fortunate can get frustrated. They also perceive their merits, yet they are not succeeding — so it must be something else at play.

So how do our decisions influence our economic trajectory?

Good decision, bad decision

To investigate this, a team of researchers from Columbia University surveyed 5,000 participants from 27 countries. They measured participants’ decision-making ability through 10 individual biases, such as:

  • temporal discounting (the ability to forego immediate gains for much larger gains in the future);
  • overestimation (thinking that your decisions are better than they actually are);
  • overplacement (thinking that you’re better than the average person at making decisions).

The research aimed to investigate if cognitive biases in decision making differ between positive deviants (individuals who have overcome low-income backgrounds) and low-income adults, potentially influencing economic mobility. Despite anticipating small-to-moderate effects, the study found no significant differences in cognitive bias rates among these two groups in a sample of nearly 5000 participants from 27 countries.

Essentially, the researchers found the same level of bias and decision-making ability across the entire economic spectrum.

“Our research does not reject the notion that individual behavior and decision-making may directly relate to upward economic mobility. Instead, we narrowly conclude that biased decision-making does not alone explain a significant proportion of population-level economic inequality,” says first author Kai Ruggeri, PhD, assistant professor in the Department of Health Policy and Management at Columbia Public Health.

This contradicts the popular myth that low-income people are more prone to making bad financial decisions. In a vacuum, they are just as good as the other financial brackets at making decisions. It’s their economic starting point that makes all the difference, the researchers conclude.

“Low-income individuals are not uniquely prone to cognitive biases linked to bad financial decisions. Instead, scarcity is more likely a greater driver of these decisions,” Ruggeri adds.

Addressing inequality

In a world where economic inequality seems to be accelerating, the findings are highly significant. They suggest that, on average, the rich and the poor make equally good decisions. The main difference maker is already-existing poverty. This poverty creates a climate more conducive to making decisions that are worse in the long-run. Meanwhile, having a financial cushion can give people the stability to make better long-term decisions. For policy makers looking to reduce inequality and poverty, this is extremely important.

Of course, a survey on 5,000 people is not enough to settle the issue, but the findings are consistent with previous work. For instance, earlier research suggested that temporal discounting is tied more to the broader societal economic environment, and not individual financial circumstances. This means that people’s decision-making regarding immediate versus future rewards tends to be influenced more by their overall economic success.

While it acknowledges the impact of factors like economic inequality and financial behaviors on decision-making, the study suggests that broader interventions combining both behavioral and structural measures are necessary to improve financial well-being across populations. These findings challenge the efficacy of behavioral interventions targeting disadvantaged groups, and call for comprehensive policies that address systemic barriers and provide necessary resources and opportunities.

There are, of course, limitations to the study. In addition to the sample size, the study only measured a narrow set of biases, without considering factors like personality, resilience, numeracy, personal beliefs, or financial literacy. These factors could potentially impact results if included in future research.

Ultimately, however, the research suggests that poorer individuals are not uniquely prone to cognitive biases — and these biases alone can’t explain protracted poverty. If we want to truly address these economic issues, we have to look elsewhere.

The study was published in Nature Scientific Reports.

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