Responding to the Psychological Context of Extreme Poverty: Using Cash Transfers to Stimulate Productive Investment Decisions in Bangladesh

The extreme poor in Bangladesh suffer from a particularly severe form of multidimensional poverty. Despite opportunities for investment made available by approaches such as microfinance, which could ensure future subsistence and graduation from poverty, the extreme poor continue to under-invest in long-term income-generating activities. This continued prioritisation of immediate needs perpetuates poverty, and often leads to its intergenerational transfer. While the evolving debate on multidimensional poverty has helped to unpack the structural causes behind this investment behaviour, very little literature has sought to understand the decision process itself. In this paper, we argue that investment decisions by the extreme poor are shaped by the psychological context of life in extreme poverty. We propose a psychological model of how extreme poverty—which is multidimensional as well as commonly chronic—affects the decision-making context of the individual, causing the future to be heavily discounted and inhibiting investment. The psychological impact of extreme poverty could be seen as an overarching and under-emphasised dimension of poverty itself due to its role in undermining the capability to invest, and impeding the long-term security of a household. We argue for a holistic approach to extreme poverty and wellbeing, involving a greater understanding that people’s own perceptions of agency and needs impact upon decision making for the present and the future, in this case specifically towards livelihood choices likely to stimulate productive gains. Using a case study of one demand-driven conditional cash transfer project in Bangladesh, we propose that the psychological context of extreme poverty must be addressed in order to stimulate investment. An analysis of the project’s success suggests that it was able to effectively promote investment by altering the context within which investment decisions were made. The paper concludes that effective poverty reduction programming must more directly address the psychological context of poverty and decision-making, and recommends that innovative choice architecture could provide one method of doing so. Copyright Springer Science+Business Media Dordrecht 2013