Short-Term Financial Stress and Decision-Making: Evidence from Market Vendors in Addis Ababa

Financial stress is correlated with behavioral biases thought to negatively affect quality of economic decision-making. To investigate whether this hypothesis holds for short-term (acute) financial stress, I conducted a lab-in-the-field experiment with vendors in neighborhood markets in Addis Ababa. Half of the vendors in the study were visited by a mystery shopper who made a single sizable purchase at their stalls, tripling vendors’ average daily earnings on that day but leaving their poverty status unchanged. Vendors who received this unanticipated earnings shock reported higher than expected earnings and an improvement in psychological well-being. However, the unanticipated increase in earnings did not translate into improved cognition or decision-making. Descriptive evidence shows that monthly shortfalls in earnings are more predictive of better-quality decision-making (as proxied by income-seeking behavior) than day-to-day variation in earnings.