The role of poverty on economic decision-making: a model of cognitive function and heuristic use

Social scientists are increasingly interested in the question of whether living in poverty affects reasoning and decision-making. The role of stress on cognition, cognitive load and economic decision-making is a unifying domain of research across disciplines. The scarcity thesis argues that cognitive scarcity, in addition to actual resource scarcity, affects individuals’ valuation of trade-offs and discounts. The role of cognition in this thesis is critical. A basic model is presented that outlines a framework to understand the cognitive factors affecting economic decision-making and their inter-relationship. The specific inclusion of perception, as a factor enabling the movement of financial stress from an exogenous ‘shock’ to effect short-term cognitive capacity, is an important contribution. The model also includes a specific heuristic - attribute non-attendance. The model identifies a pathway between financial stress, cognition, heuristic use and household expenditure. This basic model is expanded and empirically tested. Empirically analysis is supported by data collected in Samburu County, Kenya. The stressor used in this study was a severe and protracted drought between 2015 and 2017. Repeated measures are taken of rural respondents over a 10-month period as communities recovered from the drought. Controlling for household income and livestock asset ownership, fluid intelligence and choice heuristic use are important channels affecting household expenditure decisions. The relative importance of perceptual scarcity, relative to resource scarcity, in affecting economic decision-making is also identified.