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Poverty and Uncertainty Attitudes

Author

Listed:
  • Víctor González-Jiménez

    (Erasmus University Rotterdam)

Abstract

This paper demonstrates that well-established biases in decision making under uncertainty can generate poverty traps. A theoretical framework is developed to demonstrate that: i) probability weighting and ambiguity attitude can lead individuals to erroneously undervalue profitable investments, and ii) poverty increases the magnitude of these investment errors. The model predicts that poverty is perpetuated by inducing poor individuals to underinvest in profitable opportunities to a greater extent than rich individuals. We empirically validate these theoretical predictions using data from two experiments conducted on a representative sample of American households.

Suggested Citation

  • Víctor González-Jiménez, 2024. "Poverty and Uncertainty Attitudes," Tinbergen Institute Discussion Papers 24-058/I, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20240058
    as

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    References listed on IDEAS

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    1. Esther Duflo & Michael Kremer & Jonathan Robinson, 2011. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," American Economic Review, American Economic Association, vol. 101(6), pages 2350-2390, October.
    2. Zhihua Li & Julia Müller & Peter P. Wakker & Tong V. Wang, 2018. "The Rich Domain of Ambiguity Explored," Management Science, INFORMS, vol. 64(7), pages 3227-3240, July.
    3. James Ming Chen, 2017. "Risk and Uncertainty," Quantitative Perspectives on Behavioral Economics and Finance, in: Econophysics and Capital Asset Pricing, chapter 0, pages 189-211, Palgrave Macmillan.
    4. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-1668, December.
    5. Karni, Edi & Schmeidler, David, 1991. "Atemporal dynamic consistency and expected utility theory," Journal of Economic Theory, Elsevier, vol. 54(2), pages 401-408, August.
    6. Chen Li, 2017. "Are the poor worse at dealing with ambiguity?," Journal of Risk and Uncertainty, Springer, vol. 54(3), pages 239-268, June.
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    Keywords

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    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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