Why debts associated with poverty can cause long-lasting problems

Enlarge (credit: Keith Cooper)

Poverty can be a persistent problem, following families and communities through multiple generations. But the problems don't appear to be genetic. Instead, behavioral scientists have found that poverty and the debt that goes with it actually change people's behavior, including how they respond to monetary decisions. Now, a new study suggests that the problem isn't the amount of debt per se, but rather the challenge of keeping track of multiple debts.

That conclusion came thanks to an accidental experiment set up by a charity that eliminated debts of poor people in Singapore.

Poverty's impact

The debt burden associated with poverty can be extreme. In the US, many families in a low-income group (the bottom 20 percent) spend more than 40 percent of their income simply paying off debts. A number of studies have shown that this level of debt affects people's ability to make decisions, including financial decisions, causing them to focus on short-term income over long-term gains, among other effects. Thus, poverty itself can cause behavioral changes that promote future poverty.

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