Cognitive Droughts
University of Zurich, Department of Economics, Working Paper No. 341
82 Pages Posted: 16 Mar 2020
Date Written: February 18, 2020
Abstract
Poverty involves both low income levels and high income uncertainty. Do both these dimensions of being poor capture attention in ways that distort decision-making and trap people in poverty? We examine these issues using real-life shocks faced by farmers in Brazil: random payday variation affecting income levels, and rainfall shocks that affect income uncertainty. We find that it is income uncertainty that systematically has adverse cognitive effects; low income levels affect only the poorest households. The net adverse impacts on cognitive function prevail even though both dimensions of poverty reallocate attention to scarce-resource tasks. These results broaden our understanding of the impacts of uncertainty by exploring a psychological channel distinct from risk aversion, and help reconcile apparently contradictory evidence on the cognitive impact of poverty in previous studies.
Keywords: Uncertainty, attention, psychology of poverty, scarcity
JEL Classification: D81, D91, I32
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