Introduction
This investigation falls under the umbrella of economic psychology that examines the psychological underpinnings of various economic phenomena as well as the mechanisms underlying people’s perception, decision-making, and behavior in economic contexts. Karl-Erik Wärneryd established the first economic psychology course in a European institution in 1957 at Stockholm University with assistance from Folke lander, who later relocated to Denmark to teach the course at Aarhus University (Robinson & Dow, 2021). Later, in 1972, Gery van Veldhoven and Fred van Raaij created courses in economic psychology at Tilburg in the Netherlands, and the discipline started to gradually spread throughout the continent (Robinson & Dow, 2021). This paper seeks to investigate the socio-economic phenomena of poverty, by fully drawing on the insights provided by economic psychology in an effort to understand the financial decisions and behaviors of people living in poverty.
Statement of the Problem
According to the Census Bureau, based on the official poverty criterion, 37.2 million Americans, or 11.4% of the country’s population, were living in poverty in 2020 (Kilduff, 2022, par. 3). Research mostly focuses on individual attributes of poverty; however, little has been done to examine how countless hurdles and inefficiencies are present in the financial environment that low-income people and families live in. By delving deeper into the decisions made by people living check to check, this investigation endeavors to provide a model for economic reform that will greatly reduce poverty (Mullings et al., 2022).
Literature Review
After conducting a comprehensive critical review of the scarcity theory on a multidimensional foundation, de Bruijn and Antonides (2021) discovered that while financial scarcity had the ability to increase resource efficiency, it also fundamentally increased borrowing. Adamkovič and Martončik (2017) strive to advance a cognitive structure explaining the manner in which economic-decision making is negatively impacted by poverty using four factors. These include executive processes, load affecting cognitive capacity and control, economic decision-making, and perceptive and thoughtful decision-making. However, there are also differing study outcomes: Carvalho et al. (2017) strongly object to previous research. They state that financial resources do not necessarily cause the poor to make reckless economic decisions: instead, choices concerning monetary rewards or gratification are dependent on the element of liquidity.
Method Section
An explanatory research design will be employed for this research investigation. The reasoning behind this is its ability to examine links between defined key terms and variables relevant to economic behavior, as well as its causes and implications (Robinson & Dow, 2021). This paper will undertake in-depth interviews with 60 men and women from a low-income neighborhood and a high-income one in order to examine their economic behavior in relation to spending and savings habits after payday.
Conclusion
Economic psychology discerns the economic behaviors of poor people and goes further to explain how these behaviors confine individuals in a cycle of poverty. A scarcity mindset tends to grip poverty-stricken people, thus altering their economic decision-making. This is because they often lack the cognitive capacity to undertake aspects of financial stability such as time-discounting and risk aversions, and would rather buy lottery tickets or unnecessary things than create an emergency fund.
References
Adamkovič, M., & Martončik, M. (2017). A review of consequences of poverty on economic decision-making: A hypothesized model of a cognitive mechanism. Frontiers in Psychology, 8, 1-13. Web.
Carvalho, L. S., Meier, S., & Wang, S. W. (2017). Poverty and economic decision-making: Evidence from changes in financial resources at Payday. American Economic Review, 106(2), 260–284. Web.
Mullings, J., Arbor, S., Cumbay, M., McPherson, A., & Ho, M. S. (2022). Health-related quality of life: Measurement tools, predictors and modifiers. BoD – Books on Demand.
de Bruijn, E.-J., & Antonides, G. (2021). Poverty and economic decision making: A review of scarcity theory. Theory and Decision, 92(1), 5–37. Web.
Kilduff, L. (2022). How poverty in the United States is measured and why it matters. PRB. Web.
Robinson, J., & Dow, S. (2021). Economic philosophy. Taylor & Francis.