Savings policy and decisionmaking in low-income households

Theories about poverty, held both by social scientists and by regular folks, typically fall into one of two camps: those who regard the behaviors of the economically disadvantaged as calculated adaptations to prevailing circumstances, and those who view these behaviors as emanating from a unique "culture of poverty" that is rife with deviant values. The first view presumes that people are highly rational, hold coherent, well-informed, and justified beliefs, and pursue their goals effectively, with little systematic error and no need for help. The second view attributes to the poor a variety of psychological and attitudinal shortcomings, presumed to be endemic, that render the views of the poor misguided and ill informed, their behaviors impulsive and lacking, and their choices fallible, and that leave them in need of paternalistic guidance. Both camps are likely to capture some important elements some of the time. There are, no doubt, important circumstances in which people-the poor included-are methodical and calculating, and other circumstances in which they are fallible or misguided. But both camps fail to explain important phenomena. We propose an alternative perspective, one largely informed by recent behavioral research. According to this perspective, the behavioral patterns of the poor may be neither perfectly calculating nor especially deviant. Rather, the poor may exhibit fundamental attitudes and natural proclivities, including weaknesses and biases, that are similar to those of people from other walks of life. One important difference, however, is that in poverty the margins for error are narrow, so that behaviors shared by all often manifest themselves in the poor in more pronounced ways and can lead to worse outcomes (see Bertrand, Mullainathan, and Shafir 2004, 2006). Whereas the "rational" view assumes that the poor are doing as well as they can and ought to be left to their own devices, the "culture of poverty" perspective is motivated by the impulse to change how the poor function. In contrast, the central gist of the "behavioral" perspective is that much of the time the poor are not functioning optimally, nor are they any more in need of behavioral change than everyone else. Instead, it is the interaction of fundamental behavioral proclivities with the context in which they function that produces the particularly destructive circumstances in which the poor often find themselves. According to this behavioral view, people who live in poverty are susceptible to many of the same impulses and idiosyncrasies as those who live in comfort, but whereas people who are better off function in the midst of a system-composed of consultants, reminders, cooperative employers, "no-fee" options, incentive awards, and automatic deposit-that is increasingly designed to facilitate their decisions and improve their outcomes, people who are less well off typically find themselves without easy recourse to such "aids" and often are confronted by obstacles-institutional, social, and psychological-that render their economic choices all the more overwhelming and their economic conduct all the more fallible. In what follows, we explore some insights provided by a behaviorally more realistic analysis of the economic conditions of the poor. Our perspective draws on empirical research on judgment and decisionmaking and is supplemented by lessons from social and cognitive psychology. We first review the psychological insights and then consider their implications for a variety of financial products and services that feature prominently in the financial context of the American poor. Of course, insights generated by experimental research and empirical observation need to be carefully tested and evaluated before they can be relied on to shape policy. Even when an intervention succeeds in shaping some intended outcomes, there is always the possibility that other, unforeseen patterns will emerge. Bearing that in mind, we propose some guidelines for thinking about the future design and regulation of financial services.