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.

Three Singapore-based researchers (Qiyan Ong, Walter Theseira, and Irene Ng) were interested in understanding the mechanism that connected poverty to behavioral changes. And they suspected that the size of a debt wasn't the critical factor in altering people's cognition.

Their hypothesis was based on the idea that all debts create a bit of mental strain as people struggle to keep track of what they owe to whom. While a large mortgage might be somewhat more stressful, it requires as much mental exertion to keep track of owing $40 to the owner of the local deli. The researchers suspected that the poor had more, smaller debts, and this exacted a large mental strain on them. "The poor may have great difficulty improving their situation," they write, "simply because debt mental accounting imposes a background cognitive load, causing bandwidth tax that impairs cognitive functioning."

But testing this hypothesis is a challenge, since you can't just randomly select a population and load them up with lots of debts. (Well, you could, but it's doubtful that a review board would approve the experiment.) Instead, the researchers took advantage of a charity program that was providing debt relief to some of Singapore's poor.

Non-financial impacts

All told, the researchers tracked nearly 200 participants who had an average of over three accounts that they owed money to. The people at the charity who handed out the money had what the researchers term an "idiosyncratic" approach to clearing debts, with some who focused on eliminating the smallest ones and others who paid down the largest. They also had a variety of total amounts of debt forgiven. As a result, the researchers were able to test correlations to different levels of debt forgiveness, as well as different total numbers of debt eliminated.

The participants were also brought in and given a series of tests that measured their mental state before and after the debt was eliminated. These include a standard test that tracks a person's ability to control their impulses and another that measures reaction times. Two other surveys measured anxiety and whether a person's general outlook is positive or negative. In addition, the participants' attitude toward money and risk were sampled.

Debt relief induced significant changes in all of them. The error rate on the self-control test plunged from 17 percent to four percent. Reaction times dropped by over half a second. The differences were equivalent to what you'd see between well-rested people and those who had a night of sleep deprivation. Anxiety symptoms also dropped from 78 percent to 53 percent. Overall, these results replicated a variety of earlier studies in showing that people function much better with lower debt.

The participants also changed their attitude toward money: they were willing to take more risks, think longer-term, and put off rewards today for larger ones in the future.

What a relief

With that data in hand, the authors explored how total debt relief and number of debts relieved played into the changes. For context, the participants' average income was 364 Singaporean Dollars (SGD) a month, while their average debt was 6,257 SGD. Clearing a single debt was calculated as being equivalent to between 1,300 and 2,200 SGD of debt relief when it came to mental function. In addition, the number of debts cleared influenced general anxiety, while total debt relieved didn't.

That doesn't mean that number of debts explains everything. Risk aversion driven by debt seems to be entirely the product of total debt. By contrast, the ability to defer gains for the future is influenced primarily by the number of debts.

There are a lot of caveats to this experiment. The participants come from a single culture, and their selection wasn't truly random: all of them had significant debt, so they may not reflect the general population. In addition, there were no objective standards that determined how each participant's debts were retired—they depended on the vagaries of the individuals working at the charity.

Still, some of the results are dramatic. They suggest our relationship with debt is complicated, with different behavioral impacts from the number of debts and the total debt amount. Regardless, there's definitely some support for the idea that tracking the number of debts takes a toll on people. And that, in turn, suggests possible interventions, like debt consolidation and a simplified or automatic payment system that keeps the stress in check.

PNAS, 2019. DOI: 10.1073/pnas.1810901116 (About DOIs).