The Psychological Effects of Poverty on Investments in Children’s Human Capital

While accumulating research suggests that poverty imposes a psychological tax on decisionmaking, there is still no evidence of whether such psychological consequences also affect real economic decisions, in particular those that could generate poverty traps. This paper tests this hypothesis by offering individuals the opportunity to invest in an educational program with large average impacts on children’s educational outcomes. Drawing on a survey experiment to emulate the psychological consequences of poverty, we find that poor parents’ willingness to invest decreases with the predicted returns of the program – while it increases with returns in the control group. We show that the failure to evaluate long-term returns operates through mental bandwidth: experimentally poor subjects display higher focus on short-term returns, performing better on incentivized attention and memory tests. While prior experience with the program does not help, making program’s returns top-of-mind mitigates the psychological effects of poverty on focus and investment decisions.