February 01, 2008

Financial Decision Making Processes of Low-Income Individuals

Edna R. Sawady, Jennifer Tescher

UCC08-2: In The End of Poverty, Jeffrey Sachs describes the poor as “… ready to act, both individually and collectively … hard working … [and having] a very realistic idea about their conditions and how to improve them, not a mystical acceptance of their fate.” This description differs markedly from the stereotypical portrayal of low-income individuals as reluctant workers and irrational consumers. By judging various choices as irrational, observers who are not themselves poor invoke the traditional notion of rationality, which assumes that individuals make choices that maximize economic utility. Examples of perceived irrationality abound, particularly when it comes to basic financial decisions. For instance, some wonder why lower-income consumers choose to cash their paychecks for a fee when they could open a bank account instead and have the funds deposited electronically. Similarly, others question why immigrants would use a higher-priced money transfer service when a growing number of banks offer free or reduced-cost transfers via a bank account. This thinking reflects how difficult it is for a casual observer to understand the lives and circumstances of low-income individuals. Further confirming their diagnosis of “irrationality,” these same observers often suggest financial education as the cure...

Category: Working Papers

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