Low-income residents who trust their communities to help in times of need may be less likely to reach for quick financial fixes, such as payday loans (which can further exacerbate poverty cycles), and more likely to make better long-term financial decisions, according to a new study led by Princeton University.
The researchers suggest that policymakers move away from focusing on low-income individuals and instead focus on the community as a whole. They also emphasize the importance of using targeted policies to help build strong communities, especially in low-income neighborhoods.
“Instead of cutting funding to community development programs, policymakers should implement changes that give individuals in low-income communities more opportunities to develop community trust,” said study co-author Elke Weber, the Gerhard R. Andlinger Professor in Energy and the Environment and professor of psychology and public affairs at Princeton University’s Woodrow Wilson School.
To understand why low-income individuals tend to make more harmful short-term financial decisions, the researchers conducted a series of studies, focusing on both the United States and Bangladesh.
In the first study, the researchers invited 647 participants from the U.S. to make several choices between “smaller, sooner” and “larger, later” options, taking into account participants’ incomes and how much they trusted their local communities.
They found that more affluent participants were less likely to make harmful short-term decisions than those with lower incomes, but this only applied to low-income individuals who did not trust their communities. However, low-income individuals who did trust their communities were more likely to make financial decisions very similar to those made by wealthier participants.
The new findings are in line with previous research at Princeton showing how scarcity leads to harmful long-term decision-making.
“Current financial dilemmas are stressful and leave people with no option but to choose immediate solutions. Our results indicate that lower-income people are less likely to invest in the long-term because of their immediate financial needs,” said Weber.
In the second study, the researchers evaluated “payday loans” in the U.S., which carry high interest rates and exacerbate cycles of poverty among the poor. After reviewing the Federal Reserve Board’s Survey of Household Economics and Decisionmaking, the researchers found that fewer payday loans were taken out in communities where levels of trust were higher.
This is because people in tough situations can rely on their communities to help with financial needs (taking out a loan from a friend, for example), instead of resorting to high-interest emergency loans, the researchers said.
The third part of the research involved a two-year field study in Bangladesh. Together with the Bangladesh Rural Advancement Committee (BRAC) and The Hunger Project, a global nonprofit organization, the researchers worked with 121 of Bangladesh’s smallest local government units, known as council unions.
They trained community volunteers to act as intermediaries between local government and community residents. Volunteers met with members of their community and helped provide them with access to public services. Volunteers also provided guidance to government units directly.
The researchers found that residents with community volunteers had higher levels of community trust, which also influenced their decision-making. Specifically, these residents were more likely to forgo smaller payoffs in exchange for more-profitable, delayed options.
Taken together, the findings highlight the importance of building trust in low-income communities and also point to the benefits of programs currently being targeted for budget cuts.
In addition to Weber, the study was conducted by lead author Jon Jachimowicz, Columbia University; Salah Chafik, Columbia University; Sabeth Munrat, BRAC; and Jaideep Prabhu, University of Cambridge.
Their findings are published in the journal Proceedings of the National Academy of Sciences.