The Mental Inheritance of Being Poor

I spent the first 18 years of my life living in public-housing projects. My childhood was as poor as it gets in America.

I’ve also seen what being poor is like in places like Mexico, Colombia, and the Dominican Republic. Once, on a volunteer trip to the Dominican Republic, I worked in a neighborhood where the houses didn’t even have floors, just packed dirt that turned to mud during a rainstorm. I’ve ridden through shantytowns outside of Mexico City where there was no plumbing or electricity.

But even in the U.S., growing up so poor that you have to rely on public assistance to survive is not a pleasant experience. We were on food stamps. We relied on a school food bank, the Salvation Army, and free breakfast and lunch at school. When school was out, my mom enrolled us in summer camps funded by HUD and the Housing Authority so that we still had meals.

I spell this out to show that I understand poverty from the inside. And I understand that poverty endures because it creates a mindset—a problem that can’t be fixed by just giving people money.

I grew up in Pittsburgh’s Terrace Village Housing projects, and when those were demolished, I moved to the Northview Heights housing projects. These are two of the city’s roughest, most dangerous, poorest areas. I lived in these places until I was 18.

My father died during my senior year of high school. He wasn’t really part of my life. I knew who he was, and I had spoken to him on the phone occasionally, but he moved out of town when I was a baby, and I only saw him for a few hours a year.

In May 2003, my mostly absent father left a $55,000 life insurance policy. For the first time, I wasn’t poor. But that wouldn’t last long.

By August 2004, I was overdrawing my account to buy food. I went to the ATM and kept taking out money until it stopped me. Fifteen months later, all the money was gone.

That experience raised a hard question I’d revisit for years: Which comes first, poverty or poor decisions? Does being poor cause you to make bad decisions that keep you poor, or do you make bad decisions that lead you to lose your money?

Many people think it’s the latter. “Stop wasting all your money on shoes, video games, and weed,” they say, or the more gentrified version, “Stop buying lattes and eating out, and you’d have more money to invest.”

Those ideas contain a great deal of truth. Let’s say I do something dumb, like get a DUI. I’ll lose my car, which means I probably can’t get to work—if I still have my job. I’ll have to pay fines, restitution, attorney and court fees, towing, and storage costs. You can do one big dumb thing that puts you in the poor house for years, or a series of smaller dumb things that keep you from ever stepping off the porch of poverty.

At the same time, growing up in poverty increases the likelihood of remaining poor. A Stanford study that followed children into adulthood found that lower parental income predicts lower earnings at age 30. When you grow up in poverty, there are, by definition, no examples of healthy financial habits to emulate. So, if you grow up in low-income public housing, surrounded by people who lack the resources to get out of the projects, you’re already set up for financial failure. But that’s not even the worst part.

A 2013 Princeton study found that when low-income people endure financial stress, they score worse on cognitive and reasoning tests. Under financial strain, subjects experienced a drop in IQ scores equivalent to 13 points. To put that drop in perspective, the average IQ range is 85 to 115. For someone with an IQ of 85—the low end of the average—that drop pushes them near the range for clinical disability. Poverty’s stress makes harmful choices more likely and helpful ones less likely.

Why do low-income households buy more lottery tickets than affluent ones? Shouldn’t the poor be focused on saving every dollar? Yes, they should—when you’re viewing the problem from the perspective of affluence.

But viewed from a perspective built on scarcity, buying that lottery ticket feels like hope. You’re just trying to make it to the end of the week and, in some cases, just to the end of the day. Why not spend a few extra dollars on a chance to win big?

We now know that poverty also triggers some depressing, long-term changes in your brain. When you’re poor, the limbic system—the part of the brain responsible for behavioral and emotional responses—constantly signals fear and sends stress messages to the prefrontal cortex. The prefrontal cortex is responsible for decision-making and planning. The constant stress of poverty can reduce its volume, making a person less able to solve problems, set goals, and complete tasks efficiently.

A set of experiments conducted by University of Chicago Booth School of Business professor Anuj Shah demonstrated this effect. Shah studied the impact of scarcity on decision-making by using a series of games in which participants were paid based on their performance. In each study, some participants received extra resources or chances to play the games, while others received fewer “shots.” In some studies, players could borrow extra resources at a defined interest rate.

Participants with fewer “shots” focused more intently on each one, but when allowed to borrow against future rounds, those with fewer resources made choices that hurt their overall performance. Scarcity sharpened short-term focus but eroded long-term decision-making.

While these experimental games are not the same as real-life poverty, they capture the main problem of being poor. Decisions considered routine by the affluent take on great urgency for the poor. By monopolizing attention and draining cognitive resources, this added urgency can lead to bad choices in other matters.

It’s not that people with money make many more good financial decisions than those without. In fact, the research suggests that poverty forces individuals to make more efficient use of their resources, which can improve short-run outcomes. But mistakes are more costly when margins are thin.

When I was in my early twenties, a few years after I squandered the life insurance windfall in a way that only a person with limited means could, I became entangled in the insidious cycle of payday loans. These loans require only that its recipient have a job. They help in a pinch, but the interest is crushing. I had more than a few loans with a monthly interest rate of 20 percent.

The type of person who needs a $500 payday loan to cover a sudden emergency doesn’t have $600 to pay it off by the time the next paycheck comes. I was that type of person, so I did the most obvious thing: I took out another payday loan when I fell behind on the first one. And when I fell behind on that one, I took out another.

This vicious cycle continued until I shut the account from which they withdrew. Over the next few years, I screened my phone calls as I paid them back on my own time. Fortunately, the quasi-legal nature of payday-loan companies prohibits them from reporting delinquency to credit bureaus.

These are the kinds of counterproductive borrowing decisions Shah observed in his experiments. When you’re poor, survival is the highest priority. You either make decisions that ignore the long term so you can make it to the next paycheck, or being in survival mode shuts down your ability to handle immediate problems intelligently.

People are quick to look at research like this and propose a simple solution: give people money so they stop feeling the stress of scarcity. With money plus financial education, we can eradicate poverty. But if that were all it took, then how do we explain the lottery winners or high-paid athletes, actors, and musicians who go broke despite having immense wealth? How do we explain what I did with my $55,000 life insurance money?

A scarcity mindset doesn’t instantly change if you become flush with cash. Decades of stress don’t disappear overnight, any more than one apple erases years of poor dieting. The longer you’re poor, the worse you’ll be with money when you get it.

By analyzing Americans’ tax returns from 1996 to 2012 and then evaluating the tax returns of their children, Stanford-linked research found that the children of higher-earning parents are more likely to be employed at 30 and to earn more than children from lower-earning families.

Poverty endures not only because resources are scarce but also because scarcity teaches a way of thinking. Until policy addresses this mental inheritance—not just the bank balance—the cycle will repeat.

Photo by Spencer Platt/Getty Images