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How the Poor Make Better Financial Decisions Than the Wealthy

In this Thursday, Nov. 27, 2014, photo, a woman pays for merchandise at a Kohl's department store in Sherwood, Ark. Relying on credit for holiday shopping without a plan to pay off the debt quickly can easily cost you more in the long run. (AP Photo/Danny Johnston)
(AP Photo/Danny Johnston)

 

(Slate) – People often assume that the poor are less competent than the wealthy. Some even suggest that the poor have flawed values or ways of thinking. But my colleagues and I have recently found that the poor outperform the rich at some financial decisions. Under poverty, people develop a unique expertise.

To appreciate this expertise, we should first come to terms with a mistake nearly everyone makes. Consider this question, which I regularly pose to my MBA students: Imagine you are buying a $300 tablet, but the salesman says the same tablet is available for $50 less at a store 20 minutes away. Would you travel for the discount? Almost certainly. Now imagine that the tablet costs $1,000. Would you still travel the 20 minutes to save $50? Now you might hesitate.

You are not alone. People are far more likely to say “no” to the second question than the first, even my MBA students, whose jobs are to make good financial decisions. This is a common response. It is also irrational.

If you value 20 minutes of your time at $50 in one case, then you should in the other case as well. The price of the tablet has nothing to do with it. Puzzles like this lie at the root of behavioral economics, which highlights errors in the way nearly everyone makes decisions. But as common as this mistake is, one group is relatively immune to it: the poor.

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