The Persistence of Poverty in the Context of Financial Instability: A Behavioral Perspective

We review recent findings regarding the psychology of decisionmaking in contexts of poverty, and consider their application to public policy. Of particular interest are the oft‐neglected psychological and behavioral consequences of economic scarcity coupled with financial instability. The novel framework highlights the psychological costs of low and unstable incomes, and how these can transform small and momentary financial hurdles into long‐lasting poverty traps. Financial instability, we suggest, not only has obvious economic ramifications for well‐being, but it also creates the need for constant focus and attention, and can distract from the very opportunities otherwise designed to alleviate the effects of poverty. We describe a variety of public policy strategies that emerge from this perspective that are not readily apparent in conventional theories that permeate the design of social programs.