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Reducing debt improves psychological functioning and changes decision-making in the poor
Open accessAbstract
Significance: The impact of chronic debt on the poor is psychological, not just financial. We hypothesize that chronic debt impairs psychological functioning and decision-making, contributing to the poverty trap. This is because debt is not considered fungible and is viewed as costly mental accounts that consume cognitive bandwidth. We test this using quasiexperimental evidence from a one-off, unanticipated debt-relief program worth several months’ household income. Comparing the poor before and after debt relief, those with more debt accounts paid off experienced greater improvements in cognitive functioning, reported less anxiety, and became less present-biased. These findings provide actionable evidence for poverty-alleviation policy.
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“However, they found only weak descriptive evidence of a mediating role of cognitive control underlying this effect.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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“They found that low-income Singaporean participants performed significantly better on a cognitive control task (Flanker task) after debt relief than before.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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“Because this study used a pre-post design to identify treatment effects, similar to the harvest study of Mani et al. (2013a), learning effects and potential confounders might have affected the results.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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“Similar to the effect on time discounting, suggestive evidence for a mediating role of cognitive control was weak.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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“Only a study of Ong et al. (2019) found that debt relief reduced risk aversion.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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“In their study among Singaporean low-income households, Ong et al. (2019) showed that debt relief reduced present bias.”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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“First, it is unclear how financial scarcity affects risk aversion as studies have shown positive (Ong et al. 2019), negative (Dalton et al. 2019), or no effects (Carvalho et al. 2016).”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. 2019
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“Participants showed improved cognitive control and reduced negative affect, risk aversion, and present bias after debt relief”
From Poverty and economic decision making: a review of scarcity theory (2022) · cites this paper as Ong et al. (2019)
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Citations
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Cited by
Sorted by citations
Poverty and economic decision making: a review of scarcity theory
de Bruijn, E.-J., & Antonides, G. (2022) · Theory and Decision · doi:10.1007/s11238-021-09802-7 · Cited by 277
Metadata
- Authors
- Ong, Q., Theseira, W., & Ng, I. Y. H.
- Affiliations
- National University of Singapore (SG)
- Singapore University of Social Sciences (SG)
- Corresponding author
- Ong, Qiyan
- Venue
- Proceedings of the National Academy of Sciences
- Publisher
- National Academy of Sciences
- Published
- 2019-03-25
- Volume
- 116
- Issue
- 15
- Pages
- 7244-7249
- ISSN
- 0027-8424 (ISSN-L)
- 1091-6490
- PMC
- PMC6462060
- OpenAlex
- W2923558166
- Cited by
- 154
- References
- 7
- Citations by year
- 2026: 15 · 2025: 30 · 2024: 27 · 2023: 29 · 2022: 24 · 2021: 19 · 2020: 7 · 2019: 3
- FWCI
- 10.55
- Type
- journal article
- Language
- en
- Open access
- hybrid
- doi.org
- Licence
- Locations
- Proceedings of the National Academy of Sciences (publishedVersion, cc-by-nc-nd)
- Europe PMC (PubMed Central) (publishedVersion, cc-by-nc-nd)
- PubMed Central (publishedVersion, cc-by-nc-nd)
- PubMed (publishedVersion)
- National University of Singapore (submittedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Radboud Repository (Radboud University) (submittedVersion)
- Topics
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Sociology and Political Science › Income, Poverty, and Inequality
- Keywords
- debt relief, mental accounting, cognitive function, anxiety, present bias, decision-making, poverty reduction, low-income households
- MeSH terms
- Adult, Decision Making, Family Characteristics, Female, Humans, Income, Male, Middle Aged, Poverty, Singapore
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