POVERTY AND ASPIRATIONS FAILURE ESRC Overview Poverty traps

POVERTY AND ASPIRATIONS FAILURE ESRC

Overview Poverty traps and adaptive preferences: beyond conventional accounts of deprivation and disadvantage. The design of pro-poor interventions

Poverty Traps: Two views Persistent Poverty Due to External Constraints � Credit Market Imperfections, Poor Nutrition, Network effects � Implicit Assumption: Poor but Rational Persistent Poverty due to Internal Constraints � Implicit Assumption: Irrational, hence poor? � 60 % of Americans think that the poor "are lazy or lack willpower" (World Values Survey, Alesina et al, 2001). � Lack of Self-Control among the poor could lead to Poverty Trap (Banjeree-Mullainathan, 2010; Bernheim -Ray-Yelteki, 2011)

Poverty & Beliefs Alberto Bandura : "People's beliefs in their efficacy influence the choices they make, their aspirations, how much effort they mobilize in a given endeavor, how long they persevere in the face of difficulties and setbacks. . ” Self-efficacy beliefs: ‘Beliefs in the capacity to achieve desired outcomes through one’s effort’ Persistent Poverty has been associated with: � ‘Lack of hope’ -- Mookherjee(2003) � Lack of the capacity to aspire -- Appadurai(2004) � More external ‘Locus of Control’ – Moreira (2003), Macleod(1995): America, LSYPE(2006)

Internal Constraints – Cause or Effect ? Is it that the poverty persists because the poor lack hope and motivation to pull themselves out of poverty? OR… Is it that `the poor may exhibit the same basic weaknesses and biases as do people from other walks of life, except that in poverty, . . the same behaviors. . . lead to worse outcomes’ ? (Bertrand et al (2004)) In a theoretical paper (Dalton, Ghosal and Mani), we examine this interaction between poverty and individual weakness/bias – and whether it can explain the psychology of the poor, and their

Evidence Beliefs, Aspirations and Poverty: Moreira (2003), Rabow et al. , (1983), Mac. Leod, (1995), Walker, (1997) and Frankerberger et al. , (2007), Bernard et al. (2011), Longitudinal Study of Young People in England (2006), Rotter, (1954), Furnham, (1986), Poortinga et al. , (2008), Arjun Appadurai (2004). Poverty and Low Aspirations: Lack of Opportunity or Information-Miguel and Kremer (2004), Duflo et al. (2010), Jensen (2010) Pessimism and Low Aspirations: Cause or Consequence of Poverty? Banerjee and Duflo (2011), Akresh et al. (2010), Gutman and Akerman (2008).

Conceptual Framework: Dalton, Ghosal and Mani (2012) (A) Preferences are reference-dependent, where the reference point is a person’s Aspiration Level � Rich and Poor have the same preferences and draw from the same distribution of ‘innate’ ambition (initial aspirations) (B) Aspirations are Endogenous Reference points (Shalev (2000), Koszegi-Rabin(2006), Dalton. Ghosal (2012 a, b)) � i. e. people’s effort and aspirations feed into each other. Thus, they are jointly chosen such that a person’s aspiration is the rational expectations equilibrium outcome, given his effort

Behavioral Bias in Setting Aspirations Evolve with Effort “Every ceiling, when reached, becomes a floor. . . ” -- Aldous Huxley In setting their life goals, individuals recognize that � Higher Aspirations require greater Effort to be achieved… � …But do not anticipate that Aspirations evolve with Effort, through outcomes realized Survey Evidence: � Easterlin(2001): People underestimate how preferences evolve as their income changes, over their lifetime � Knight & Gunatilaka(2008): Migrants underestimate how their preferences adapt with their location – ending up less happy than rural and urban non-migrants

Mechanism: How Poverty causes Aspirations Failure Suppose a poor person draws the same initial aspiration as a rich person… Both of them choose effort level taking aspiration g as given, but… a poorer person chooses lower effort for a given aspiration level because greater risk reduces his Expected Marginal Benefit of effort However, Aspirations evolve with Effort – hence, … In (long run) equilibrium, the poor person ends up farther away from his best possible outcome than a rich person, i. e. he is more prone to aspirations failure

Poverty Traps WEALTH-BASED: Low effort is optimal ASPIRATION BASED: Low effort is sub-optimal

Related papers Ray (2006) provides a non-mathematical exposition of how socially determined aspirations contribute to poverty persistence. Closely related papers on aspirations include Bogliacino and Ortoleva (2011), Genicot and Ray (2011) and Stark (2006), all of which have a more macro focus. Banerjee and Mullainathan (2010) provide a model to understand how poverty may persist due to a different behavioral constraints -- a lack of self -control in the consumption of certain goods.

Subjective well-being data and poverty If reference points adjust to the current state of the individual, relating preference satisfaction and reported SWB is problematic even in the long-run (Dalton and Ghosal (2011 a, b)): SWB data as a measure of deprivation and disadvantage. Eg. Poverty and happiness: A “satisfaction” paradox Sen (1999), Biwas-Diener, and Diener (2001), Rojas (2004). If an economy provides more social mobility and increase people expectations and aspirations, it may result in a decrease of well being self-report. In fact, raising aspirations can be a route out of poverty traps.

Measuring the impact of shocking aspirations Fieldwork 1: “Dream Building”, Kolkata Reseachers: Ghosal, Mani, Roy and Jana (Durbar). Examine the impact of “Dream Building” program that aims to raise aspirations and self-perception of a marginalised group, sex workers, impact on actions (e. g. savings behaviour) to improve their own well-being. The training program will be carried out in collaboration with the Durbar Foundation, an NGO working with sex workers in Kolkata, India. It consists of 8 sessions, during which experienced trainers (some of whom are from the same community) associated with Durbar will attempt to lift aspirations of the participating sex-workers through novel methods of discussion and engagement.

Pilot Results: Pre-vs-Post Analysis Opinio Shame n about self (1) (2) Discrim- Self Locus Decisi ination confiden of on ce control makin g (3) (4) (5) (6) Kali -0. 24 0. 17 0. 13 0. 14 (0. 16) (0. 14) (0. 13) (0. 16) Post 0. 29** -0. 29** 0. 28** 0. 39** (0. 14) (0. 12) (0. 15) 0. 83** 0. 06 * (0. 11) (0. 09) Kali*Post 0. 28 0. 08 -0. 16 -0. 05 -0. 30* -0. 24* 0. 21 (0. 21) (0. 20) (0. 18) (0. 22) (0. 17) (0. 13) (0. 16) Constant 0. 60*** 0. 29*** 0. 00 0. 39*** 0. 06 0. 94** 0. 78* * ** (0. 10) (0. 09) (0. 11) (0. 08) (0. 07) (0. 08) Adj. R-sq 0. 20 0. 11 0. 05 0. 12 0. 54 0. 07 0. 19 66 67 67 67 68 66 No. of observations 60 Mobil ity 0. 34** -0. 01 * (0. 12) (0. 09) -0. 21* 0. 22* * (0. 11) (7) (0. 12)

Pilot: Treatment-vs-Control Opinion Shame about self Discrim Self -ination confide nce Locus of control Decisio Mobilit n y making (1) (3) (4) (5) (6) (7) 0. 75** * (0. 10) (2)` Kali 0. 67*** 0. 25 -0. 03 0. 50* 0. 42 0. 25 (0. 23) (0. 16) (0. 29) (0. 26) (0. 22) Treat 0. 89*** -0. 25 -0. 72 0. 53** 0. 56** 0. 25 (0. 17) (0. 47) (0. 23) (0. 21) (0. 17) Kali*Treat -0. 62** 0. 00 (droppe d) -0. 40 -0. 37 (0. 25) (0. 28) (0. 32) (0. 28) -0. 50** 0. 75** * (0. 25) (0. 11) Constant -0. 00 0. 25 1. 00*** 0. 25 0. 33* (0. 15) (0. 18) (0. 45) (0. 20) Adj. R-sq 0. 43 0. 12 0. 02 No. of observations 41 42 35 (0. 25) (0. 20) 1. 00** * (0. 08) 0. 00 (0. 19) 0. 75** * (0. 16) 0. 10 0. 13 0. 08 0. 82 42 41 42 42 (0. 07)

Fieldwork 2: Argentine CLASSICAL MUSIC ORCHESTRAS FOR CHILDREN FROM DISADVANTAGED BACKGROUNDS, BUENOS AIRES PROVINCE, ARGENTINA People: Dalton, Ghosal, Mani and Waldinger Aim: To examine whether (a) the aspirations of children from very deprived backgrounds are raised by their participation in classical music orchestras; (b) Regular participation has spill-overs in other dimensions such as educational performance. 4000 children, 40 schools (20 treated, 20 control) Baseline survey done; First stage of randomisation implemented.

Policy Implications Pro-poor policy interventions need to shock internal constraints (such as aspirations), in addition to relaxing external constraints. Changing Beliefs are important to break aspiration failure driven poverty Traps. Could do this by: � Changing Initial Aspirations (of Parents, for instance) SPOKE Program in UK � Creating Relevant (‘similar’) Role Models Bandura Project on Country-specific soap operas, developed with Population Services International