October 17, 2023

17 October is designated as the International Day for the Eradication of Poverty. It is a day dedicated to the acknowledgement of the struggles of the poor, and is a call to action towards the lessening of suffering of the destitute.

Debt—an issue which disproportionately burdens the less well off—affects not only financial stability, but also alters psyches. In ‘Reducing debt improves psychological functioning and changes decision-making in the poor’ (Proceedings of the National Academy of Sciences of the United States of America, 2019), Dr Ong Qiyan (NUS Social Service Research Centre), Associate Professor Walter Theseira (NUS Business School), and Associate Professor Irene Ng (NUS Department of Social Work and NUS Social Service Research Centre) demonstrate the effectiveness of debt-account reductions in reducing mental load.

The researchers suggest that multiple debt accounts create the impression of ‘more debt’, and this creates greater cognitive load. Debt is perpetuated among the poor through ‘bandwidth taxes’—otherwise known as the demands that reduce productive behaviour, and cognitive and psychological capabilities. The effects of bandwidth taxes are measured through cognitive function, anxiety, attitudes toward risk, and time discounting. Economic decision-making was tested by evaluating participants’ risk tolerance, and their willingness to delay a monetary payment for larger return in the future.

Debt-relief and debt-account reductions were common strategies used to reduce debt in Singapore. The researchers studied both strategies to evaluate the effectiveness of debt-account reductions. They found that debt-relief reduces financial anxieties, increases risk tolerance, and overall improves decision-making ability. Although these efforts are effective, debt-account reductions are associated with larger and more significant improvements in psychological and cognitive functioning. Thousands of dollars of debt-relief (more than what was offered by social services) were equivalent to one debt-account clearance, regardless of debt size. The removal of one debt account resulted in greater cognitive abilities. This confirmed the researchers’ hypothesis that finances are calculated based on individual items, not as a collective whole.

Ultimately, the researchers suggest that focus on mental load is more suitable and sustainable. Policies that decrease mental load will not only support the cognitive abilities of low-income households, they are also more sustainable than monetary debt-relief strategies.

Read the full article here.