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The economics and psychology of poverty: can debt collection increase the bandwidth of debtors?

In the six years that I worked as a full-time credit controller at the collection agency TCM Belgium, I often heaved a sigh. Don’t get me wrong, the job is very diverse and challenging. But your patience is often challenged too. One of the most important recruitment criteria for new employees in debt collection, is therefore a great emphatic ability. A lot of decisions made by debtors are (economically) difficult to frame rationally. On a psychological level, however, they are very understandable: many actions and reactions can be traced back to the bandwidth of people living in poverty.

 

‘The best way to save money is to spend money’ – Eldar Shafir

It is sometimes frustrating for credit controllers to hear that an invoice remains unpaid, given that the debtor in question just purchased a new mobile phone/flatscreen/car/…. But Eldar Shafir (co-author of the book ‘Scarcity: Why Having Too Little Means So Much’) gives a very clear view on this, one that every debt collector should keep in mind in such situations: when you’re poor and suddenly have a large sum of money at your disposal, it’s best to spend it quickly (or in other words, ‘invest’ as a way of saving) before your environment (or your creditor) comes to collect the amount.

Culture/character/environment/education are not the cause of poverty, but do contribute to getting out of poverty or not. In technical terms, this is called cultural perpetuation. There is also such a thing as economic consolidation: economic rules do not cause poverty, but maintain it. Poverty is a costly affair. Just think of the best-known ‘poverty trap’, in which people in poverty who would give up their benefits for a paid job, end up generating less income since a lot of aids attached to those benefits wouldn’t be applicable any longer.

A debtor who buys a new mobile phone when a lot of unpaid invoices are piling up, usually doesn’t do this because of his/her ‘weak character’ or ‘low IQ’. Sometimes spending is simply not such an irrational decision. In addition, one must also take into account the bandwidth of debtors.

 

Scarcity in bandwidth

It’s not that poor people have less bandwidth. It’s that “all people, if they were poor, would have less effective bandwidth”- Sendhil Mullainathan & Eldar Shafir

Scarcity in bandwidth occurs when there is a lack of time and money. Your cognitive space is reduced by the scarcity of money and time, as a result of which usually only decisions with a short term effect are made. The most urgent matters (invoices) are dealt with first, the rest is shifted backwards. Borrowing money to pay off borrowed money on time at high rates, when there is no time to negotiate. There is literally no room in your head (bandwidth) for other (let alone) long term solutions. Scarcity in the mind promotes tunnel vision.

Some readers will think that if they were to end up in poverty, the situation would certainly be dealt with differently (read: better) than the way ‘stereotypical debtors’ act. I, too, have been guilty of that thought for a while. However, two situations very clearly support the opposite idea.

  • In the first situation participants (divided into ‘rich’ and ‘poor’) participated in the game Family Feud (a trivia game with multiple choice questions) as an experiment. The ‘poor’ team got only 15 seconds per round, the ‘rich’ team got a ‘budget’ of 1 minute. Both groups could borrow time (decreased of future rounds) Outcome: The ‘poor’ borrowed much more, so the future ‘pay checks’ gradually became smaller, the rich mostly avoided debts. Scarcity, independent of personality or other factors, feeds an urge to borrow recklessly.

 

  • A critical person might argue that the above experiment does not show how one and the same person acts in both a poor and a rich situation. In the end, an experiment is only theory. Researchers have therefore taken a closer look at Indian cane sugar farmers. At a certain moment the farmers are very rich (after the harvest they receive 60% of their annual income), and at another moment they can barely make ends meet. A perfect case, so what is the outcome? The farmers score higher on IQ tests when they have a well-filled bank account, than when there is a shortage of money. The difference in IQ would even be 13 points, comparable to a night of not sleeping or being addicted to alcohol.

 

The government in the debtor’s footsteps

How do governments want to respond to poverty? The government is rather patronising towards debtors (punishing or reducing benefits when people in poverty break the rules), but it puts the ‘blame’ on the individual. Self-reliance and talent are celebrated values, education is the panacea. But what if debtors do not have the necessary bandwidth to commit to education?

The Belgian Chamber recently wanted to approve a bill whereby debtors could, among other things, postpone their payments. This would make private companies partly responsible for (the follow-up of) people in poverty. But even more astonishing: the government seemed to want to put forward a short-term solution as a way out of poverty, which would push people even more into poverty in the long term. Something that debtors would instinctively do themselves because of this scarcity of bandwidth. That is by no means a solution.

 

Can the credit controller help debtors out of poverty?

The crucial question: how to increase the bandwidth of people living in poverty? The easiest way is, of course, to give these people sums of money, but unfortunately we don’t live in a utopia. Education can help, but one already needs quite a bit of bandwidth in the mind for that.

The most realistic way? To follow up on people in poverty and to search a way out together, to help them with the administrative load that would otherwise remain. The credit controller can play a key role in that. Our credit controllers draw up feasible payment plans together with debtors. When debtors forget arrangements, they can expect reminders and phone calls from our credit controllers. Without a response, we even pass by and search other solutions. This provides (perhaps contradictory for some) some peace of mind for debtors and has a positive impact on their bandwidth.

The actions of the credit controllers seem of little importance, but they do keep the debtor away from the court and therefore from extra costs, another poverty trap.

 

Author: Kim Rutten

 

Would you like to know more about poverty and scarcity? Then I would recommend you to read the following articles (also our sources for this article):

 

The economics and psychology of poverty: can debt collection increase the bandwidth of debtors?

In the six years that I worked as a full-time credit controller at the collection agency TCM Belgium, I often heaved a sigh. Don’t get me wrong, the job is very diverse and challenging. But your patience is often challenged too. One of the most important recruitment criteria for new employees in debt collection, is therefore a great emphatic ability. A lot of decisions made by debtors are (economically) difficult to frame rationally. On a psychological level, however, they are very understandable: many actions and reactions can be traced back to the bandwidth of people living in poverty.

 

‘The best way to save money is to spend money’ – Eldar Shafir

It is sometimes frustrating for credit controllers to hear that an invoice remains unpaid, given that the debtor in question just purchased a new mobile phone/flatscreen/car/…. But Eldar Shafir (co-author of the book ‘Scarcity: Why Having Too Little Means So Much’) gives a very clear view on this, one that every debt collector should keep in mind in such situations: when you’re poor and suddenly have a large sum of money at your disposal, it’s best to spend it quickly (or in other words, ‘invest’ as a way of saving) before your environment (or your creditor) comes to collect the amount.

Culture/character/environment/education are not the cause of poverty, but do contribute to getting out of poverty or not. In technical terms, this is called cultural perpetuation. There is also such a thing as economic consolidation: economic rules do not cause poverty, but maintain it. Poverty is a costly affair. Just think of the best-known ‘poverty trap’, in which people in poverty who would give up their benefits for a paid job, end up generating less income since a lot of aids attached to those benefits wouldn’t be applicable any longer.

A debtor who buys a new mobile phone when a lot of unpaid invoices are piling up, usually doesn’t do this because of his/her ‘weak character’ or ‘low IQ’. Sometimes spending is simply not such an irrational decision. In addition, one must also take into account the bandwidth of debtors.

 

Scarcity in bandwidth

It’s not that poor people have less bandwidth. It’s that “all people, if they were poor, would have less effective bandwidth”- Sendhil Mullainathan & Eldar Shafir

Scarcity in bandwidth occurs when there is a lack of time and money. Your cognitive space is reduced by the scarcity of money and time, as a result of which usually only decisions with a short term effect are made. The most urgent matters (invoices) are dealt with first, the rest is shifted backwards. Borrowing money to pay off borrowed money on time at high rates, when there is no time to negotiate. There is literally no room in your head (bandwidth) for other (let alone) long term solutions. Scarcity in the mind promotes tunnel vision.

Some readers will think that if they were to end up in poverty, the situation would certainly be dealt with differently (read: better) than the way ‘stereotypical debtors’ act. I, too, have been guilty of that thought for a while. However, two situations very clearly support the opposite idea.

  • In the first situation participants (divided into ‘rich’ and ‘poor’) participated in the game Family Feud (a trivia game with multiple choice questions) as an experiment. The ‘poor’ team got only 15 seconds per round, the ‘rich’ team got a ‘budget’ of 1 minute. Both groups could borrow time (decreased of future rounds) Outcome: The ‘poor’ borrowed much more, so the future ‘pay checks’ gradually became smaller, the rich mostly avoided debts. Scarcity, independent of personality or other factors, feeds an urge to borrow recklessly.

 

  • A critical person might argue that the above experiment does not show how one and the same person acts in both a poor and a rich situation. In the end, an experiment is only theory. Researchers have therefore taken a closer look at Indian cane sugar farmers. At a certain moment the farmers are very rich (after the harvest they receive 60% of their annual income), and at another moment they can barely make ends meet. A perfect case, so what is the outcome? The farmers score higher on IQ tests when they have a well-filled bank account, than when there is a shortage of money. The difference in IQ would even be 13 points, comparable to a night of not sleeping or being addicted to alcohol.

 

The government in the debtor’s footsteps

How do governments want to respond to poverty? The government is rather patronising towards debtors (punishing or reducing benefits when people in poverty break the rules), but it puts the ‘blame’ on the individual. Self-reliance and talent are celebrated values, education is the panacea. But what if debtors do not have the necessary bandwidth to commit to education?

The Belgian Chamber recently wanted to approve a bill whereby debtors could, among other things, postpone their payments. This would make private companies partly responsible for (the follow-up of) people in poverty. But even more astonishing: the government seemed to want to put forward a short-term solution as a way out of poverty, which would push people even more into poverty in the long term. Something that debtors would instinctively do themselves because of this scarcity of bandwidth. That is by no means a solution.

 

Can the credit controller help debtors out of poverty?

The crucial question: how to increase the bandwidth of people living in poverty? The easiest way is, of course, to give these people sums of money, but unfortunately we don’t live in a utopia. Education can help, but one already needs quite a bit of bandwidth in the mind for that.

The most realistic way? To follow up on people in poverty and to search a way out together, to help them with the administrative load that would otherwise remain. The credit controller can play a key role in that. Our credit controllers draw up feasible payment plans together with debtors. When debtors forget arrangements, they can expect reminders and phone calls from our credit controllers. Without a response, we even pass by and search other solutions. This provides (perhaps contradictory for some) some peace of mind for debtors and has a positive impact on their bandwidth.

The actions of the credit controllers seem of little importance, but they do keep the debtor away from the court and therefore from extra costs, another poverty trap.

 

Author: Kim Rutten

 

Would you like to know more about poverty and scarcity? Then I would recommend you to read the following articles (also our sources for this article):

 

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