By: Dalton, P.S. Ghosal, S. (Tilburg University, Center for Economic Research)
We develop a theoretical framework to study the psychology of poverty and ‘aspirations failure’. In our framework, the rich and the poor share the same preferences – and also a behavioral bias in setting aspirations. Greater downside risks imposed by poverty exacerbates the effects of this behavioral bias: the poor are more susceptible to both an aspirations failure and pessimism about the likelihood of achieving success. Poverty limits the set of people whose life experiences the poor consider relevant for forming their own beliefs and aspirations. Mitigating behavioral poverty traps require policies which go beyond reducing material deprivation.
Keywords: Reference-dependent Preferences;Aspirations;Persistent Poverty;Locus of control;Simillarity and Belief Formation.