Financial Concerns, Cognitive Abilities, and Economic Decisions

Study Context

Research suggests that individuals’ cognitive ability is not fixed, but rather a function of one’s environment (Mullainathan & Shafir, 2013; Haushofer & Fehr, 2014). This study uses a lab experiment in Nairobi, Kenya, where the study team exogenously varies an unconditional, high-stakes endowment to alleviate individuals’ short-term financial concerns, then study their performance on a broad set of outcomes. This study will explore the economic effects of mental bandwidth, cognitive function, and behavioral biases in low-income settings.

Study Design

Using Low-Income Nairobi Wards Panel Data for recruitment, sampling will be restricted to not formally employed 120 individuals. Upon arriving at the lab, all participants receive a show-up fee, answer a short questionnaire, and complete two incentivized cognitive tasks: Raven’s progressive matrices for fluid intelligence and a Stroop test for inhibitory control. After randomization of an unconditional payment on that same day (today treatment), an unconditional payment in fourteen days (14-day treatment), or nothing (control), the participants will complete two cognitive tasks again. Then, four incentivized tasks on economic reasoning and decisions will be conducted which measure contingent thinking, belief updating, constrained optimization, and choice consistency.

Results and Policy Lessons

The research team conducted an experimental pilot to simulate how they envision the next phase of data collection to proceed. They also organized a partnership with Turaco Insurance, and incorporated a real-world task to involve participants in choosing health insurance policies for themselves. The team found positive treatment effects from earlier payments on all cognitive tasks. For the economic reasoning tasks, the coefficient estimates are in the expected direction (improving outcomes) but the results are not statistically significant due to a small sample size. The team aims to carry out a next round of data collection with a larger sample.