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 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 empathic 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 or car.

But Eldar Shafir (co-author of Scarcity: Why Having Too Little Means So Much) gives a very clear view on this, one that every debt collector should keep in mind. 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, to ‘invest’ as a way of saving — before your environment or your creditor comes to collect the amount.

Culture, character, environment and education are not the cause of poverty, but they 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 they 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 aid attached to those benefits would no longer apply.

A debtor who buys a new mobile phone when unpaid invoices are piling up usually doesn’t do this because of a ‘weak character’ or a ‘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 that scarcity, so usually only decisions with a short-term effect are made. The most urgent matters (invoices) are dealt with first; the rest is pushed back.

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 — no 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, they would certainly deal with the situation differently — read: better — than ‘stereotypical debtors’. I, too, have been guilty of that thought. Two situations, however, clearly support the opposite idea.

In the first situation, participants (divided into ‘rich’ and ‘poor’) played Family Feud, a trivia game with multiple-choice questions. The ‘poor’ team got only 15 seconds per round; the ‘rich’ team got a ‘budget’ of one minute. Both groups could borrow time from future rounds. Outcome: the ‘poor’ borrowed much more, so their 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 this experiment does not show how one and the same person acts in both a poor and a rich situation. Researchers therefore took a closer look at Indian sugar-cane farmers. After the harvest they receive 60% of their annual income; at other times they can barely make ends meet. 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 would even be 13 points — comparable to a night without sleep, or to alcohol addiction.

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 — and 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.

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 deeper 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 mental bandwidth for that.

The most realistic way? To follow up on people in poverty, search for a way out together, and 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. Without a response, we even pass by and look for other solutions. This provides — perhaps contradictorily for some — some peace of mind, and has a positive impact on their bandwidth.

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

Author: Kim Rutten