Dealing With The Mental Burden Of Debt

Financial debt is a strain on cognitive resources, negatively impacting decision-making, which in turn prevents the poor from escaping poverty, say researchers in Singapore.

AsianScientist (Apr. 16, 2019) – In a study published in the Proceedings of the National Academy of Sciences, researchers in Singapore have discovered that debt reduction improves the psychological and cognitive performance of the poor.

Many people with low incomes tend to be saddled with debt. While there are poverty alleviation schemes in place to help such individuals get out of debt, there remains a stigma that the poor are indebted because of personal failings. Those trapped in poverty are often believed to be lacking in desirable qualities such as motivation and talent.

Seeking to address this potentially misguided belief, researchers led by Dr. Ong Qiyan and Associate Professor Irene Ng at the National University of Singapore studied 196 chronically indebted low-income individuals who benefitted from the Getting Out of Debt (GOOD) program managed by Singapore-based charity Methodist Welfare Services.

The GOOD program is a one-off debt relief program for households with monthly per capita income of less than S$1,500 and had outstanding chronic debts owed for at least six months. Such debts included mortgage or rental, utilities, town council taxes, telco bills and hire purchase debts. Before debt relief, the average monthly household income per capita of the participants was S$364.

The research team designed a household financial survey that measures anxiety and cognitive functioning as well as financial decision-making of the participants. The survey was conducted before the participants received the debt relief and three months after debt relief.

The researchers found that the participants experienced less anxiety, displayed improved cognitive functioning and could make better financial decisions three months after receiving debt relief. Between two participants receiving the same amount of debt relief, the participant with more debt accounts eliminated showed more psychological and cognitive improvements.

These findings confirm that being chronically in debt impairs psychological functioning and decision-making. The findings also imply that people view each debt as a separate ‘mental account’ and being ‘in the red’ in many debt accounts is psychologically painful.

Thus, thinking about these accounts consumes mental resources, increases anxiety and worsens cognitive performance. This psychological impact may prevent the poor from making the right decisions to get out of poverty, further contributing to the poverty trap, said the researchers.

“The findings in this study opens a pragmatic case for designing good debt relief programmes for low-income households. Firstly, they help. In fact, not helping low-income households with debt is counter-productive because not doing so leaves them in suboptimal functioning and high anxiety. Secondly, the design of the intervention is key. As it is the pile up of debt accounts (more than the amount of debt) that affects functioning, interventions should focus on decreasing the mental load on low-income households, whose minds are already highly stressed,” Ng added.

The researchers suggest that policy interventions that streamline debts would significantly improve cognitive and psychological functioning, as well as reduce counterproductive behavior. For instance, restructuring or consolidating debt could be a more sustainable policy as it is less costly and more effective than simply clearing debt. More generally, poverty alleviation interventions should target and reduce the factors that contribute to the mental burdens of the poor.

The researchers are now examining the longer term effects of debt relief and are applying the insights from the study to find innovative solutions that may help the poor.

The article can be found at: Ong et al. (2019) Reducing Debt Improves Psychological Functioning and Changes Decision-making in the Poor.


Source: National University of Singapore; Photo: Pexels.
Disclaimer: This article does not necessarily reflect the views of AsianScientist or its staff.

Asian Scientist Magazine is an award-winning science and technology magazine that highlights R&D news stories from Asia to a global audience. The magazine is published by Singapore-headquartered Wildtype Media Group.

Related Stories from Asian Scientist