Reducing debt improves psychological functioning and changes decision-making in the poor Article Swipe

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Debt Debt-to-GDP ratio Economics Internal debt Recourse debt Monetary economics Senior debt External debt Debt levels and flows Household debt Demographic economics Finance

Qiyan Ong , Walter Theseira , Irene Y. H. Ng ·

YOU? · · 2019 · Open Access · · DOI: https://doi.org/10.1073/pnas.1810901116 · OA: W2923558166

Significance The impact of chronic debt on the poor is psychological, not just financial. We hypothesize that chronic debt impairs psychological functioning and decision-making, contributing to the poverty trap. This is because debt is not considered fungible and is viewed as costly mental accounts that consume cognitive bandwidth. We test this using quasiexperimental evidence from a one-off, unanticipated debt-relief program worth several months’ household income. Comparing the poor before and after debt relief, those with more debt accounts paid off experienced greater improvements in cognitive functioning, reported less anxiety, and became less present-biased. These findings provide actionable evidence for poverty-alleviation policy.