Poverty is associated with both risk avoidance and risk taking: an empirical test of the desperation threshold model

Benoît de Courson, Willem Frankenhuis and Daniel Nettle
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Daniel Nettle: Centre Nationale de la Recherche Scientifique

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Abstract: In situations of poverty, do people take more or less risk? Some theories state that poverty makes people 'vulnerable': they cannot buffer against losses, and therefore avoid risk. Yet, other theories state the opposite: poverty makes people 'desperate': they have little left to lose, and therefore take risks. Each theory has some support: most studies find a negative association between resources and risk taking, but risky behaviors such as crime are more common in deprived populations. Here, we test the 'desperation threshold' model, which integrates both hypotheses. The model assumes that people attempt to stay above a critical level of resources, representing their 'basic needs'. Just above the threshold, people have too much to lose, and should avoid risk. Below it, they have little to lose, and should take risks. We conducted preregistered tests of this prediction using longitudinal data of 472 adults over the age of 25 in France and the UK, who completed a survey once a month for 12 months. We examined whether risk taking first increased and then decreased as a function of objective and subjective financial resources. Results supported this prediction for subjective resources, but not for objective resources. Next, we tested whether risk taking varies more among people who have fewer resources. We find strong evidence for both more extreme risk avoidance and more extreme risk taking in this group. We rule out alternative explanations related to question comprehension and measurement error, and discuss implications of our findings for welfare states, poverty, and crime.

Date: 2024-02-09
New Economics Papers: this item is included in nep-cbe and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:gqjkm

DOI: 10.31219/osf.io/gqjkm

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