Poverty and Uncertainty Attitudes

Víctor González-Jiménez
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Víctor González-Jiménez: Erasmus University Rotterdam

No 24-058/I, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper demonstrates that well-established biases in decision making under uncertainty can generate poverty traps. A theoretical framework is developed to demonstrate that: i) probability weighting and ambiguity attitude can lead individuals to erroneously undervalue profitable investments, and ii) poverty increases the magnitude of these investment errors. The model predicts that poverty is perpetuated by inducing poor individuals to underinvest in profitable opportunities to a greater extent than rich individuals. We empirically validate these theoretical predictions using data from two experiments conducted on a representative sample of American households.

Keywords: Poverty traps; Probability Weighting; Ambiguity Attitude (search for similar items in EconPapers)
JEL-codes: D81 I3 O12 (search for similar items in EconPapers)
Date: 2024-09-13
New Economics Papers: this item is included in nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20240058

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