Breaking the Cycle: Cost-Effective Interventions for Escaping the Psychological Poverty Trap

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Jun 17, 2024

“While the psychological poverty trap remains a puzzle, the potential bidirectional effect between poverty and psychological well-being should draw our attention….  For development practitioners leveraging behavioral science as a tool, this is a clear sign we should take a more holistic approach, incorporating psychological support and mental health interventions into economic development programs.” 

This was the concluding statement of my last article, "The Mental Cost of Economic Insecurity." While talking with a few friends about my post, one of them pointed out, “It is easy to say let’s take a holistic approach to improving mental health, but the truth is that we have very limited resources to make it all happen at once.” This follow-up article aims to navigate the research landscape concerning the cost-effectiveness of potential interventions to escape the psychological poverty trap. This is not meant to provide definitive answers but to stimulate thought and discussion among development practitioners or anyone else interested in the matter.

Interventions for escaping the psychological poverty trap

The psychological poverty trap describes a vicious cycle in which poverty and mental health issues reinforce each other. Poverty can worsen mental health by draining cognitive resources, leading to poor financial decisions that make it hard to escape the cycle. Behavioral scientists have tried addressing this through two strategies: improving financial situations to boost psychological capacity or improving psychological capacity to enhance financial outcomes.

As I discussed last time, the most straightforward example of the first strategy is a cash transfer, in which eligible individuals receive money either with specific requirements (a conditional cash transfer) or without any conditions (an unconditional cash transfer). A large body of research reveals a positive impact of cash transfers on both financial outcomes and subjective well-being.1

The other potential solution is psychological interventions. This includes both “light-touch interventions” targeting specific thoughts, feelings, and mindsets like aspirations, self-image, and self-efficacy, as well as “heavy-handed” interventions like psychotherapy and pharmacotherapy.

Light-touch interventions

Researchers in Oaxaca, Mexico, teamed up with a local microfinance organization, Fuentes, to provide hope interventions.2 These interventions aimed to boost “aspirations,” a common mindset associated with poverty,3 among women running small businesses. The program included three key components:

  1. A 25-minute documentary that featured four prosperous borrowers
  2. Goal-setting exercises focused on the microenterprises
  3. Designated follow-up messages sent out periodically

Researchers measured business performance, including working hours, savings, profits, and the number of employees, before and 12 months after the intervention was delivered. They found a moderate but noticeable improvement in the performance of businesses that received the intervention.

Self-efficacy, or the belief in one's own ability to attain desired outcomes, is another common focus for light-touch interventions. People with higher self-efficacy set more ambitious goals, work harder, persist longer, and are more likely to improve their financial situation.4 In rural Uttar Pradesh, India, McKelway implemented a behavioral intervention that enhanced women's generalized self-efficacy, thereby boosting short-run employment among the treated women by 32%. 

Heavy-handed interventions

There are already some attentive psychological interventions in place. A systematic review and meta-analysis covering 39 randomized controlled trials on the impact of psychotherapy or pharmacotherapy identified a 16% improvement in labor market outcomes, including employment status, time spent working, capacity to work, and engagement in job search. A more extensive treatment effect was found in pharmacotherapy interventions targeting severe mental disorders like schizophrenia. 

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How cost-effective are these interventions?

Armed with a list of proven effective interventions, development practitioners often ask: which intervention has the most potential to maximize impact? A common approach to answering this question is by comparing the cost-effectiveness of these interventions. By evaluating the costs and benefits, cost-effectiveness analysis helps identify solutions that provide the most benefit for the least expense.

Several cost-effectiveness analyses indicate that psychotherapy interventions are more cost-effective than cash transfers. The Happier Lives Institute conducted cost-effectiveness analyses using life satisfaction as the outcome metric. They compared two organizations providing psychotherapy services in Uganda, Zambia, and Zimbabwe with an organization offering unconditional cash transfers. Their findings concluded that StrongMinds, which provides group interpersonal psychotherapy in Uganda and Zambia, is 3.7 times as cost-effective as GiveDirectly, the organization implementing unconditional cash transfers. The number increased to 7.0 times for Friendship Bench, which provides individual problem-solving therapy in Zimbabwe.5

Bossuroy et al. came to a similar conclusion in their trial in Niger, targeting extremely poor female beneficiaries enrolled in a national cash transfer government program. In the experiment, three treatment arms included group savings promotion, coaching, and entrepreneurship training. Then, they added either a lump-sum cash grant, psychosocial interventions, or both the cash grant and psychosocial interventions. They found a similarly positive impact on psychological and economic outcomes among all three treated groups—however, the cash transfer was about twice as expensive as the psychological intervention.6 Together, these results suggest that psychotherapy is more cost-effective than cash transfers in improving both economic and psychological outcomes, as well as life satisfaction. 


However, this does not make psychotherapy more impactful than cash transfers regardless. A study in central Kenya indicated that a World Health Organization-developed psychotherapy program called “Problem Management Plus” (PM+) has no statistically significant impact on consumption, income, and psychological well-being in contrast to unconditional cash transfers.7 For older people who live alone in India, cash transfers, instead of the cognitive behavioral therapy researchers provided, reduced their depression rate.8

Understanding local context

So, how do we reconcile these contrasting findings to choose the program with the greatest impact? One promising avenue is to further investigate through which mechanisms a given program operates (or fails to). What do I mean by this? Let’s revisit some studies I cited before. 

Take, for instance, Bossuroy et al.’s study on extremely poor female beneficiaries. They found that the likely mechanism of why cash transfers improved women's empowerment was by enabling them to control earnings, whereas psychological intervention improved their social relationships. This suggested that in scenarios where a strong supportive system exists but women lack control over earnings, cash transfers may be more effective, even if psychological interventions were more cost-effective in other contexts.

In the study comparing PM+ and cash transfers, the potential mechanism for the psychotherapy program's failure might be a lack of a clear target. Several studies on PM+ with an explicit goal, like reducing gender-based violence or alleviating postpartum depression, have proven to have a large positive impact. This tells us that when implementing the PM+ program, setting explicit goals can enhance the effectiveness of each dollar spent. 

Asking through which mechanisms a program operates (or doesn't) allows us to dive deep into the challenge and understand the local context. Different situations may yield different results based on varying impact mechanisms. Contexts may change, pushing us to reflect and rethink our strategies constantly. This need for continuous adaptation is, for me at least, a fascinating aspect of behavioral science.

But in practice, how can we investigate and understand the mechanism at hand? First, I recommend you read this fabulous piece by my colleague Celestine, where she provides insight into how to contextualize interventions in LMICs. On top of that, here are another few things you can do:

  • Have a clear definition of the problems you’d like to address and of the population you’d like to target 
  • Understand contextual differences as well as the specific bottleneck in the organization’s context
  • Test the intervention in the context in which it will be employed and integrated

What to make of all of this

So, what is my conclusion, you may ask? As I mentioned in my last article, there is no single narrative, nor should this narrative be told by me alone. Yes, we are addressing one of the world’s most challenging and complex issues: poverty. Yes, it's about broader social structures, economics, and policy. But it’s also about individuals, their daily experiences, decisions, feelings, and every aspect of their lives. 

I sometimes wonder: what if there were a one-size-fits-all solution that could magically eliminate poverty? As development practitioners, we always ask, "Can this intervention be scaled up?" Unfortunately, there is no magic wand. Interventions proven to be highly cost-effective in experimental settings often don’t work as well in the field. But isn't that part of why we continue working on them and what makes this work so compelling?

About the Author

Xingyan Lin headshot_square

Xingyan Lin

Xingyan Lin is a Senior Associate at The Decision Lab. She holds a Master’s in Development Practice from the University of California, Berkeley, and a Bachelor’s in Public Policy. She believes in the incredible power of human cognitive behavior to change the world for the better.

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