Breaking the Cycle: Cost-Effective Interventions for Escaping the Psychological Poverty Trap
“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:
- A 25-minute documentary that featured four prosperous borrowers
- Goal-setting exercises focused on the microenterprises
- 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.
About the Author
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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