Poverty and Uncertainty Attitudes
-
SeriesBrown Bag Seminars General Economics
-
Speaker
-
FieldBehavioral Economics
-
LocationErasmus University Rotterdam, Campus Woudestein, T3-06
Rotterdam -
Date and time
November 28, 2024
13:00 - 14:00
This is a mock job market seminar.
Abstract
This paper shows that well-established biases in decision making under uncertainty generate poverty traps. A theoretical framework is developed to show that: i) probability weighting and ambiguity attitudes can lead individuals to systematically undervalue profitable investments, and ii) poverty exacerbates the consequences of these investment errors. The model predicts that poverty persists because these biases disproportionately discourage investment among poor individuals, while rich individuals continue to invest regardless. These theoretical predictions are validated using data from two experiments conducted on representative samples of American households.