“Reducing debt improves psychological functioning and changes decision-making in the poor”: The value of quasi-experimentation

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Journal article: Ong, Q., Theseira, W., & Ng, I. Y. (2019). Reducing debt improves psychological functioning and changes decision-making in the poor. Proceedings of the National Academy of Sciences, 116(15), 7244-7249.

Published in the Proceedings of the National Academy of Sciences – the second most cited scientific journal in the world – the study by Ong et al. (2019) examines the relationship between debt relief among low-income individuals and their psychological functioning and economic decision-making. In this vein, it is worthwhile to evaluate the value of quasi-experimentation, to consider how they define and operationalise key concepts, and to share the significance and implications of the findings on social services and policies in Singapore.

First, on the value of quasi-experimentation. 196 chronically indebted (outstanding debts for at least six months), low-income (monthly per capita income of less than S$1,500) individuals participated in a one-off debt-relief programme administered by Singaporean charity Methodist Welfare Services. The maximum relief was S$5,000 and the average participant received S$2,548. “Three months after debt relief, average debts fell from S$3,754 to S$1,128, and 90% of participants reported holding less debt. Average debt accounts fell from 3.27 to 2.21” (p. 7245).

Traditionally, a randomised experiment would be used to test the effectiveness of an intervention. With a debt-relief intervention, a similar group or sample of chronically indebted, low-income individuals could be assigned to “treatment” (who receives the debt relief) or “control” (who does not receive the debt relief) groups, and after some time the effects of the debt relief can be tested. Notwithstanding the operational difficulties, the most likely opposition in a social service context is an ethical one: It does not seem right to deny individuals in the “control” group access to an intervention which is hypothesised to be good for them.

In this case, quasi-experimentation was possible because the independent variable – or “cause” – is the number of debt accounts reduced, not the amount of debt relief received (or whether relief was received at all, as per the aforementioned randomised experiment). In other words, if two individuals received the same amount of relief, the individual who now has fewer debt accounts is hypothesised to show greater improvements:

“Because social workers (and not participants) allocated debt relief, debt structure varied quasiexperimentally: For a given dollar amount of relief, some participants had more debt accounts cleared, while others had fewer. We studied the same participant before and after debt relief, testing whether their chronic indebtedness affected their cognitive functioning, anxiety, and attitudes toward risk and time discounting. We then tested whether changes in debt accounts had greater impact, compared with changes in overall debt levels” (p. 7245).

Second, on the definitions and operationalisation of key concepts. Three months after the debt relief, Ong et al. (2019) found that individuals who had more debt accounts paid off experienced greater improvements to cognitive functioning, reported less anxiety, and became less present-biased. Cognitive functioning was scored based on the individual’s speed and accuracy on a test. A criterion for generalised anxiety disorder was used as a measure for the psychological response to poverty. And present bias is “characterised by dynamically inconsistent choices” (p. 7246), such as preferring an earlier, smaller payoff to a later and larger one and less impatience when both payoffs are in the future.

For all these effects, the extent to which they are sustainable or sticky beyond the three-month period would be an instructive next research step.

Third, on the significance and implications of the findings, that “debt mental accounting creates bandwidth taxes that impair cognitive processes” (p. 7248). Because each debt is perceived as a separate “mental account”, having to manage different accounts adversely affects psychological functioning and economic decision-making, thereby making it harder for low-income individuals who are in debt – without assistance – to emerge from poverty.

There may be aversion towards debt-relief programmes because some may think that individuals should take responsibility for their own debts, yet the bigger point is that well-designed programmes focused on debt restructuring – not relief per se – should be a key part of a country’s poverty policies. In a thought exercise comparing two potential housing policies for low-income individuals who have arrears and are falling behind on their rent payments:

“A policy that considers mental-accounting costs would combine bills for rent, power, water, and maintenance into one statement instead of billing tenants separately. But a policy which ignores mental-accounting costs might simply apply automatic payments, send tenants reminders, or coordinate billing on the same repayment schedule. Our study suggests that policies which consider mental-accounting costs may be more effective” (p. 7248).

Given the quasi-experimental approach, a big part of the study was dedicated to establishing the reduced number of debt accounts as the true cause (or to make sure there are no confounding factors or alternative explanations for the observed effects). Ong et al. (2019) checked – for instance, if the individuals were learning from or becoming more familiar with the cognitive functioning tests (“training effects”), whether there were “calendar effects” of public holidays or time-off from work which may be related to the effects, and how the findings compared to other field studies. Moving ahead, replicating the study in Singapore and with other groups of low-income individuals would be of research and practice interest.

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