My finances, my projects, my life
March 31, 2023

Precarity: what we can learn from the rich

In recent years, both the COVID-19 crisis and rampant inflation have contributed to a much weaker overall economic situation. Alongside companies, households have also seen their means dwindle and their financial security eroded. This impoverishment can be overwhelming and we may struggle to see light at the end of the tunnel. This is not surprising – we tend to take a blinkered approach in such situations! It may be useful to look for inspiration from a better understanding of the state of mind of successful people to help us shake off this feeling.

As well as material difficulties, becoming poorer creates a psychological burden that only increases over time. And this is exactly what we need to address first of all in order to break this downwards spiral. As we become poorer, it occupies all of our attention and eventually erodes the mental resources that we desperately need in order to cope and improve our situation.

Limited mental resources

Everyone knows that if you don’t get enough food it has an impact on both your mental and physical ability. When we are undernourished, our body and mind activity slows as we try to save energy, and we are more susceptible to weaknesses and mistakes. But are you aware that when we are short of money this also has an impact on our cognitive ability?

When we are short of money this has an impact on our cognitive ability.

When we are faced with financial difficulties and misfortune, our brain is faced with a huge quantity of complex information to process, things to prioritise and decisions to take. We are required to make difficult financial trade-offs, just as our body prioritises different organs when faced with a lack of food. When we mobilise a major part of our limited cognitive abilities to tackle financial decisions, this situation tires our brain to the same extent as a physical shortage!

Scientific research has shown that our state of mind when we take decisions when we are short of money is similar to that of a person who is permanently sleep deprived! The impact is so great that the same research suggests that a major loss of income or poverty can temporarily reduce an individual’s IQ by 13 points. In addition to objective material difficulties, reduced cognitive ability hampers the ability to find solutions and improve the situation. This explains why being short of money stops us taking the right decisions.

What does this mean in real terms for someone who feels trapped in an endless tunnel of poverty? They are unable to improve their financial situation, not because they are less capable than the next person, but because their situation undermines their abilities at that specific point in time. A different person in the same situation would struggle in the same way. Recognising this simple fact removes the onus of guilt and should act as a confidence booster.

For example, there is one study entitled “Poverty impedes cognitive function” carried out in India among farmers by Mani, Mullainathan, Shafir and Zhao. Their research highlighted that farmers took worse decisions for their financial wellbeing just before harvest time (a period when they lack income and financial resources) than afterwards, i.e. when they were in a better position to cover their requirements and envisage the future more calmly.

So it is worth stressing this point again: with a few exceptions, precarity is not caused by a lack of ability – financial precarity reduces our mental ability! A personal financial crisis is the source of both material and cognitive difficulties. The good news is that this cognitive impact is reversible. Neuroplasticity means that our brains can be rewired to follow more virtuous decision-making processes.

To achieve this, we must first understand the biases that take over our brains when we are faced with major financial challenges, before then looking for inspiration from the positive practices of those who achieve financial success.

The parasitical thought processes at play in precarity

There are many thought processes that are damaging for a person who is struggling financially. Here are just a few of those:

    • Mental overload. Both poverty and financial difficulties represent a state of stress. They dominate our attention, are the source of intrusive thoughts, and use up the cognitive resources available to us. This results in mental overload. The brain tires rapidly as it is submerged by problems that it perceives as imminent dangers. It’s impossible to think with a clear head in such a situation. We do not have the strength to take what would be an easy decision or a straightforward course of action in normal times.

Economic hardship makes us focus exclusively on solving emergencies.

    • Tunnel vision. Economic hardship makes us focus exclusively on solving emergencies (e.g. putting food on the table, paying a bill, etc.). We put ourselves in a mental tunnel and we can’t see the end of it! This tunnel vision may certainly be helpful in resolving an immediate and temporary crisis but is detrimental when we are dealing with a chronic situation. It anchors an individual in the present moment and prevents them allocating resources to seeking longer term solutions which would help break the downwards spiral.
    • Lack of executive control. Financial hardship may have a negative impact on executive control which governs planning, will and impulse control. These three elements are key to the pursuit and achievement of long term goals. This lack of control may also explain why we abandon our goals or are unable to stick to our fixed budget plan.
    • Defeatism and self-deprecation. Trapped in what seems to be a vicious circle, a person in a situation of precarity or poverty may see each new failure as confirmation of their lack of ability. This encourages a tendency to self-deprecation and over-focus on the obstacles and difficulties of the current situation.
    • Availability bias. The feeling of being overwhelmed by a situation results in a blinkered approach. It becomes impossible to look beyond the current situation or to try and see things from a different angle. Clearly this bias and tunnel vision are related and feed off each other.
    • Status quo bias. Because of all the mental barriers previously mentioned, there is such a feeling of impotence that it becomes very tempting to make no changes at all, paralysed by the idea that one bad decision could make the situation even worse.

All of these mechanisms can make us feel as if we’re trapped in a vicious circle. What is the solution? Adopt a different frame of mind that will allow you to make some real changes, identify the opportunities available to you and embark on a new and more promising path.

Rewire your brain to focus on opportunities

To succeed in this, it makes sense to look for inspiration from the positive practices of those who achieve financial success. Don’t get stuck in a rut, always acting in the same way and hoping for different results, force yourself to consider this crisis, whether personal or economic, as an opportunity for change!

Here are a few mental processes to think about that are adopted by successful people:

    • Adopt a growth mentality. A successful person does not consider every error or failure as proof of their incompetence but as an opportunity to learn, change and readjust their way of seeing things. This state of mind has a positive impact on the way we approach problems and helps us stay on track with resolving difficulties.
    • Learn to listen. To clear our tunnel vision and come up with new solutions, we must force ourselves to read, listen to other opinions and learn new things. We must be open to new ideas to avoid repeating the same mistakes.
    • Change your relationship with money. A person in a precarious position will tend to apply the following formula: savings = wages – monthly expenditure. Most people who are financially successful change this formula to the following: wages – savings = monthly expenditure. In concrete terms this means that we should prioritise saving, even if it’s only small amounts to start with. We must force our brains to consider the long term in order to be able to open up new perspectives on the current situation.

Buying in bulk reduces the unit cost of goods but not the overall price tag.

    • Only buy what is necessary. This may seem counterintuitive, but a person who is in a precarious situation will tend to buy more than a well-off person. At the supermarket, someone in difficulty will tend to stockpile food for the end of the month. The issue is that although they mean well, in reality they spend more than anticipated. Buying in bulk of course reduces the unit cost of goods but not the overall price tag. It’s not profitable unless we are certain that we will really need the quantities purchased. It’s absurd to empty your bank account five days after payday to take advantage of a bulk purchase of dairy products on special offer that will be past their sell-by date in a few days! Some will have to be thrown away or more than necessary consumed in a short period of time, and then the fridge will be empty again.
    • Get your confidence back. A person in a precarious position is sometimes ashamed of their situation. Social pressure in our consumer society may push them to buy goods that are a status symbol, such as an expensive smartphone, in an attempt to disguise their situation. Successful people are often indifferent to what others think and would not act this way, unless perhaps they feel poor in comparison to someone even richer than they are. To regain confidence, it is essential to avoid isolation, to make new plans and not to be too proud to ask for any help that is available. Buying a status symbol will not act as a long-term confidence booster, but it will aggravate a difficult situation.
    • Dare to take on challenges. The status quo solves nothing. To change things, you have to take risks and try new approaches even if that appears inappropriate in your situation. New directions, new contacts, it’s key to remain open to learning and experiencing new things!
    • Pare things down. Don’t hesitate to pare things down when you can, this will help avoid falling victim to the mental overload associated with precarity. For example, why not use online banking features to put money on one side, create sub-accounts and set up default financial targets. Technology can also help us to change our habits. However, be careful not to set an overly rigid budget.

Good luck!