Why do poor people stay poor?
It’s a question that everyone already seems to have an answer for.
“The poor are lazy.”
“The poor can’t manage money.”
“The poor don’t have the right mindset.”
These theories are anecdotal at best and downright insulting at worst. The problem with these arguments is that they are based on small sample sizes rather than empirical data. While I agree that some people are poor because of these things, there has been little experimental research done on this topic…until now.
Earlier this year researchers at the London School of Economics released a paper titled, “Why Do People Stay Poor?” that illustrated how the lack of initial wealth (and not motivation or talent) is what keeps people in poverty. The researchers tested this by randomly allocating wealth (i.e. livestock) to female villagers in Bangladesh and then waited to see how that wealth transfer would affect their future finances. As their paper states:
[We] find that, if the program pushes individuals above a threshold level of initial assets, then they escape poverty, but, if it does not, they slide back into poverty…Our findings imply that large one-off transfers that enable people to take on more productive occupations can help alleviate persistent poverty.
Their paper clearly illustrates that many poor people stay poor not because of their talent/motivation, but because they are in low-paying jobs that they must work to survive.
They are, in essence, in a poverty trap. This is a poverty trap where their lack of money prevents them from ever getting training/capital to work in higher paying jobs. You might be skeptical of these findings, but similar things have been found by experimental researchers doing random cash transfers in Kenya as well.
The fact is that money begets money. In investing we all know this to be true, but these empirical studies suggest that this is also true in the labor market. Without financial resources people find it incredibly difficult to get the skills and training to get ahead. I know this all too well as a first-generation college student who was fortunate enough to have their tuition paid for by a need-based scholarship.
And I can tell you that without that financial support there is almost no way I am here today. I know this because in the spring quarter of my junior year I didn’t have an internship lined up for that summer. I had been rejected from every one I had applied to. Luckily, my aunt was nice enough to offer me a job working in the warehouse she ran back home. If I had taken it I would’ve been paid minimum wage to move boxes while many of my peers were working at various Fortune 500 companies across the country.
However, late in the spring quarter one of my professors asked me what I was doing for the summer. I told him the unfortunate truth about the warehouse job and he immediately replied, “You are not doing that.” He then basically forced me to send my resume to a healthcare consulting firm that was run by another professor at our university. I did as he said, got the job, and spent my summer learning computer programming. It was amazing.
When I think back on it now, it was probably the most pivotal moment in my career. Without that initial nudge into a corporate role, a role that taught me my first technical skills, nothing in my career exists. I likely would have interned at my aunt’s warehouse and probably worked there full-time at a fraction of what I got paid in my first actual job out of college. But, even that result would have been incredibly fortunate because I would have had a guaranteed job coming out of college no matter what.
I only tell this story because it illustrates the immense amount of wealth/resources that were needed to change my career trajectory from one of low income to one of high income. The financial capital provided by my university, the social capital provided by my professor, and the career capital provided by my aunt were all things that most other first-generation college students wouldn’t have had access to. I am lucky to know the transformative power of wealth and how it can affect someone’s life.
I was reminded of this truth after hearing about the recent passing of famed actor Chadwick Boseman, most well known for his role in Black Panther. Boseman, who didn’t come from money, had his time at Oxford’s Drama Academy paid for by a secret benefactor who later turned out to be Denzel Washington.
Rather than summarize the power of Washington’s gift on Boseman, I’ll let Boseman’s words to Washington speak for themselves:
An offering from a sage and a king is more than silver and gold. It is a seed of hope. A bud of faith. There is no Black Panther without Denzel Washington. And not just because of me, but my cast, that whole generation, stands on your shoulders. The daily battles won. The thousand territories gained. The many sacrifices you made for the culture on film sets through your career. The things you refused to compromise along the way, laid the blueprint for us to follow.
That is the power of wealth. Not the fancy cars. Not the private planes. Not the mansions. But the ability to change someone’s life. Think about the compounded effects of Washington’s gift on Boseman’s career and, eventually, on the world. Think about the number of young black children that will forever be inspired by Black Panther because of that gift long ago.
This is why wealth can be so powerful. Because it gives people the ability to change their world in meaningful ways. Whether that means getting a cow in Bangladesh or getting funds to pursue an acting scholarship in a foreign country, wealth is the change agent.
[Author’s note: If you are interested in learning more about cash giving and its effectiveness, check out the research from GiveDirectly here.]
Thank you for reading.
If you liked this post, consider signing up for my newsletter.
This is post 202. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
Why Are Over 320,000 People Falling in Love With This New Investing App?
With volatility rising, billionaires are increasing their allocation to real assets—among them, blue-chip art. According to KKR, they’re diversifying over 50% of their portfolios into alternatives on average.
The only problem? Adding high-end art to your portfolio could cost over $10M. That’s why tech entrepreneurs invented Masterworks.
This online investing app lets you access this billionaire favorite asset without breaking the bank. Over 320,000 members have fallen in love with Masterworks. And they raised $110M from their Series A and secured a $1B valuation.
(Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers click here.)