Monday, May 14, 2007

Sunday dollars+sense: Money matters, if you are poor

We are told that the tax cuts in the budget were directed to low to middle income earners. While as a proportion of the tax they pay this is true; in terms of absolute dollars it is total nonsense.

If you are on an annual income of $200,000 by mid-2008 the budget will hasve handed you back $2,750 – enough to buy 2 to 3 cups of coffee every day of the year. If you are only on $20,000 the budget will hand you $150 – just enough to buy a cup of coffee once a week.

But it is true that low-income earners have been better looked after than in the past, and it may be true that small amounts of money matter more to them.

Does this sound patronising, even ridiculous?

It actually fits in with our experience...

A poor person will feel excited about finding a one-dollar coin on the street. A rich one might not bother to pick one up.

Last year Philippe Tobler and a group of psychologists from Cambridge University attempted to measure the extent to which small amounts of money really do matter more to poor people than to rich ones (economists call this “diminishing marginal utility”).

They assembled 14 students, some rich, some poor and showed them a jar full of 20-pence coins. They told them that they could keep any coins they won and flashed a series of images on a screen. Some of the abstract shapes were always followed by a picture of a coin, others were not. Every correct guess that a coin would come earned them one.

The poorest of students turned out to be much faster learners than the richest. Tobler says the poorest students figured out the game after 12 turns. The richest took 35. The richer students weren’t dumber or older – they seem to have been just less concerned about coins.

Then Tobler and colleagues attached the students to brain scanners and flashed the images in front of them again. This time the students just had to look.

Their brains of poor students reacted much more to the thought they were about to see a coin than did the brains of rich students.

So have a bit of sympathy for rich Australians next budget night. They need to be given more money than do the rest of us just to even notice.

Philippe N. Tobler, Paul C. Fletcher, Edward T. Bullmore, and Wolfram Schultz, Learning-Related Human Brain Activations Reflecting Individual Finances,
Neuron, Vol 54, 167-175, 05 April 2007