Lower debt, higher cognitive function

Debt reduction improves psychological and cognitive function, enabling better decisions to be made

A new study by the NUS Social Service Research Centre has demonstrated that reduced debt lowers the mental burden of the poor, thereby improving psychological and cognitive performances, and enabling better decision-making overall.

The study, the first of its kind, was conducted between January 2015 and August 2017 by Dr Ong Qiyan and Associate Professor Irene Ng from NUS Arts and Social Sciences, together with Associate Professor Walter Theseira from Singapore University of Social Sciences School of Business. The research findings were published in the prestigious journal Proceedings of the National Academy of Sciences of the United States of America on 26 March 2019.

Dr Ong said that one challenge with poverty alleviation policies is the belief that the poor are indebted because of personal failings and a lack of motivation and talent that many Singaporeans value. “However, our study showed that because debt impairs psychological functioning and decision-making, it would be extremely challenging for even the motivated and talented to escape poverty. Instead, the poor must either have exceptional qualities or be exceptionally lucky to get out of poverty. It is hard to be poor, harder than we thought,” she explained. 

The study involved 196 chronically indebted low-income individuals who benefitted from the Getting Out of Debt programme managed by Singapore-based charity Methodist Welfare Services. This one-off debt relief programme is for households with monthly per capita income of less than S$1,500 with outstanding chronic debts including mortgage or rental, utilities, and hire purchase debts owed for at least six months. Before debt relief, the average monthly household income per capita of the participants was S$364.

The research team then designed a comprehensive household financial survey that measured anxiety, cognitive functioning, and the financial decision-making abilities of the participants. The survey was conducted before the participants received the debt relief and three months after. 

The results showed that the participants experienced less anxiety, had improved cognitive functioning, and could make better financial decisions three months after receiving debt relief. Between two participants receiving the same amount of debt relief, the participant with more debt accounts eliminated showed more psychological and cognitive improvements. 

The findings further implied that people view each debt as a separate “mental account” and being “in the red” in many debt accounts is psychologically painful. Therefore, thinking about these accounts consumes mental resources, increases anxiety, and worsens cognitive performance which may prevent the poor from making the right decisions to get out of poverty, further contributing to the poverty trap. 

Our study showed that because debt impairs psychological functioning and decision-making, it would be extremely challenging for even the motivated and talented to escape poverty.

Assoc Prof Ng said that the findings open a case for designing good debt relief programmes for low-income households. “In fact, not helping low-income households with debt is counter-productive because it leaves them with suboptimal functioning and high anxiety. Secondly, the design of the intervention is key. As it is the pile-up of debt accounts (more than the amount of debt) that affects functioning, interventions should focus on decreasing the mental load on low-income households, whose minds are already highly stressed,” she added. 

The researchers suggest that policy interventions to streamline debts would significantly improve cognitive and psychological functioning, and reduce counterproductive behaviour. For instance, restructuring or consolidating debt could be a more sustainable policy as it is less costly and more effective than simply clearing debt. More generally, poverty alleviation interventions should target and reduce the factors that contribute to the mental burdens of the poor. 

The team is now examining the longer term effects of debt relief and will apply the insights from the study to find innovative solutions that may help the poor. 

See press release.