What would your response be to the following questions?
Would you prefer to have $20 tomorrow or $30 a month from now?
Would you prefer a certainty of receiving $20 or a 60% chance of getting $50?
Would you rather have $40 today or $50 next week?
Would you rather be certain of receiving $30 or have a 40% chance of getting $45?
Now, consider how your answers would be different if you grew up in a wealthy family or if you came from a poor one.
Recently, a team of researchers from MIT Sloan School of Management posed these questions to subjects in a series of experiments to confirm the impact of "life-history theory," which says that your early life environment creates a pattern of behavior and responses that emerge even more strongly in adults during stressful times.
What they found was that the economic environment in which you are raised influences how you handle financial problems as an adult. No surprise there. What's eye-opening about their findings is how people from different walks of life act during times of economic crisis.
In a nutshell: Poor people spend more than rich people during difficult economic times.
Stress Response: Save or Spend?
You'd think that when times are tough, everyone's natural instinct would be to pull back on their spending and switch to save mode. It also seems logical to expect that those who grew up in families that struggled financially would be more cautious about money when faced with a weak economy.
But when measuring the survey responses, Prof. Joshua Ackerman and his fellow researchers found that people who grew up in rich households were more risk-averse and reacted to an economic crisis by slowing their spending. Meanwhile, people who grew up poor were more impulsive and took more risks than those from wealthy backgrounds.
A supplementary experiment testing how recession cues affect decisions to save rather than to spend money from a paycheck gave the researchers similar results: Individuals from wealthier backgrounds chose to save for the future, while those from low-income childhoods opted to spend money to improve their current quality of life.
Why Do People Who Grew Up Poor Spend More?
On the surface, spending more when times are tough may just seem foolish, but Ackerman says that people who come from a poor background are behaving rationally according to their psychological instincts.
Ackerman explains it this way: If you grew up poor, your life history may lead you to think your chances of surviving a recession and coming out ahead are very low. Your expectation that your lifespan may be shorter -- again, based on your life history -- means that instead of taking measured steps to preserve the little money you have, you're more likely to take risks and spend money on things like jewelry or cars in order to show off and attract others to "promote reproductive success."
What Was Your Recession Reaction? Not everyone responds in the same way to stress, whether financial or otherwise. What has been your response to the tough economy? How do you think it was influenced by your upbringing?
How A Family Of Four Manages To Live Well On Just $14,000 Per Year
In Hard Times, People Who Grew Up Poor Spend More, Cut Less
Wagasky barely knew her way around a kitchen when she started her money makeover.
Now she's an avid cookbook collector (she checks them out from libraries or asks for them as gifts to save), and it's one of the simplest ways she's managed to cutback on spending.
With a $7 bread-maker she scored at a local thrift shop, she never spends on store bought slices. She's not shy about professing her love for wholesale stores like Costco, which is her go-to source for baking ingredients.
"Everything must be budgeted," Wagasky wrote in a June entry on her blog. "From family outings, to toiletries to clothes purchases. It must be budgeted."
And she takes Do-It-Yourself to the extreme. Everything from laundry soap and clothing to the kitchen her husband installed in their new home was either crafted by hand or thrifted.
She swears by this home-made laundry detergent recipe. (pictured above)