Explaining the paradoxical effects of poverty on decision making: The Desperation Threshold Model

The impacts of poverty and material scarcity on human decision making appear paradoxical. One set of findings associates poverty with risk aversion, whilst another set associates it with risk taking. We present an idealized general model, the ‘desperation threshold model’ (DTM), that explains how both these accounts can be correct. The DTM assumes a utility function with two features: a threshold or ‘cliff’, a point where utility declines steeply with a small loss of resources because basic needs can no longer be met; and a ‘rock bottom’, a point where utility is not made any worse by further loss of resources because basic needs are not being met anyway. Just above the threshold, people’s main concern is not falling below, and they are predicted to avoid risk. Below the threshold, they have little left to lose, their most important concern is jumping above, and they are predicted to take risks that would otherwise be avoided. Versions of the DTM have been proposed under various names across biology, anthropology, economics and psychology. We review a broad range of relevant empirical evidence from a variety of societal contexts. Though the model primarily concerns individual decision making, it connects to a range of population-scale and societal issues such as: the consequences of economic inequality; the deterrence of crime; and the optimal design and behavioural consequences of the welfare state. We discuss a number of interpretative issues and offer an agenda for future DTM research that bridges disciplines.