How Money Impacts Your Thinking Ability

The ability to make wise decisions is an important part of creating and living “the good life.” Key life choices have a substantial impact on our health, wealth, and happiness. Choosing to marry person A over person B could be the difference between a 40-year fairytale marriage or a nasty divorce. Likewise, deciding to invest money in company X instead of company Y could be the difference between experiencing financial freedom and failing to make ends meet.

The question is: What factors can improve the quality of our decisions?

We know that fixed characteristics, such as intelligence, have an impact on the quality of the decisions we make. We simultaneously understand that ephemeral and short-term factors shape decision-making quality as well. Decisions made after eight hours of sleep and a full belly are oftentimes better than decisions made after a night of three hours of sleep and not having eaten yet.

Researchers set out to examine the interesting and important question of how poverty impacts decision-making quality. Findings from the stereotype content model in social psychology (Fiske, Cuddy, & Glick, 2007) show that low-income categories of people, such as the homeless and welfare recipients, are evaluated as low in competence. But is this relationship correlational or causal?

An experiment that asked participants to think about their personal finances and then perform a cognitive function task found that making money top-of-mind (vs not mentioning money) for poor participants decreased cognitive performance (Mani, Mullainathan, Shafir, & Zaho, 2013). Eliciting thoughts of personal finance (vs not mentioning money) had no impact on cognitive performance among the middle class or wealthier participants.

In a follow-up experiment, the researchers looked at farmers over the yearly planting cycle. Farmers earn the lion’s share of their money after a harvest, leading to feelings of abundance. Prior to harvest, farmers are cash-poor, leading to feelings of scarcity.

The research team discovered that the farmers had higher fluid intelligence, reasoning ability, and were less likely to make mistakes on a test after harvest season, meaning when they were no longer experiencing poverty. This experiment shows that the relationship between experiencing poverty and difficulty making smart decisions is likely causal, not just correlational.

These findings are sobering for two reasons. The first reason is that people experiencing financial hardship have an increased propensity to think about money matters. Thinking about financial trade-offs, being able to pay bills/rent, and considering whether you can (or should) buy something are all more common and top of mind if your wallet is constricted. The second reason for concern is that making bad decisions can produce a snowball effect. For example, the consequences of taking out a payday loan to pay bills, which are notorious for preying on low-income people, can make it even more difficult to pay bills the following month with the newfound debt accumulated from taking out the payday loan.

With many Americans struggling to make ends meet in 2025, it is important to understand how financial scarcity impacts decision-making. Simply knowing how poverty impacts cognition can help everyday people make wiser decisions or avoid making important decisions during times of scarcity. Policy makers should take stock of this finding as well, crafting policies to help those who need aid the most.