Poverty is associated with both risk avoidance and risk taking: empirical evidence for the desperation threshold model from the UK and France.

Abstract

In situations of poverty, do people take more or less risk? One hypothesis states that poverty makes people avoid risk, because they cannot buffer against losses, while another states that poverty makes people take risks, because they have little to lose. Each hypothesis has some previous empirical support. Here, we test the 'desperation threshold' model, which integrates both hypotheses. We assume that people attempt to stay above a critical level of resources, representing their 'basic needs'. Just above this threshold, people have much to lose and should avoid risk. Below, they have little to lose and should take risks. We conducted preregistered tests of the model using survey data from 472 adults in France and the UK. The predictor variables were subjective and objective measures of current resources. The outcome measure, risk taking, was measured using a series of hypothetical gambles. Risk taking followed a V-shape against subjective resources, first decreasing and then increasing again as resources reduced. This pattern was not observed for the objective resource measure. We also found that risk taking was more variable among people with fewer resources. Our findings synthesize the split literature on poverty and risk taking, with implications for policy and interventions.