Surprise, surprise, people aren't always rational when making economic choices. That is why I don't believe the Efficient Markets Theory. I think long-term markets are efficient, but in the short-term they can often get out of whack due to psychological/emotional factors. From the study:
In a paper to be reported in the June 13 issue of Science, Princeton psychologists used brain-imaging technology to study people as they made decisions that caused them needlessly to lose money and found that negative emotional states can override logical thinking. The study supports a growing area of research called behavioral economics, which departs from conventional theory by considering psychological factors other than pure logic in individual decision-making.
The study focused on an example of decision-making called the ultimatum game, in which two strangers meet and have a chance to split $10. One person is designated the "proposer" and offers some portion of the money to the "receiver." If the receiver accepts the offer, both collect the money as proposed; if the receiver rejects the offer, neither receive anything. The game is played with the explicit stipulation that it is a one-time interaction.
Standard economic theory suggests that the proposer should always offer $1 or some minimal amount and that the receiver should always accept, preferring to receive $1 than nothing. Many previous studies, however, have shown that people often reject what they see as unfair offers, foregoing profit and denying a windfall for the other player.
In their study, the Princeton researchers asked people to play the ultimatum game while the receiver's brain was being scanned by functional magnetic resonance imaging, a technology that allows researchers to see what brain areas are active at all moments during the study. They found that the more unfair the offer, the more activity they saw in an area called the anterior insula, which is associated with disgust and other negative emotions.
This, coupled with the fact that economies are extremely complex, is why policies do not always produce the results we intend. My question is this… If it is shown that poor people tend to be those who make economic decisions based on emotion more than reason, does that change our policy towards them?
There are plenty of high income people who have very little wealth, and plenty of families making less than 100K a year that are millionaires. To what extent do we hold people accountable for their genetic makeup, and how it affects their thinking, and thus their economic decisions?
*** I am not arguing that poor/rich always boils down to bad/good economic decision making, but I bet that is a significant part of it.