The idea is that financial stress monopolizes thinking, making other calculations slower and more difficult, sort of like the effects of going without sleep for a night.
And this money-and-brain crunch applies, albeit to a smaller degree, to about 100 million Americans who face financial squeezes, say the team of economists and psychologists who wrote the study published in Friday's issue of the journal Science.
"Our paper isn't about poverty. It's about people struggling to make ends meet," said Sendhil Mullainathan, a Harvard economist and study co-author. "When we think about people who are financially stressed, we think they are short on money, but the truth is they are also short on cognitive capacity."
If you are always thinking about overdue bills, a mortgage or rent, or college loans, it takes away from your focus on other things. So being late on loans could end up costing you both interest points and IQ points, Mullainathan said.
The study used tests that studied various aspects of thinking including a traditional IQ test, getting the 13 IQ point drop, said study co-author Jiaying Zhao, a professor of psychology and sustainability at the University of British Columbia.
The scientists looked at the effects of finances on the brain both in the lab and in the field. In controlled lab-like conditions, they had about 400 shoppers at Quaker Bridge Mall in central New Jersey consider certain financial scenarios and tested their brain power. Then they looked at real life in the fields of India, where farmers only get paid once a year. Before the harvest, they take out loans and pawn goods. After they sell their harvest, they are flush with cash.
Mullainathan and colleagues tested the same 464 farmers before and after the harvest and their IQ scores improved by 25 percent when their wallets fattened.
"It's a very powerful effect," said study co-author Eldar Shafir, a Princeton University psychology professor. "When you are dealing with budgetary finances, it does intrude on your thinking. It's at the top of your mind."
In the New Jersey part of the study, the scientists tested about 400 shoppers, presenting them with scenarios that involved a large and a small car repair bill. Those with family incomes of about $20,000 scored about the same as those with $70,000 incomes on IQ tests when the car bill was small. But when the poorer people had to think about facing a whopping repair bill, their IQ scores were 40 percent lower.
Education differences can't be a major factor because the poor only scored worse when they were faced with big bills, Safir said. The more educated rich may have learned to divide their attention, but that wouldn't be a significant factor, he said.
The study's authors and others say the results contradict long-standing conservative economic social and political theory that say it is individuals — not circumstances — that are the primary problem with poverty. In the case of India, it was the same people before and after, so it can't be the person's fault.
"For a long time we've been blaming the poor for their own failings," Zhao said. "We're arguing something very different."
Poverty researcher Kathryn Edin of Harvard, who wasn't part of the study, said the research "is a big deal that solves a critical puzzle in poverty research."
She said poor people often have the same mainstream values about marriage and two-parent families as everyone else, but they don't seem to act that way. This shows that it's not their values but the situation that impairs their decision-making, she said.