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Victor H. Gonzalez: The Psychological Effects of Poverty

PhD Defence, December 8
What is the influence of psychological and social factors on the individual’s motivation to pursue economic outcomes? In his dissertation entitled On the Psychological Motives of Economic Performance, Victor H. Gonzalez studies how emotions and cognitive biases influence economic success and how social factors that are external to the individual, such as being in the state of poverty, affect this relationship.

The motivation of this subject stems from the scandalous poverty rates in developing countries, as well as the dramatic rise in income inequality in some of the most advanced economies. Notwithstanding the efforts to palliate these phenomena in the last 70 years, poverty rates persist over time and the social mobility rates in advanced economies are decreasing.

Alternative redistributive policies

This denotes a profound need for alternative and more effective redistributive policies. The dissertation by Gonzalez is an effort to understand alternative mechanisms through which poverty and income inequality manifest and persist. Particularly, those that underscore the role of the psychological states induced by these phenomena, and their harmful influence on the individual’s economic success in life. The existence of a mechanism whereby emotions and psychological biases alone are able to lock the individual in poverty contradicts standard economic theory, inasmuch as the market outcomes may not be a reflection of the individual preferences and beliefs, but instead are contextual-based.

Gonzalez demonstrates that including more realistic underpinnings about the decision-maker’s behavior, based on psychological research, guarantee the existence of the aforementioned mechanism. This implies that the traditional redistributive policies of market (de)regulation, may be insufficient, and that policies and institutions that help consumers and investors to overcome some of their behavioral and emotional shortcomings are urgently needed.

Motivation schemes

Chapters 2 and 3 study the psychological effects of poverty and low social status and their influence on an individual’s attainment and performance. The main message of these chapters is that disadvantaged individuals may exhibit suboptimal economic performance due to the psychological component associated to their position in the society, rather than for their own abilities or their material constraints.

Chapters 4 and 5, focus on solutions to the problem that poverty and inequality may persist means of psychological states. Here Victor H. Gonzalez focuses on how to motivate the individual using incentive schemes that motivate the individual. The idea is to design cost-efficient contracts whose novelty does not rely on the monetary incentives that they deliver, but on their capacity to use the individual’s psychological biases at the benefit of the employer. He envisions these contracts as policy instruments used by governments and firms to improve the motivation of disadvantaged individuals.

The contract studied in Chapter 4 features the formation of reference points by means of a self-chosen production threshold. This contract takes advantage of the psychological loss that the individual feels from falling short of her target. The contract studied in Chapter 5, exploits the regularity that individuals overweight small probabilities. A random performance evaluation featuring different frequency evaluations is implemented. These two incentives schemes deliver higher economic outcomes, than standard pay-for-performance contracts.

Methodology

The methodology used in this dissertation, combines applied economic theory, laboratory experiments, and survey data. I use applied theory to predict the behavior of individuals under the situation of disadvantage and under different contracts. I use both psychological and standard economics assumptions about the behavior of these individuals. The results under both sets of assumptions are evaluated in a controlled laboratory environment. In Chapter 2 survey evidence is used to motivate the problem, the stage of laboratory experiments, and to gain external validation.

Victor H. Gonzalez Jimenez (Bogota, Colombia, 1987) received a B.A. in Economics from Universidad de los Andes in 2010. He obtained the M.Sc. Econometrics and Mathematical Economics with distinction from Tilburg University in 2011, and the M.Sc. Economics (Research) with distinction from Tilburg University in 2013. He has been a Ph.D. candidate at the dept. of economics at Tilburg since 2013. In September 2017, he joined the University of Vienna as an Assistant Professor.

Victor Hugo Gonzalez Jiminez: On the Psychological Motives of Economic Performance. Promotor: Prof. dr. Charles Noussair (Tilburg University). The defence will take place on December 8, at Tilburg University (Auditorium, 10 AM).