That is the new book by Sendhil Mullainathan and Eldar Shafir, and as you might expect it is one of the most significant economics books of the year. Here is their bottom line:
The poor are not just short on cash. They are also short on bandwidth.
For an example, imagine giving both rich and poor an intelligence test with this question:
Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make?
In their answers to that question, we are told, rich and poor look equally smart. Now run the same question with different groups, but change the first sentence to this:
Imagine that your car has some trouble, which requires an expensive $3000 service.
All of a sudden the poorer individuals did much worse in response to this question and the authors claim this result has been replicated repeatedly. Control studies suggest it is not about the number being larger per se, but rather that the poor individuals see this as a more stressful decision, which lowers their measured fluid intelligence.
Overall I find this all very intriguing, but would like to have a better sense of how this fits in with other results about the relative rigidity of IQ. I also worry about tests where there is an exogenous increase in stressfulness, to which test participants must submit. There are various ways that an examiner could stress me out, but part of one’s smarts, whether at high income levels or low, is exercising some control over matching your talents to the environment.
Here is a good review of the book by Oliver Burkeman. By the way, Alex Tabarrok and MR make a cameo appearance on p.103.
Addendum: Here is Alex on their work.