The Psychological Effects of Poverty on Investments in Children’s Human Capital

Do financial worries lead poor parents to miss high-return opportunities to invest in their children even when they would
have the financial means to do so? We study this question in the context of an educational program in Brazil, whose child-specific impacts on the probability of advancing to the next grade can be predicted by applying machine learning techniques to results from a previous experiment. In the absence of the program, low-SES students were expected to fail the grade almost 4 times more often than high-SES ones. The program was predicted to benefit nearly every student, but had particularly high returns for low-SES ones: if take-up were universal, the SES gap in expected grade repetition would be nearly 25% lower. Nevertheless, poor parents invested 37.5% less in the program. Combining multiple experiments, we show that financial worries reallocate poor parents’ attention to immediate needs, leading them to respond inefficiently to investment returns. Consistently, modifying the decision environment to make investment returns salient unlocks the contributions of the program to inequality reduction.