The concept of the poverty trap has played a central role in the economics of poverty and development. Limited resources coupled with a low rate of return from investing (in food, in education, in a business) prevent the poor from being able to invest enough to improve their lot. Above a certain threshold, however, investment is productive, allowing those sufficiently rich at the outset to increase their income.
The goal of this lecture is to systematically explore whether hope, or the lack of it, can be the source of a poverty trap. We proceed in three steps. First, we explore the implications of hope (or lack of hope) from the point of view of a rational decision-maker. We show that the anticipation of likely failure could lead an individual to rationally decide to hold back his or her efforts, avoid investment, and thus achieve even less then he or she could otherwise have attained. Second, we relax the assumption of perfect rationality and review some evidence from psychology and neuroscience about the impact of depression and pessimism on decision-making. This evidence suggests that depression can make us less effective at focusing on the long run and thus more prone to making decisions that are likely to keep us poor. Finally, we ask what happens in a world where people may have rational expectations, but may not behave in a fully rational, time consistent way: Does self-awareness ameliorate or worsen the potential for a hopelessness-based poverty trap? We conclude with a discussion of implications for economic policy.