Better data, better policy: Distinguishing income poverty and financial stress may promote better temporal decision-making

The poverty trap is a cycle in which financial hardship is reinforced through short-sighted choices. To design effective policy, it is important to identify who is at risk of falling into it. Yet different measures of poverty may not identify the same people as at risk. This study tested whether subjective financial stress is associated with intertemporal choice over and above income poverty, and whether financial literacy moderates these effects. Across seven countries (N = 1,497; Germany, Italy, the Netherlands, Slovenia, Spain, the UK, and the US), financial stress was associated with more present-oriented choices in five of seven countries on a temporal discounting task and in five of seven countries on a windfall allocation task. By contrast, income poverty showed no reliable association, and financial literacy did not consistently moderate either relationship. These findings suggest that identifying who is at risk of the poverty trap requires capturing lived financial reality, not just income brackets, and that financial education may offer little to individuals whose short-sighted choices reflect constraint rather than comprehension. Policy makers are encouraged to review how poverty is defined for targeting purposes, and to prioritise policies that expand financial resources over those that assume the problem is a lack of knowledge or planning.