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Asset Choice as a Reflection of Wealth-Based Risk Aversion
The Vicious Circle of Poverty (Poverty Trap)
A lack of wealth can trap an individual in a self-perpetuating cycle of poverty, also referred to as a poverty trap. This vicious circle arises because financial constraints and higher situational risk aversion lead to investments in safer, low-yielding assets. Since these assets fail to generate significant growth, the individual's wealth stagnates, reinforcing their state of poverty. This mechanism, as depicted in Figure 9.21, highlights how wealth-dependent risk aversion contributes to persistent inequality. [1]
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Social Science
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Economy
CORE Econ
Economics
Ch.2 User-centered design process - User Experience Design - Winter 23 @ UI Design in UI @ University of Michigan - Ann Arbor
UI Design in UI @ University of Michigan - Ann Arbor
User Experience Design - Winter 23 @ UI Design in UI @ University of Michigan - Ann Arbor
UI @ University of Michigan - Ann Arbor
User Experience Design @ UI Design in UI @ University of Michigan - Ann Arbor
University of Michigan - Ann Arbor
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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The Vicious Circle of Poverty (Poverty Trap)
An economist studies the investment patterns of two individuals. Individual 1 has a low net worth and invests almost exclusively in government-guaranteed savings bonds that offer a modest but stable return. Individual 2 has a high net worth and allocates a significant portion of their funds to a portfolio of stocks, which have fluctuating values but offer the potential for much higher average returns. Which statement provides the best analysis of the behavior observed?
Investment Decisions and Personal Wealth
Client Investment Profile Analysis
An individual who experiences a significant increase in personal wealth, moving them from a low-wealth to a high-wealth category, is expected to maintain their original conservative investment strategy because the fear of losing their new assets will be greater.
Match each individual's financial profile with the investment portfolio that best reflects their likely asset allocation, based on the relationship between personal wealth and risk tolerance.
Evaluating a Wealth-Building Policy
According to the principle where investment choices are influenced by an individual's financial standing, as personal wealth decreases, the willingness to accept financial risk also tends to ______, prompting a preference for more secure, lower-return assets.
Arrange the following statements into a logical sequence that illustrates how an individual's initial financial standing can influence their long-term economic trajectory.
Evaluating Financial Advice
Imagine two countries, Country A and Country B, with similar overall wealth distributions. Country A has a comprehensive social safety net, providing robust unemployment benefits and public healthcare, which significantly reduces the financial devastation of job loss or illness. Country B has minimal social safety nets. Based on the principles of how personal financial security influences investment behavior, which of the following statements is the most plausible?
Learn After
Self-Perpetuation of Wealth and Social Inequality
Disrupting the Poverty Trap by Mitigating Risk
An individual with very limited savings is offered two investment opportunities: a low-interest savings account with guaranteed returns, and a new business venture with the potential for very high profits but also a significant risk of losing the entire investment. The individual chooses the savings account. Which statement best analyzes the core mechanism that can trap this person in a self-perpetuating cycle of poverty?
Evaluating a Micro-Loan Program
The Subsistence Farmer's Dilemma
A self-perpetuating cycle can emerge where an individual's initial financial circumstances prevent them from improving their economic standing. Arrange the following statements to correctly describe the causal sequence of this cycle, starting from the initial condition.
The Connection Between Risk Aversion and Persistent Poverty
Analyze each of the following situations. Match each situation to the outcome it is most likely to produce regarding the cycle of poverty.
The self-perpetuating cycle of poverty primarily occurs because individuals with limited financial resources are naturally more inclined to take on high-risk investments in the hope of achieving high returns.
In the context of a self-perpetuating poverty cycle, an individual's lack of initial wealth often leads to a higher degree of situational ______, causing them to favor safer, low-growth investments and thus remain financially constrained.
Urban Worker's Economic Dilemma
Evaluating Policy Interventions for Poverty Traps