Why are diamonds expensive? It's not because they're so pretty; only an expert can tell the real thing from a good fake. Nor is it because they're particularly rare.
The answer, of course, is that while diamonds are actually rather common, the supply was strictly limited by the De Beers mining cartel: this is what made them valuable and desirable, in tandem with advertising campaigns that massaged demand.
And mining firms aren't the only companies to ramp up their prices by creating a false sense of scarcity. At clothing retailer Supreme, for example, it's common for hundreds of people to queue for a chance to buy perfectly ordinary t-shirts for £100 a pop, simply because each one is a “strictly limited” edition.
Ironically, it seems we're more likely to do this when we can't really afford it.
Not at a loss? Nice!
In one study, New York University researchers discovered that when given the chance financially deprived people not only ate more M&Ms than people who felt privileged, but also preferred rare colours to common ones.
"States of deprivation prompt heightened visual sensitivity to and preference for scarce goods that appear to be unavailable to other consumers," they explain.
"Indeed, the effects only arise when consumers believe that scarce goods have not been obtained by others, and when they are unaware of how their financial state might be influencing their thoughts and feelings."
Snaffling up things that are scarce might make perfect sense from an evolutionary standpoint. When resources are short, it makes sense to grab whatever you can. Unfortunately, though, when times are hard, we don't necessarily make the best decisions.
In some famous research, a team at Princeton University studied the behaviour of shoppers in a New Jersey, USA mall and farmers in Tamil Nadu, India.
It helps to cultivate a “glass half full” mindset, and convince yourself that resources aren't actually scarce.
Both groups were asked to consider how to pay for car repairs, with the farmers asked both before harvest, when they were poor, and afterwards, at their richest point in the year. The two groups were then given a number of unrelated tasks designed to test their cognitive performance.
How much can you manage?
What the team found was that people who could easily afford to fix their car did well on the other tasks. Those who had financial concerns, though, showed a drop in performance equivalent to a 13-point fall in IQ.
"A person in poverty might be at the high part of the performance curve when it comes to a specific task and, in fact, we show that they do well on the problem at hand," says co-author Eldar Shafir, a professor of psychology and public affairs at Princeton.
"But they don’t have leftover bandwidth to devote to other tasks. The poor are often highly effective at focusing on and dealing with pressing problems. It’s the other tasks where they perform poorly."
In another study, Shafir and his team had students play a game where time was rationed but could be “borrowed”.
"We found that when people were rich, in terms of having plenty of time, they were very judicious and needed it less," says Shafir.
"But when they were time-poor, these sophisticated Princeton students grabbed available loans to try and do well in the game, and ended up making less money than the time-poor students who weren't given the option to borrow."
In this way, poverty can become a self-fulfilling prophecy.
Create space to think in
Again, the problem is mental bandwidth. The answer, psychologists agree, is to try and build in a bit of slack. It may be hard, but creating a financial cushion when times are good will mean that sudden emergencies don't throw you off-beam.
Instead, like the richer shoppers, farmers and students in the experiments described above, you'll be able to focus on all your problems more calmly and make better financial decisions.
It also really helps to cultivate a “glass half full” mindset, and convince yourself that resources aren't actually scarce. That's easier said than done if you really are on the poverty line, but should help you make more measured decisions.
Prioritise the things you really need, and allow yourself to feel secure once you've got them – and as for forking out for super-expensive designer t-shirts: just don't.
Read more about the psychology of scarcity here.
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