Stories | September 10, 2013

When scarcity strikes: how it affects the rich and the poor

Many people have something in their life that they wish they had more of. It might be money, time, food or something else.

Economists have long studied scarcity – the allocation of finite resources, such as money, to competing demands. Behavioural economist Sendhil Mullainathan and psychologist Eldar Shafir published a book about the topic – titled Scarcity – which explores the feeling of scarcity, the emotional and cognitive effects of not having enough, rather than scarcity itself.

Double trouble: the impact of scarcity
The authors explain what happens to people when they experience not having enough to meet their needs. Since needs can be subjective, this concept therefore applies both to those in absolute poverty in the developing world and also those in relative poverty elsewhere (such as after losing a job, getting divorced, or being subjected to some other shock), or those who know the sinking feeling of having bills arrive before the next pay cheque.

It turns out that scarcity (not having enough) is doubly troubling. This is because beyond the obvious disadvantage of not having enough (money, time, food) to meet your goal, the feeling of scarcity also effectively drains your mental energy.

As the authors write: “Scarcity is more than just the displeasure of having very little. It changes how we think. It imposes itself on our minds.”

How scarcity affects the mind
What they mean by this is that needing to deal with not having enough is mentally exhausting (as explained in a previous eZonomics article and this blog). Although it focuses the mind and can help to avoid distractions, the disadvantages generally outweigh this benefit. The authors use the term “mental bandwidth”, referring to our cognitive capacity.

When we are subject to scarcity, our mental bandwidth is reduced, leaving us prone to a host of bad outcomes: performing worse on tests of mental agility; showing impulsivity, worse self-control, and irritability; and speaking our mind even if it is impolite to do so.

We focus so much on reducing the scarcity (for example increasing income or reducing expenses) that we can’t evaluate the true costs and benefits of a trade-off or attend to other important areas of our lives.

This theory is not saying that poor people (or other people struggling with scarcity such as those on diets or busy people who are "time-poor") are inherently different in some way. Instead, the research on scarcity shows that, in general, it is the scarcity that changes people and impedes optimal behaviour and decision making rather than the other way around.

This can then lead to behaviour or bad decisions that further perpetuate the disadvantage, creating a downward spiral which is difficult to climb out of. Put simply, being short of money can make it harder to make the best choices to help improve your financial position.

Studies by academic Anandi Mani and colleagues (including Mullainathan and Shafir) in the journal Science examined these effects both in a controlled setting (a mall in suburban America, where people were asked to think of a hypothetical situation in which they had to make some tough financial decisions) and a more natural setting (rural India, where sugar cane farmers were experiencing real financial hardship, or scarcity of money, just before their harvest).

In both settings, the researchers found that when people had to deal with the problem of having only very little, they performed worse than average on subsequent tests of cognitive capacity, showing that thinking about scarce resources leaves only little ‘mental bandwidth’ left to use on other tasks and decisions.

How to tackle scarcity
So what can be done to stop the cycle of perpetual scarcity, of never having enough? The academic papers don’t have all the answers at the level of individuals, but many recommendations are offered on the policy or practitioner level. Examples include aiming to set a helpful default option, simplifying paperwork, or providing services which will relieve people of competing demands on their attention.

If scarcity is having an effect on your own mental bandwidth, consider trying these tips so that your bandwidth is used most efficiently. This might be by scheduling reminders for yourself in your calendar or phone (so that you don’t have to spend mental energy remembering critical dates), use commitment devices to help calm impulsiveness, or even "outsource" your thinking by enlisting the help of a friend or family member who might have less on their mind and who can offer a second opinion on purchases or other important financial decisions.

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Nathalie Spencer
Nathalie Spencer

Behavioural scientist at ING