Scarcity: Why Having Too Little Means So Much

The chapter begins with an anecdote from Chennai, India, where an encounter with an auto rickshaw driver illustrates a common behavioral economic paradox: Individuals, regardless of their financial status, often exhibit a surprising reluctance to incur even minor additional costs. Mullainathan and a PhD student were waiting together in the intense Chennai heat for a rickshaw. When a driver tried to charge the two men 60 rupees instead of the usual 40 rupees (the equivalent of 80 cents), the student refused to pay the extra money, opting instead to continue waiting in the uncomfortable heat and mud. This scenario sets the stage for a broader discussion on how people value money differently based on the context of the transaction, rather than the absolute value of the money itself.

To illustrate this point, they present scenarios in which people are more likely to make a detour for a small savings on a lower-priced item (such as a $100 DVD player priced at $65) than they are for the same savings on a higher-priced item (such as a $1,000 laptop priced at $965). Even though the savings in both scenarios would be $35, most people say they would be willing to drive to another store to buy the DVD player, but not the laptop. This challenges the standard economic model, which assumes a constant exchange rate between time and money. This behavior, which deviates from the traditional economic model that expects a constant value for money, suggests that context heavily influences one’s perception of value. However, the chapter reveals that this pattern does not hold universally, particularly under conditions of scarcity.

Mullainathan and Shafir’s study conducted in a soup kitchen in Trenton, New Jersey, reveals that people facing financial scarcity value a dollar consistently, regardless of the transaction’s context. This finding challenges the assumption, espoused by behavioral economics—a field that attempts to incorporate psychology into economic models to account for behavior that deviates from the “rational” economic standard (See: Background)—that relativity in valuing money is a universal trait, instead suggesting that scarcity engenders a more rational and consistent approach to economic decisions.

Delving into the psychophysics of perception, the authors explain how perception is relative and dependent on background amounts, a principle first identified by German physician Ernst Weber. However, Mullainathan and Shafir argue that scarcity can make individuals “experts” in assessing value, similarly to how musicians cultivate an inner sense of time that serves as an accurate metric when gauging the silences between notes. Scarcity forces individuals to become acutely aware of the value of each unit of resource—be it money, time, or calories—leading to a more rational and consistent valuation that is less influenced by contextual factors.

Empirical evidence supporting this notion comes from studies showing that individuals from lower-income backgrounds are more adept at identifying cost-effective purchases, such as accurately assessing taxi fares or recognizing when larger packages do not necessarily offer a better unit price. This expertise in valuation contrasts with the behavior observed in more affluent individuals, who often exhibit a less consistent approach to valuing money, swayed more by context and less by the inherent value of the dollar.

The chapter concludes by reflecting on the broader implications of these findings for behavioral economics and the study of scarcity. While traditional economic models presume a consistent valuation of resources, and behavioral economics posits that people behave in predictably “irrational” ways, the reality of human decision-making is much more complex and influenced by factors such as scarcity. Those experiencing scarcity, through a necessity-driven refinement of their decision-making skills, often come closer to embodying the rational actor model presumed in classical economics. However, the authors caution that this “expertise” is not without its drawbacks, as the intense focus required to manage scarcity can lead to tunneling and the neglect of other important aspects of life.

This chapter delves into the reinforcing cycle of scarcity, in which immediate needs and pressures exacerbate future scarcity, primarily through mechanisms like borrowing and neglecting long-term planning. Through anecdotal narratives and experimental data, Mullainathan and Shafir explore how scarcity-driven behaviors have wide-reaching implications, both personally and societally.

The chapter opens with the story of Sandra Harris, who becomes ensnared in a debt cycle due to payday loans. This example illustrates how individuals facing financial scarcity often resort to solutions that provide immediate relief but worsen their future financial state. The authors highlight that the bulk of payday loan revenue comes from rollovers, underscoring the cyclical nature of borrowing under scarcity.

The authors argue that borrowing is a natural consequence of “tunneling,” or focusing intensely on immediate needs to the exclusion of future considerations. This focus on the present, driven by scarcity, leads individuals to make decisions that may seem rational in the moment but are detrimental in the long term. They extend this concept beyond financial decisions, showing how busy people also “borrow time” with similar adverse effects, such as increased workload and stress due to procrastination.

To empirically test the hypothesis that borrowing is a direct result of tunneling, the authors created artificial scarcity in a lab setting using a game modeled after the American TV game show Family Feud. Participants were divided into “rich” and “poor” by allocating them different amounts of time to answer questions. The participants were also allowed to “borrow” time, with interest. Those who were time-poor tunneled, leading them to borrow time at high rates, ultimately diminishing their performance. This experiment parallels the real-world dynamics of payday loans, illustrating how scarcity compels individuals to make suboptimal borrowing decisions.

Mullainathan and Shafir then explore the broader implications of scarcity-driven behaviors. For instance, people tend to employ quick fixes and neglect important but non-urgent tasks, even though there are consequences in the long term. They reference the author Stephen Covey, whose framework classifies tasks by importance and urgency, to explain how scarcity leads to prioritizing urgent tasks over important but not urgent ones, such as maintenance and long-term planning.

The chapter also examines how the poor often fail to invest in high-return opportunities, like owning equipment essential for their work, due to the immediate pressures of scarcity. Mullainathan and Shafir describe how many rag collectors in India rent the pushcarts that they use to sell their wares. Investing in a pushcart is an important but not urgent activity; even though saving up to buy a pushcart would save on rent on the long run, most rag collectors do not do so. The authors do not attribute this to a lack of knowledge or skill but to the intense focus on short-term survival that scarcity enforces.

In concluding the chapter, Mullainathan and Shafir argue that failing to plan for the future is a natural outcome of tunneling. They emphasize that the myopic behaviors induced by scarcity are not indicative of personal failure but are a direct result of the scarcity context. Even individuals known for their long-term planning and investment in their futures are susceptible to the myopic effects of scarcity when they are in situations of immediate need. Ultimately, this chapter illustrates the vicious cycle of scarcity: how immediate needs force individuals into behaviors that seem necessary in the moment, but which ultimately perpetuate or exacerbate their scarcity.