The Science of Scarcity

Why having too little means so much

Scarcity picture

Senthil Mullainathan and Eldar Shafir, in their book, look to explain some of the world’s problems through the theory of scarcity. They begin by describing scarcity as a mindset, not just defined in physical terms. Scarcity, therefore takes on more dimensions than the physical one. It becomes applicable to various domains like scarcity of money (being poor), scarcity of time (being overworked), scarcity of partners (being lonely) or even a scarcity of choice (a dieter’s food options).

The book examines the effects of a scarcity imposed on someone and the consequences of it. It particularly looks at the implications this can have on the poor. Scarcity explains why the poor frequently do not make the best decisions for themselves in many areas and perform worse in their jobs or education.

First, to understand the consequences of scarcity, its effects must be looked at:

  1. Focusing: Focusing arises as a by-product of facing scarcity of any kind. When a person realises that they face scarcity, they automatically block out other un-related activities and dedicate all of their time and resources towards the area they face a scarcity in. A perfect example of focusing is when people are facing a deadline. The work completed the night before a deadline is usually far greater than the work done preceding it. Scarcity, in this sense has a positive outcome than the usual negative precedents it sets. Indeed, it was shown in a study that students with shorter, more regular deadlines fared better in timeliness and quality than students with a single long period deadline. The question then arises, why is scarcity a bad thing if it leads to better focus on important tasks. The answer to that lies in tunneling.
  2.  Tunneling: Another similar by-product to scarcity is the tendency to tunnel. Short-term important tasks fall within the tunnel, while medium to long term but equally important tasks or commitments are often ignored. For instance, getting insurance falls outside the tunnel for a person who is scarce on money to meet his immediate obligations. They have immediate costs but realise their benifits only later.

The Consequences of Perpetual Scarcity

The authors argue that scarcity mindset imposes certain cognitive costs upon individuals which in turn affect their processing and decision making abilities. Scarcity imposes a bandwidth tax and affects the executive control of the people facing it.

A bandwidth tax decreases a person’s cognitive abilities which in turn affect their performance at their respective jobs. Fast food chain owners often complain of their employees being very distracted and not performing well. According to this principle, it is because they face a scarcity of money (in terms of a looming rent or mortgage payment) that they are distracted from their jobs and do not perform well. The scarcity of money imposed a bandwidth tax upon their minds which led to decreased cognitive abilities of the workers.

A bandwidth tax also affects the executive control area of our brain. Executive control refers to our brain’s ability to resist temptations and urges. Facing scarcity, the executive control employed by our brain diminishes. It is a major reason why dieters cheat on their diets or the poor make expensive, impulsive purchases.

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The Scarcity Trap

The scarcity trap is a situation in which a person’s behaviour contributes to their scarcity. In such cases, the effects that a scarcity mindset imposes upon a person creates further scarcity or amplifies their effects are observed. It was already seen how scarcity decreases cognitive abilities and executive control, however scarcity can lead to further scarcity if not dealt with correctly.

Juggling is a feature of scarcity that contributes to further scarcity. Juggling mainfests when individuals tunnel through tasks, leaving important things outside the tunnel to when they are urgent. For example, the poor often look to solve problems one at a time and when they are immediate. If the interest on a loan is due the next week but the school fees are not due until the next month, the poor focus on the more immediate problem of the interest payment leaving the school fees out of the tunnel. This though, leads to more scarcity as when the school fees are due; they are short on cash and will have to borrow money again.

Combating Scarcity

Combating scarcity is a daunting task since it affects individual behaviour so adversely. Getting out of scarcity involves taking a step back and planning clearly. This is seen less often due the effects of tunneling.

An important way to combat scarcity is the creation of Slack. Slack refers to that extra bit that should be reserved for unforseen events that occur. For instance.the time scarce it should have an extra hour of unscheduled time, the poor must have savings or insurance. Slack helps keeping people out of the scarcity trap by giving them some breathing room.

Conclusion

Understanding the scarcity mindset is vital to policy-makers and individuals alike. Designing against scarcity can hopefully solve and eradicate some of the world’s most common yet intriguing problems.

Narayan Sharalaya is an intern at the Takshashila Institution and is currently pursuing his Bachelors at NMIMS, Mumbai.