Scarcity: Why Having Too Little Means So Much

by Sendhil Mullainathan

Poverty itself taxes the mind. Even without an experimenter around to remind us of scarcity, poverty reduces fluid intelligence and executive control.

Dieters, when doing anything, should find they have fewer mental resources because they are partly preoccupied with food.

while losing weight you are preoccupied and face a bandwidth tax. But if you are able to settle into a new equilibrium and find yourself no longer needing to restrain eating, then the bandwidth tax disappears.

Most people are right-ear dominant for language, which means that verbal information presented to the right ear is easier for them to attend to. When given no instructions, they tend to focus on the voice presented to the right ear. In fact, when asked to track what was said in the right ear, the lonely and the nonlonely did equally well. In contrast, focusing on the nondominant ear—the left ear—requires bandwidth. It requires executive control to override the natural proclivity to focus on the right and instead to attend to the left. And now the lonely did significantly less well.

whereas only some people who experience abundance will be preoccupied, everyone experiencing scarcity will be preoccupied.

Some studies find that stress heightens working memory. Still other studies have found mixed evidence, including some indication that executive control might improve during periods of stress.

Thoughts such as, Should I risk being late again on my credit card? can be every bit as loud as a passing train.

Even smiling and being pleasant is hard when your mind is taxed. The employee snaps at rude customers more often than she intends. The parent snaps at the child. A taxed bandwidth leads to carelessness.

So much of what we attribute to talent or personality is predicated on cognitive capacity and executive control. The restaurant manager looks to all the usual places to explain his employees’ behavior—lack of skill, no motivation, or insufficient education. And a taxed bandwidth can look like any of these. The harried sales manager, when she snaps at her daughter, looks like a bad parent. The financially strapped student who misses some easy questions looks incapable or lazy. But these people are not unskilled or uncaring, just heavily taxed. The problem is not the person but the context of scarcity.

Scarcity doesn’t just lead us to overborrow or to fail to invest. It leaves us handicapped in other aspects of our lives. It makes us dumber. It makes us more impulsive. We must get by with less mind available, with less fluid intelligence and with diminished executive control—making life that much harder.

The large suitcase is packed casually. The small suitcase is packed carefully and intently.

Understanding these differences in how we pack is crucial for understanding how scarcity creates more scarcity.

The packer of a big suitcase who contemplates adding a pair of sneakers simply thinks about whether he wants them. The packer of a small suitcase thinks about what he must take out to make room.

Slack is what allows us to feel there is no trade-off.

Why do bees create such precise structures and the wasps such messy ones? Scarcity. The wasps build with material that is abundant: mud. The bees build with material that is scarce: wax.

Economists call this diminishing marginal utility: the more you have, the less each additional item is worth to you.

Some estimate that over $12 billion is spent annually on self-storage, three times as much as is spent on music purchases.

Slack provides an easy way to avoid the burden of choosing. The only reason you must choose between the lecture and the movie is that your time budget is tight. If you had slack, you could do both.

With little slack, we have less room to fail. With compromised bandwidth, we are more likely to fail.

Scarcity does not just mean less room to fail. It also means a greater opportunity to fail.

Wealth transforms temptations into affordable luxuries. The same good can be a temptation when you have little but a mere frivolity when you have plenty.

the concept of slack cuts to the core of the psychology of scarcity. Having slack allows us the feeling of abundance. Slack is not just inefficiency; it is a mental luxury. Abundance does not just allow us to buy more goods. It affords us the luxury of packing poorly, the luxury of not having to think, as well as the luxury of not minding mistakes.

our frugality has a perverse consequence. We pinch pennies on small items, yet we blow dollars on big ones. Our frugality is thereby largely wasted. We spend hours surfing the web to save $50 on a $150 pair of shoes. Yet we forgo a few hours’ search to save a couple of hundred dollars on a $20,000 car.

These findings are important because they demonstrate how people routinely violate economists’ standard “rational” models of human behavior. If the value that a person attaches to a dollar changes so easily, traditional analyses of economic behavior are severely stretched.

When you stand in a dark cave, a struck match can produce a bright flare of light, powerful enough to illuminate your surroundings. That same match struck at an outdoor cafe on a sunny afternoon would be barely detectable.

Money, at least to some extent, is also judged relative to background. That’s why we care more about saving 40 percent on a $20 book than about saving 1 percent on a $1,000 refrigerator. In Chennai, Alex simply saw money a little bit the way his eyes would see a match: relative to the background. Sixty rupees looked like too much when the fair price was forty.

Marketing researchers have studied this expertise in a very specific way. They stop shoppers exiting a supermarket for a quick survey. They take the shoppers’ receipts and ask questions like, “How much was the Crest toothpaste you just bought?” Affluent shoppers do not do well on this quiz. “The price of the Crest toothpaste? Something like three dollars? Maybe five?” Most don’t even know how much they spent in total, the size of the bill they had just paid minutes before. But the lower-income shoppers do. They are more accurate in knowing both how much they spent and the prices of the items they bought.

One study examined which supermarkets practice this “trick” and found just what our discussion so far would have predicted: supermarkets in low-income neighborhoods are the least likely to have quantity surcharges. It is harder to trick someone into paying more when she is careful to squeeze the most out of every dollar spent.

Think of how striking this is. The poor in these studies behave more “rationally.” They are closer in this case to the rational economic ideal, closer to homo economicus. This not only tells us something about poverty; it also tells us something about behavioral economics.

Aaaaaaaaahhhhhhhh

When we buy something under abundance, we do not feel we have to give anything up.

Slack, and the absence of trade-offs, means we have no intuitive, easy way of valuing things.

Making the trade-off concrete requires tracing the money that was saved and understanding how it would be spent.

The problem with all these benchmarks is that they are not real. Thinking trade-offs under slack is like trying to have your cake and eat it, too.

We have some well-off friends who are frugal. Often, when we tell them about our work, they nod along and say, “That’s the way I am: very focused on money.” But frugality does not capture the experience of scarcity. The frugal have a principled conscientiousness about money. The poor must be vigilant about trade-offs. When making a purchase, the frugal consider whether the price is “good.” The poor, in contrast, must ask themselves what they must give up to afford that price.

Abundance leaves us less able to know the value of a dollar.

this remarkable illusion, square A clearly looks darker than B. What makes it an illusion is that A and B are the exact same shade of gray. You probably don’t believe this; even we occasionally feel compelled to check again, because it seems so wrong. If you don’t want to take our word for it, take a sheet of paper and cut a couple of holes in it that show just squares A and B. You will see that the two squares are identical in color. Why are our eyes fooled so badly? Here the visual system uses background cues in the image to make sense of things. Background cues affect how items in the foreground are seen. Square B has a different background from square A. Not only is it surrounded by darker squares; it also sits in the cylinder’s apparent shadow.

Perceived color, much like perceived distance, depends on surrounding cues.

We are, of course, not proposing that the poor are always more rational. What they have is a specific skill: they are better at making ends meet today. They make a dollar go further. They become experts in the value of money.

Borrowing goes hand in hand with scarcity.

Why do we borrow when we face situations of scarcity? We borrow because we tunnel. And when we borrow, we dig ourselves deeper in the future. Scarcity today creates more scarcity tomorrow.

The bill that is due now generates threatening notices; the bill in two months’ time is nowhere to be seen.

Jmmmmmm… lo abstracto no duele

We need cognitive resources to gauge future needs, and we need executive control to resist present temptations.

Tunneling this way creates a bias toward borrowing. Because only the most immediate scarcity enters the tunnel, loans are particularly attractive.

When faced with scarcity, we borrow when it makes sense in the long run and when it does

To explain why the poor borrow excessively, we do not need to appeal to a lack of financial education, the avarice of predatory lenders, or an oversized tendency for self-indulgence.

borrowing is a simple consequence of tunneling.

We have tried this in many such games, and the results are consistent: scarcity, in whatever form, always leads to borrowing.

Perhaps the poor borrow simply because they are more present biased.

The powerful impulse to borrow, the demand for high interest and potentially spiraling borrowing, the kind that creates a slippery slope and looks so ill advised, is a direct consequence of tunneling. Scarcity leads us to borrow and pushes us deeper into scarcity.

Patching is a lot like borrowing, a failure to invest and to commit the resources now so that the job is done correctly.