Scarcity: Why Having Too Little Means So Much

by Sendhil Mullainathan

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. The poor, in short, are expert in the value of a dollar.

They do not rely on the environment to get a sense of how much to pay. The pressing needs that are top of mind help generate their own internal scale.

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. That money is valued in relative terms is considered a classic finding in

behavioral economics: presumably something that characterizes everyone’s thinking. Yet here we see that scarcity overturns—or at the very least waters down—this classic finding. In fact, scarcity alters many other findings as well.

So he decided to put everything on a bean burrito scale. Instead of asking whether he would rather have the Walkman or $70, he could ask himself whether he wanted the Walkman or seventy-eight bean burritos.

While deliberating about the

Walkman, Sendhil realized how misleading this reasoning was. He was already eating all the burritos he wanted. Suppose he chose not to buy the Walkman. He would not go out and eat seventy-eight more burritos.

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

The problem with all these benchmarks is that they are not real.

Since we do not actually make many trade-offs, they remain largely an invention. Without such trade-offs, the value of small amounts is not something you ever really need to bother yourself with.

These problems arise because we do not, under abundance, have a sense of what $10 is worth. And this ambiguity can leave us open to manipulation.

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. Without engaging in real trade-offs, the frugal, like all those who live with abundance, have a hard time making sense of a dollar. So they rely on context.

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

Many biases and inconsistencies uncovered by behavioral economics are really about people struggling to make sense of a dollar. Without a clear sense of how to value a $50 savings, people in our study with Hall used the base price as background against which to value the $50. The poor, in contrast, because they do face $50 trade-offs, have an expert’s internal metric (possibly a rough one) for what $50 is worth. Consequently, they are less prone to inconsistency.

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.

Perceived color, much like perceived distance, depends on surrounding cues. And as it turns out, so does perceived value.

A friend gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold [a small, run-down grocery store] [a fancy resort hotel].

Respondents who are well-off show a classic decision making bias, as Thaler had originally reported. They will pay more for the same beer in the context of a fancy resort. Much like Alex’s behavior, this difference in willingness to pay is an inconsistency.

The poor behaved quite differently. Their reported willingness to pay was much closer in the two contexts. It is not that they gave larger or smaller amounts. They simply gave more consistent answers.

Note that what subjects are being asked here is not what they would expect to pay. Both the poor and the well off report the same answer when you ask them: of course the resort will charge more. The two groups differ only in what they themselves would be willing to pay.

This is what we would predict: the poor are able to make better sense of what to pay. Unmoved by context, they can rely on their own inte...

Along these lines, people have been shown to think of money as compartmentalized into separate accounts. For example, studies have found that when gasoline prices go up, people substitute lower quality gasoline. We act as if we’re “poorer” even when the added cost of gas does not materially affect our overall budget. And even then, we act as if we’re poorer “in gasoline.”

The confusion about the value of things comes about because we do not make trade-offs—perhaps do not even know how to make these trade-offs—when we have abundance.

With slack, you are not giving up anything to go—selling that ticket really wouldn’t buy you anything you wouldn’t already

In contrast, the poor have a clear idea of what they could do with $75. As a result, we find that the poor are much more likely to report that it feels as if the ticket costs them $75. Once again, they appear much closer to the economic ideal.

Not accustomed to facing minor trade-offs, why should they be prone to calculate minor opportunity costs?

But measured against everyday human behavior, they gave the right answer. Many well-off people—including these economists—do not think about trade-offs for modest amounts.

But economics is meant to follow the logic of scarcity. It is fitting then that its predictions are truer for those who actually have the scarcity mindset.

Economics is supposed to follow the logic of scarcity.

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. This expertise can make them appear more rational, less prone to inconsistencies, in some contexts. But this local expertise also becomes a hindrance. Along with the focus that brings expertise comes tunneling. And with tunneling comes a slew of negative consequences.

There is nothing in the prospect of a sharp, unceasing battle for the bare necessities of life, to encourage looking ahead, everything to discourage the effort. —JACOB RIIS, HOW THE OTHER HALF LIVES

This phenomenon is not unique to the poor. Busy people borrow time, often at similarly high rates. To make room for a project due soon, the busy borrow by putting off other work. And just like a payday loan, the bill comes due: the work that was postponed must now get done.

And there is often a “fee” for borrowing time as well: putting off work can increase the time it takes to do it.

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.

Within that tunnel, the payday loan proved eminently attractive. Its benefits fell inside that tunnel: it helped her make it through the month. The costs of the loan—the repayment and the fees—all fell outside this tunnel. The loan seemed to offer a solution to the problem she was fixated on.

Ask a borrower at the time of borrowing, “How do you plan to pay it back?” and you usually get cursory answers such as “Well, I get paid in a week.” Probe a bit—“But don’t you have other expenses?”—and you encounter exasperation, as if you just don’t get it. “Don’t you understand? I’ve got to make my rent payment this month!” The subtext being “I’m focusing on what needs to get done now!”

This is why payday loans are so attractive—people turn to them when they are tunneling on putting out a fire. And their best feature is that the loans put out this fire, quickly and effectively. Their worst feature—that the fire will return in the future, possibly enlarged—is obscured.

Yet people tunnel on their immediate scarcity; knowing you will be hungry next month does not capture your attention the same way that being hungry today does. The bill that is due now generates threatening notices; the bill in two months’ time is nowhere to be seen.

One reason for this is the bandwidth

tax. The present presses automatically on you. The future does not. To attend to the future requires bandwidth, which scarcity taxes. When scarcity taxes our bandwidth, we become even more focused on the here and now.

When we tunnel, though, we borrow above and beyond what is dictated by this cost-benefit calculus. When faced with scarcity, we borrow when it makes sense in the long run and when it does not.

Instead, borrowing is a simple consequence of tunneling.

Shah realized that Family Feud contestants experience scarcity: they must respond under time pressure, with very limited time to think.

These answers are mere guesses: the potential popularity of each must then be contemplated. Time pressure means fewer paths can be followed, and less time can be devoted to gauging each answer’s potential. Unlike busy people who measure scarcity in days or hours, Family Feud contestants measure it in seconds. Instead of deciding which project to work on first, they must quickly decide how to come up with the most popular answers.

Having created the rich and the poor, we added the element of real interest to us: we gave them the option to borrow, with interest. Each additional second they chose to use on a round cost them two seconds deducted from their total time. We also allowed them to “save”: if they finished a round early, the remaining time was “deposited” back into their total.

The poor focused. Per second, they were more effective than the

rich; they made more guesses and earne...

The poor were more effective because they tunneled. As a result, they borrowed much more than the rich.

Despite the high interest rate, loans looked extremely attractive in the tunnel, much more attractive than a view from the outside would warrant. So the poor resorted to borrowing often, to help themselves right now. But in the end they were hurt by it.