Scarcity: Why Having Too Little Means So Much

by Sendhil Mullainathan

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. He was not trading off the Walkman against seventy-eight burritos. For this thinking to work, he needed to know where the money saved would be spent. It certainly would not have gone to bean burritos, any more than refraining from buying something would send you on vacation to the Bahamas. Making the trade-off concrete requires tracing the money that was saved and understanding how it would be spent. This was true of the other suggestions as well: how should we pick the items to compare in a way that makes tangible sense?

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. Purchases can be made to look more or less attractive through judicious comparisons. Upgrading to a better room on your vacation is a pittance if you think of it as a fraction of what you pay in rent. But it can seem a fortune if you think of it in terms of the terrific desserts you could eat instead. Marketing agencies—and nonprofits—use this strategy. Supporting a child in Africa or buying a vacuum cleaner only costs you pennies a day. With slack, of course, those pennies feel like they come from nowhere.

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.

Because things in shadows look darker, the eye will correct for the shadow, making the item appear lighter. Perceived color, much like perceived distance, depends on surrounding cues. And as it turns out, so does perceived value.

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. A beer is a beer (and they’ll be consuming that same beer on that same beach). That beer will quench your thirst equally whether it comes from the grocery store or the resort. The well off, however, not sure what to pay, use the context to come up with a value. 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.

Well-off people get this wrong. They are much more likely to say $20. Many of them would even choose a third option: $0 because the ticket is already paid for. You can see why it feels this way to the well off. When you have slack, arguably $0 (or $20 because that’s something you can anchor on) feels “right.” With slack, you are not giving up anything to go—selling that ticket really wouldn’t buy you anything you wouldn’t already buy. 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.

Behavioral economics was born from the empirical observation that people violate several basic predictions of economics. They do not consider opportunity costs. Their willingness to pay for items is too easily moved. 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.

Sandra Harris also “borrowed,” first by reducing her tax withholdings and then by falling behind on her tax payments. The poor around the world borrow, often from informal moneylenders who charge rates every bit as extreme as the payday lender (and sometimes more). And yet poor borrowers pay these rates, not once but continuously, setting in motion the same slippery slope of rolled-over debt.

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.

TUNNELING AND BORROWING 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.

Our own qualitative fieldwork supports the view that tunneling makes the payday loan particularly attractive. 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!” Next month’s budgeting is an abstraction, something to turn to later.

Of course, none of this is unique to payday loans or to money. Think about putting off answering an e-mail. When we take on this time debt, we focus on the benefits: “Right now I need to get other things done.” We do not spend much time asking ourselves, “How will I make time for this later?” It is not that we are blind to the costs; they just do not get much attention.

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. We need cognitive resources to gauge future needs, and we need executive control to resist present temptations. As it taxes our bandwidth, scarcity focuses us on the present, and leads us to borrow.

Of course, taking a loan need not be a bad choice. When you really do have more time next week, putting off things is eminently sensible. Borrowing to pay rent if you are facing eviction can be sensible if you have a paycheck coming soon. When resources today—time or money—can truly provide greater benefit than they would in the future, a loan is a good idea. 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.

This explanation for borrowing is different from the usual ones. 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. To explain why the busy put off things and fall behind, we do not need to appeal to weak self-control, deficient understanding, or a lack of time-management skills. Instead, borrowing is a simple consequence of tunneling. To test this idea, we resort to one of our favorite tools: creating artificial scarcity in the lab.

Early borrowing created a vicious cycle for the poor. Pressed for time, too rushed to make productive guesses, they borrowed more. Most of their time was just going to paying off early loans (plus interest). And as before, when they were permitted to borrow, the poor did much worse than when they were not allowed to borrow, an effect that was missing for the rich.

The contestants in Family Feud borrowed most when they were being most productive, when they were most engaged, when they really felt they needed more time. In a sense they were right to borrow: those extra seconds had a good chance of paying off. In another sense, they were wrong to borrow because that payoff did not compensate for the interest rate incurred. What they noticed in the tunnel—an extra second could really help right now—was accurate. Their mistake was to neglect what was outside the tunnel: how much would this extra second cost later in the game? It is worth noting that both the rich and the poor showed this pattern of borrowing when they were particularly productive and pressed. It’s just that the poor, with their fewer seconds, were in that state a lot more often.

In the Angry Blueberries study from chapter 1, we also allowed for borrowing. And we found that the blueberry-poor subjects—facing no time pressure—borrowed more blueberries and were hurt by the ability to borrow. Focus again played a role: those who took more time on each shot were more likely to borrow: the more engaged, the more they borrowed. We have tried this in many such games, and the results are consistent: scarcity, in whatever form, always leads to borrowing.

What is striking in our data is that subjects were randomly assigned to be poor: they were no different from the “rich” except for the flip of a coin. Clearly, both groups in this study, rich and poor, should show an equal amount of present bias. In fact, any attempt to analyze myopic thinking at the level of personal differences between rich and poor—whether differences in present bias or otherwise—would need to somehow explain how scarcity led to borrowing in our present contexts, where rich and poor were created at random and could not have been more alike.

These studies support our more general hypothesis about the world: the reason the poor borrow is poverty itself. No need to resort to myopia or to financial ineptitude for an explanation. Predatory lenders may certainly facilitate this type of borrowing, but they are not the source. 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.

Because machine uptime was important, the company encouraged maintenance engineers to respond to breakdowns as quickly as possible [emphasis added]. Even so, overall performance didn’t improve. Only after the company started keeping and analyzing records machine by machine instead of person by person did it realize [why]. Engineers … would make a quick fix and move on to the next machine. Each … breakdown [was] patched three times before it was finally solved. In a way the engineers were doing exactly as asked: they were solving problems quickly.

When working to finish things quickly, the engineers tunneled. Inside their tunnel, a quick fix was just the thing needed. Cutting corners was the perfect solution; the cost would only show up later. Much like an expensive loan, a hastily patched solution looks attractive within the tunnel. It saves us something today even as it creates greater expenses in the future. And we will then have more to do, more things to fix, more bills to pay.

And as the patches accumulate—for the engineers, the report writers, and the poor—so too do the long-term costs.

The author Steven Covey finds it helpful to classify tasks according to whether they are important and whether they are urgent. He notes that busy people spend their time on tasks that are both urgent and important. This is what it means to be working on a deadline. We get a burst of output working on the tasks that matter and that are due very soon. We would call this a focus dividend. At the same time, he argues, busy people tend to neglect the important but not urgent tasks.

Putting off an important but not urgent activity is like borrowing. You gain time today by not doing it. But you incur a cost in the future: you will need to find time (possibly more time) to do it at some later point. In the meantime you may pay a cost for not having done it or lose the benefits that taking care of it could have brought. Having a messy office makes your work just that much less productive.

Scarcity, and tunneling in particular, leads you to put off important but not urgent things—cleaning your office, getting a colonoscopy, writing a will—that are easy to neglect. Their costs are immediate, loom large, and are easy to defer, and their benefits fall outside the tunnel. So they await a time when all urgent things are done. You fail to make these small investments even when the future benefits can be substantial.

Think of it this way. On a good day, you might start by looking at your calendar, taking a moment to gauge what’s ahead of you today, maybe even getting a sense of what the week holds. Being aware of what is coming allows you to mentally prepare for it, to anticipate a challenging conversation or remind yourself of details so you don’t walk into a meeting cold. In contrast, on a busy day you dive right in. You do not step back and scope out the day. You are not quite sure who’s at the meeting or what it’s about.

They could look at it and decide to save or borrow because they think they ought to spend more or less time on it. The previews helped. To be more accurate, they helped the rich, who looked ahead, took advantage of the information, and scored more points. The poor, on the other hand, did no better with the previews. They were so focused on the current round that they did not expend the mental resources required to look ahead. Scarcity kept them tied to the present, unable to benefit from a glimpse of what the future might hold.

Many of the busiest people who borrow time are the same people who have invested years in demanding careers and planned carefully how to get ahead. In fact, as far as personality traits go these people are anything but myopic; rather, it is the context of scarcity that makes us all act that way. Tunnels limit everyone’s vision.

Everywhere is walking distance if you have the time. —STEVEN WRIGHT

Nearly every vendor has a small amount of slack in her budget, something she can cut back on. She may buy a cup of tea, a small food treat like a dosa, or some candy for a child or grandchild. Suppose that instead of spending, say, 5 rupees on these items every day, she used those 5 rupees to purchase her goods. This way, she borrows 5 rupees less each day. It might seem that it would require two hundred days for the vendor to become free of her 1,000 rupee debt this way. In fact, it would only take thirty days. This is the power of compounding (especially when the interest rate is high). Five percent a day compounds quickly.

More generally, the scarcity trap is more than a shortage of physical resources. It is based on a misuse of those assets so that there is an effective shortage. It is constantly being one step behind, constantly paying off last month’s expenses. It is a way of managing and using what you have so that it looks and feels like you have even less. An initial scarcity is compounded by behaviors that magnify it.

Play this out over time and it leads to what we call juggling: the constant move from one pressing task to the next. Juggling is a logical consequence of tunneling. When we tunnel, we “solve” problems locally and temporarily. We do what we can in the present, but this creates new problems in the future. The bill today generates a loan, which becomes another (slightly bigger) bill in the future. The cheap medical treatment works for a while, but we will need more expensive medical attention later. With many balls in the air, we focus on the ball that is about to drop when we tunnel. Sometimes we solve the problem for good. More often than not, we catch the ball just in time, only to toss it back in the air again.

Juggling is why predictable events are treated like shocks. When you juggle, you tunnel on the balls that are about to drop, and you neglect those high in the air. When those balls “suddenly” descend, they are news to the tunneled juggler, a shock if you will. An observer might see the ball coming down for quite some time. As disinterested parties, we can see school fees looming. To the poor juggling their finances, they only become real when they are imminent.

For the busy, this means burdened and contorted schedules of the kind we talked about in the opening chapter, with “near toppling” piles of to-dos and double-booked appointments. For the poor, it means complicated financial lives. Detailed research in the fascinating book Portfolios of the Poor shows that the poor use about ten distinct financial instruments on average. In Bangladesh one instrument—a short-term interest-free loan—was used more than three hundred times by forty-two households in one year. At any point in time, the poor in these surveys owed and were owed money from numerous sources, a patchwork that was created through months and even years of tunneling on the moment’s most pressing problem.

Time-use data suggest they work very few hours those days. And yet there is a lot of juggling happening. Juggling is not about being harried in time; it is about having a lot on one’s mind.

These two features—being one step behind and juggling—define the scarcity trap. Life in the scarcity trap is about having even less than you could have. It is about playing catch-up, dealing with each ball just before it lands and the messy patchwork that emerges as a result.

Getting out of a scarcity trap first requires formulating a plan, something the scarcity mindset does not easily accommodate. Making a plan is important but not urgent, exactly the sort of thing that tunneling leads us to neglect. Planning requires stepping back, yet juggling keeps us locked into the current situation. Focusing on the ball that is about to drop makes it terribly difficult to see the big picture. You would love to stop playing catch-up, but you have too much to do to figure out how. Right now you must make your rent payment.

But that was not the full story. In the ensuing months they fell back, bit by bit. Or, rather, we should say one by one. By the end of the year, they all had accumulated as much debt as those whose debt we had left alone. So while the standard explanations are not supported by the data—the vendors do not fall back right away—neither is the view that those in a scarcity trap just need a one-time infusion to rid them of the debt.

SHOCKS The core of the problem is a lack of slack. Even after our cash infusion, the vendor is still living on less than two dollars a day. After all, her income must feed more than just herself. When packed so tightly, suppose she hits a bump in the road—a relative’s wedding comes up and she has to buy a gift. In a place like India, social custom dictates buying a big-enough gift, so how this bump is managed partly depends on whether the vendor is in a debt cycle or a savings cycle. In a debt cycle, the vendor faces a difficult challenge. She must make trade-offs: what to give up to buy the gift? Or perhaps she’ll simply buy a smaller gift. She tunnels, but credit is not much of an option; she is already using the moneylender to buy fruits and vegetables. She weathers the storm by sacrificing what little she can. She may feel the pain of what she has to sacrifice to buy the gift and may feel ashamed at the meager gift she is able to afford. Now picture the vendor in a savings cycle, after we’ve absolved her of the debt. When she faces the sudden need to buy a gift, she also tunnels. She must address this pressing need. And for her there’s an “easy” solution at hand: she has cash sitting around. Of course, it is for emergency needs only, but this is one. She can borrow her working capital and use the available cash to handle the wedding gift. How will she exit another debt cycle? What are the costs?