Scarcity Theory: A Hammer, But A Good Hammer

Mullainathan and Shafir’s new book Scarcity explains that people make some debatable decisions when a resource is scarce because of the stress the shortage causes. They helps explain why people in poverty sometimes make decisions that make their situations worse. The authors stress this isn’t something special about those in poverty, we all make regrettable decisions under stress. They compare a person in poverty getting deeper into debt with an academic (one of the authors) falling behind with his time commitments.

Under stress we make decisions, e.g. take shortcuts, that make challenging situations worse. The book is therefore a plea to better understand the psychological problems that scarcity causes. They argue that worrying about something, e.g. money, can cause you to “tunnel”; to focus on solving the problem at hand while neglecting the long term. It is easy to see how with such a mindset debt piles up. You borrow at exorbitant interest rates to solve an immediate problem ignoring the worse long term problem being created.

They integrate numerous different results under a single umbrella — scarcity. I was reminded of the law of the hammer. Occasionally it seemed that they explained all human behaviour with their theory and some of their analogies were a little forced. That said I appreciated them going for big picture thinking.

I also loved that they highlight variability’s role. We usually concentrate on averages, but $36k a year is not the same if it comes in a regular $3k per month or arrives in lumps, say $18k twice yearly at random times. The practical difficulties of lumpy income can sometimes be solved with borrowing/saving but variability also creates psychological difficulties. The stress of the lean times leads people to make short term decisions. “…periods of scarcity can elicit behaviours that end up pulling us into a scarcity trap. And with scarcity traps, what would otherwise be periods of abundance punctuated by moments of scarcity can quickly become perpetual scarcity.” (Page 137, Mullainathan and Shafir 2013)

I’d recommend reading Scarcity if you can free up the time.

Read: Sendhil Mullainathan and Eldar Shafir (2013) Scarcity: Why Having Too Little Means So Much, Times Books