Mullainathan and Shafir’s new book Scarcity [written in 2014] explains that people make some debatable decisions when a resource is scarce because of the stress the shortage causes. They introduce Scarcity Theory: a hammer, but a good hammer.
Poverty Leads To Worse Decision-Making
The authors help explain poverty sometimes encourages people to take decisions that make their situations worse. The authors argue that this isn’t something special about those in poverty. It isn’t the people but the situation. 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”. By this they mean 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. In doing so you are ignoring the worse long-term problem being created.
Scarcity Theory: A Hammer, But A Good Hammer
They integrate numerous different results under a single umbrella — scarcity. I was reminded of the law of the hammer. (When you have aa hammer eveything looks like a nail). Occasionally it seemed that they explained all human behavior 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 behaviors 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.
Mullainathan and Shafir, 2013, page 137
I’d recommend reading Scarcity if you can free up the time. Ironically, I ended up accidentally buying two of these books. So I had a surfeit of scarcity.
For more on behavioral economics and public policy see here.
Read: Sendhil Mullainathan and Eldar Shafir (2013) Scarcity: Why Having Too Little Means So Much, Times Books