How Scarcity Creates More Scarcity

| February 25, 2020
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Scarcity is simply not having enough resources for a given need. That resource can be financial, but it can also be time, energy, and others. The danger of scarcity is that it creates a tunneling effect where we spend enormous amounts of brain power focusing on what is urgent and neglecting what may be important but not urgent. In the book “Scarcity” by Sendhil Mullainathan and Eldar Shafir they cite many interesting examples, one of which I discuss below.

Example - One group that had a lower income level was asked the same IQ related questions as a group of individuals with higher income. They scored similar results. They then asked both groups to decide what they would do if they had an unexpected $1,500 car repair – a cost that would be substantial for the lower income group and a small amount for the higher income group. After having them ask this question, they asked more unrelated IQ questions. The lower income group performed substantially worse than the higher income group. They found that the lower income group was still distracted by the implications of the car repair whereas the higher income group had moved past that and were just answering the questions.

Individuals with a lower income can have many hard decisions to make in a week. Do I fix the car or see how long it lasts? Do I save for retirement or pay for my daughter’s tuition? Do I pay the mortgage or the electric bill first? All of these thoughts tax the brain and have severe consequences. When the temptation comes up for an impulsive purchase, they have less mental bandwidth to consider the consequences and so they buy it. And when they do, they don’t have money at the end of the month to even consider retirement savings. And so, scarcity creates more scarcity.

 

How do we deal with scarcity? We would all like to not have scarcity – whether money or time. But the reality is that we often do. So how do we deal with it? There are probably many solutions but the one that intrigued me was the idea of creating forcing mechanisms for the things that are important by not urgent. For example, if it is scarcity of money, you create automatic savings or bill pay. If it is scarcity of time, you block off time on your calendar for family time. This will not stop the urgent from coming up but it will require less bandwidth to consider alternatives if there is not a choice in the first place. 

 

Disclaimer: This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.

Citations

  1. Mullainathan, Sendhil, and Eldar Shafir. Scarcity: Why Having Too Little Means so Much. Picador, Henry Holt and Company, 2014.
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