Scarcity by Sendhil Mullainathan and Elder Shafir

Why having too little means so much.

By scarcity, we mean having less than you feel you need.  It forms a common chord across so many of society’s problems.

The science of scarcity is not new.  It is called Economicswhich is abundant in trade-offs (= scarcity).

Scarcity captures the mind.  Unfortunately, the mind orients automatically and powerfully toward unfulfilled needs.

The lonely are better at understanding what others are feeling.  Due to scarcity, they focus more on managing social contacts and ought to be better at reading emotions.

Scarcity leads to dissatisfaction and struggle.

Scarcity captures our attention and this provides a narrow benefit—we do a better job of managing pressing needs.

1) Focusing and Tunneling

Scarcity can make us more effective (eg., study on proof-reading with tighter deadlines resulted in better productivity and efficiency). => Focus Dividend.

Scarcity captures the mind, both when thinking fast and when thinking slow.

Focus is a positive: Scarcity focuses us on what seems at that moment to matter the most = goal inhibition.

Tunneling is not: As scarcity leads us to a tunnel and we neglect other possibly more important things, both to our benefit and to our detriment.

Examples: Talking on a hands-free phone while driving can be worse than driving at above legal alcohol levels.  And eating while driving can be as big a danger.

People consume more calories when they are distracted.

2) The Bandwidth Tax

Scarcity taxes our bandwidth, resulting in inhibition of our most fundamental capacities.

Poverty itself taxes the mind.  It reduces fluid intelligence and executive control.  The poor have lower effective capacity than those who are well off.  This is not because they are less capable, but rather because part of their mind is captured by scarcity.

The lonely also show less executive control due to impaired bandwidth.  They also have a substantially higher consumption of fatty foods.

3) Packing and Slack

The large suitcase is packed casually.  The small suitcase is packed carefully and intently.

Scarcity forces trade-off thinking.  All those unmet needs capture our attention and become top of the mind.

Choice is hard.  When faced with more than 2 additional options to choose from, we often don’t decide and stay with what we do/have already.  If there is only 1 additional option, we often choose that one.

Slack provides an easy way to avoid the burden of choosing.

Scarcity not only raises the costs of error; it also provides more opportunity to err, to make misguided choices.

But with abundance, your choices on average get more and more granular.  They stop straining your budget or your planning.  Abundance affords us the luxury of not having to think, of not minding mistakes.

As Henry David Thoreau observed, “A man is rich in proportion to the number of things he can afford to let alone.”

4) Expertise

The poor in many studies have proven to behave more “rationally”.  They are closer to “homo economicus”.  Scarcity overturns the classic finding that money is valued in relative terms and presumably characterizes everyone’s thinking.

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

It is proven that the vast majority of top economists give the wrong answer to questions regarding Opportunity Costs.  Why?  Because they are well paid and have plenty of slack in their budgets.

Behavioral economics was born from the empirical observation that people violate several basic predictions of economics.

5) Borrowing and Myopia

When faced with scarcity, we borrow when it makes sense in the long run, and when it does not.

The reason the poor borrow is poverty itself.  The study results are consistent: Scarcity in whatever form always leads to borrowing, and then pushes us deeper in scarcity.

People are behaving myopically which leads to the most basic implication: Tunneling and planning less for the future.

6) The Scarcity Trap

“Everywhere is walking distance if you have the time.” — Steven Wright

The problem is not how much is being spent, but how  it is spent!

Escaping the scarcity trap does not merely require an occasional act of vigilance.  It requires constant, everlasting vigilance; almost all temptations must be resisted almost all of the time.

Studies report that half of all Americans say that they cannot get $2,000 in thirty days, if they faced an emergency!

During periods of abundance, we waste time and money.  We are too lax.  The result is an avoidable cycle punctuated by recurring periods of abundance, followed by threatened periods of scarcity.

7) Poverty

Nearly one billion people are so illiterate that they cannot even sign their names.

Nearly 50 percent of all children in the USA will, at some point, be on food stamps.

The poor take their medication least consistently.

One study found that when low-income women were moved to higher-income neighborhoods, rates of extreme obesity and diabetes dropped tremendously.  Reduction of stress is almost certainly part of the story.

Poverty—at its very core—taxes bandwidth and diminished capacity.

8) Improving the Lives of the Poor

Error is inevitable, but accidents are not.

For an incentive to work, people must see it.  And most incentives, unless designed well, risk falling outside the tunnel, rendering them invisible and ineffective.

“Financial Education”: Follow good rules of thumb.

Make any financial education class as short as possible and easy to grasp, so that it uses a lot less bandwidth and can ultimately yield higher returns.

The right financial product does much more than just create savings for a rainy day or the basis for your first million.  It can liberate bandwidth, boost IQ, firm up self-control, enhance clarity of thinking, and even improve sleep.  Far-fetched?  The data from many studies suggest not.

Programmes targeted at fighting poverty might achieve better success through better design.  And a better design will have to incorporate fundamental insights—focusing and bandwidth—that emerge from the psychology of scarcity.

9) Managing Scarcity in Organisations

Many systems require slack in order to work well (eg., a hospital which keeps one Operating Theatre vacant—for emergencies).

One must ensure that those who are focused on meeting immediate project targets are not borrowing from future projects, thereby exhausting any slack and digging the organisation deeper into a bandwidth hole in the future.

Studies prove that as work hours accumulate and sleep time diminishes, productivity eventually goes down.

There is nothing magical about working fifty or sixty hours a week.  But there is something important about letting your mind out for a jog to maximize effective bandwidth, rather than hours worked.

10) Scarcity in Everyday Life

Savings: Automatic deduction allows us to save with full neglect.  A singular moment of insight can have lasting benefits!

Vigilance: So many bad behaviours need to be done just once to cause pain: Borrowing, taking an ill-advised commitment, or making an unwise purchase.  You splurge or take a loan just once and you have dug yourself a hole for the extended future, a hole that will require vigilance to climb out of.

Save More Tomorrow Program: People agreed to increase their savings deductions whenever their salary increased.  No new sacrifices.  It is a linkage between something you expect to happen (the salary raise) and something you would like to happen (the increased savings).  This arrangement automatically links the two.

In a world of scarcity, long deadlines are a recipe for trouble.  Early abundance encourages waste and by the time the deadline approaches, tunnelling and neglect settle in.  Breaking a long deadline intoprogressively earlierchunks can cut this arc.

Follow the thread of scarcity far enough and it leads back to abundance: The recession that is caused by our behaviour during the boom.  While scarcity plays a starring role in many important problems, abundance sets the stage for it!

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