Book Review of Scarcity: Why Having So Little Means So Much by Sendhil Mullainathan and Eldar Shafir

Genre: Economics
Author: Sendhil Mullainathan and Eldar Shafir
Title: Scarcity: Why Having So Little Means So Much (Buy the Book)

Summary

Mullainathan and Shafir define scarcity as “having less than you feel you need” (4). There are two forms of scarcity: physical and psychological. Physical scarcity is essentially economics- how we achieve our unlimited desires with limited means.

Psychological scarcity is the mindset that a human experiences when faced with constraints on finite resources. Mullainathan and Shafir focus on the psychological effects of scarcity on people that are poor in time and poor in money.

The feeling of scarcity is a double-edged sword. The focus dividend is a positive effect that increases your efficiency and attentiveness to the task at hand. The bandwidth tax, the tunneling tax, and myopic behavior are some of the negative effects that take away from your mental capacity and cause you to make less rational decisions.

The purpose of Scarcity is to make the reader aware of human’s vulnerability to scarcity  and educate the reader on how to make life and organizations “scarcity-proof.”

In this Titans brief, you will find Mullainathan and Shafir’s answers to these questions:

• What is scarcity and how does it shape our choices and behaviors?
• What is the focus dividend and how does it help in a time of scarcity?
• What is the bandwidth tax and tunneling tax and how do they impede rational behavior?
• What is a scarcity trap and how can you get out of it?
• What is the importance of slack and abundance?

The brief also provides Mullainathan and Shafir’s views on:

• Borrowing
• Poverty

Introduction

What happens to our minds when we feel we have too little, and how does that shape our choices and behaviors? This is the ambiguous question that Sendhil Mullainathan and Eldar Shafir attempt to answer in Scarcity: Why Having Too Little Means So Much.

Mullainathan and Shafir first define the concept of scarcity as “having less than you feel you need” (4). The study of managing physical scarcity is ubiquitous; it’s called economics. Economics focuses on satisfying our unlimited desires with our limited means.

The study of the psychology of scarcity, on the other hand, is not commonplace.

The psychology of scarcity encompasses a mindset that a human experiences when faced with varying constraints on scarce resources such as time or money.

So what happens when one experiences scarcity? Let’s say that you have a project with a tight deadline coming up on Wednesday. It is Sunday night and you haven’t done much in the way of preparing.

You are experiencing time scarcity, and these are the psychological elements that you likely experience:

• Increased efficiency and attentiveness to the task at hand
• Decreased carelessness or error

What about the other parts of your life though? For the next 48 hours, you will likely have less “mind” to give to them. Whether that entails forgetting to pay a bill or missing a dance recital, you will probably appear to be “not all there” to others.

Mullainathan and Shafir explore the psychological ramifications of scarcity, specifically focusing on those who are scarce in money and those who are scarce in time. They attempt to discover why we act the way we do and how we can use this knowledge to rid ourselves of the irrational behavior that comes while feeling that you have less than you need.

The Scarcity Mindset

The Focus Dividend

Increased efficiency and attentiveness to the task at hand, and decreased carelessness or error are two components of the positive outcome of scarcity, termed the focus dividend. When we face time pressure, our mind focuses and tries to “condense previous efforts into immediate output” (20), inadvertently making us more efficient and able to finish the project in the knick of time.

The Bandwidth Tax While we may be more productive in one parameter of our life, we are losing bandwidth to give to the rest of life.

Bandwidth is our mental capacity, and it has two components: cognitive capacity and executive control. Mullainathan and Shafir define cognitive capacity as “the psychological mechanisms that underlie our ability to solve problems, retain information, [and] engage in logical reasoning” (47). Cognitive capacity’s largest component is fluid intelligence, our  “ability to think and reason abstractly and solve problems independent of any specific learning or experience” (47).

Executive control is the component that “underlies our ability to manage our cognitive activities, including planning, attention, initiating and inhibiting actions, and controlling impulses” (47). The largest executive control component is self-control. Scarcity reduces both our cognitive capacity and our executive control and thus makes us victims of the bandwidth tax.

Historically, researchers believed cognitive capacity was a fixed entity. However, Mullainathan and Shafir’s research has produced an interesting perspective: cognitive capacity might change with circumstances.

To better understand the bandwidth tax’s effect on cognitive capacity, Mullainathan and Shafir conducted an experiment in a New Jersey mall.

Each subject self-reported their household income and was subsequently given a brief hypothetical situation to read and then immediately asked to solve a series of Raven’s Matrices problems. There were two hypothetical situations and two groups, each consisting of the same number of affluent and financially distressed people (based on self-reported income).

Both hypothetical situations described unexpected car repairs. They rhetorically asked the individual how they would handle the repair (if they would actually fix the car or just hope that it lasted a little bit longer) and if it would be a financially difficult decision for them to make. The difference between the hypothetical situations was that the first was only a $300 repair, while the second was a $3,000 repair.

In the first group, where the car repair was $300, the affluent and the financially distressed looked equally intelligent based on their performance on the Raven’s Matrices problems.

The second group, where the car repair was $3,000, however, produced interesting results. The affluent performed at the same level as the first group, but the financially distressed performed significantly worse.

Mullainathan and Shafir concluded that “the same person has fewer IQ points when [he or] she is preoccupied by scarcity than when [he or] she is not” (52). In this situation, the financially distressed performed worse because they were using a portion of their bandwidth elsewhere.

The Tunneling Tax

So far, in a time of scarcity we experience the positive effect of the focus dividend countered by a reduction in our bandwidth. To add to the negative side effects, we also start tunneling. Tunneling is when we “focus single mindedly on managing the scarcity at hand” (29).

Leading to goal inhibition, tunneling is generally unavoidable and out of our control.

Goal inhibition is when we can only focus on one item that is important and it decreases our ability to think about other important items. Also, our ability to perceive cost-benefit relationships declines. When we tunnel and it hurts us, we become a tunneling tax victim.

A company, falling victim to tunneling tax, slashes their marketing budget in a weak economy: “In lean times, many small businesses make the mistake of cutting their marketing budget to the bone or even eliminating it entirely.

But lean times are exactly the times your small business needs marketing…you need to help [consumers] find your products and services” (37).

In poor countries, many farmers are also tunneling tax victims.

Researchers cannot answer why poor farmers don’t purchase crop insurance, as the proceeds from the crops harvested each year are typically the only source of income for their families. When asked why they do not buy insurance, the farmers respond that they cannot afford it. In reality  “they cannot afford to not be insured” (36).

Marketing and insurance expenses are two examples of costs that fall inside the tunnel while associated benefits fall outside of the tunnel. During scarcity, we are unable to appreciate cost-benefit relationships and end up hurt by the tunneling tax.

Scarcity makes us less intelligent and more impulsive. Life is fundamentally harder under scarcity. What’s worse is that scarcity generally creates more scarcity.

Scarcity Creates Scarcity

Slack and Abundance

Imagine you are packing a suitcase for a weeklong trip. If you are packing a big suitcase, you will pack more carelessly than someone packing a small suitcase. In your big suitcase, you have more room for error.

You may even throw in a couple of extra outfits to give yourself freedom of choice each day. If you’re packing a small suitcase, you’re aware of the limited space you have and will likely pack succinctly and efficiently.

Scarcity is the small suitcase

Scarcity requires trade-off thinking. Having one item in the small suitcase requires not having something else in the suitcase.

Abundance is the large suitcase.

We are in a period of abundance when we have slack. Slack is “what allows us to feel there is no trade-off”  (73). When we have slack, we don’t contemplate the utility of an item, and we are inherently inefficient and wasteful. When we have slack in time, we wake up, lounge around, and wonder where the day went.

When we have slack in money, we have the luxury of not having to choose – we can have both! Mistakes do not come with real consequences and Slack provides “room to fail” (82). In periods of slack and abundance, we also have no intuitive way to value things.

However, in order to diminish our vulnerability, shouldn’t the poor in money know the value of a dollar and the poor in time know the value of an hour?

Behavioral economics suggests that money is valued in relative terms. Scarcity overturns this notion. Mullainathan and Shafir recreated a classic experiment originally done by economist Richard Thaler. In this study, subjects were broken into two groups and asked to read a hypothetical situation and respond.

There were two hypothetical situations about a day at the beach: you and your friend were thirsty, so your friend offers to go get drinks at the local store (or in the second hypothetical situation – get drinks at the resort convenience store) and asks you to set a price that you would be willing to pay.

The affluent behaved irrationally and said they would pay different prices – lower for the local store drink and higher for the resort convenience store drink. The financially distressed, on the other hand, behaved quite logically.

They gave more consistent answers between the two purchasing locations. As it turns out, the poor are experts in the value of a dollar. This “expertise” can be attributed to their scarcity of money. Owning a smaller suitcase, the financially distressed constantly practice trade-off thinking.

Borrowing and Myopia

“Scarcity today creates more scarcity tomorrow” (108). Why? Because we borrow. We borrow because we tunnel. If you’ll recall, when we tunnel we only focus on our most immediate needs and have a hard time factoring cost-benefit relationships into our decision-making.

For the poor in money, this means that loans are very attractive. For the poor in time, this means putting off a less imminent activity is very attractive. Tomorrow’s scarcity is abstract because you don’t feel it yet.

At some point down the road, you will need to find the time or the money. It will eventually “bleed you by a thousand little cuts” (117). Tending to the future also requires bandwidth, which is taxed by your current scarcity.

Mullainathan and Shafir constructed an experiment to further study the relationship between scarcity and borrowing.

The experiment was set up to simulate Family Feud. Family Feud is an American TV game show in which contestants are asked to “name items that belong to categories like ‘Things Barbie could auction off if she needed money fast’” (111).

Prior to the show, one hundred Americans are asked to respond with their favorite answer to each category. The goal of the participants is to guess America’s favorite answer.

Each contestant in Mullainathan and Shafir’s simulation played a series of rounds in a fixed amount of time, depending on their randomly assigned “wealth.” The “rich” were given more time per round, and the “poor” were given less time per round. Each team’s accumulated points at the end of the round were turned into dollars.

In addition, teams had the option to borrow time if they so desired.

Each second they borrowed in a round cost them two seconds from their total time. However, if they had time left over at the end of a round, they could “save” the time and deposit it back into their total time allotment.

The poor “made 50 percent more guesses per second and earned more per guess” while the rich, who were given three times as long to play (thus should have earned three times as many points) “only earned 1.5 times as much as the poor” (112-113). The poor did well because they experienced the focus dividend. The poor also exhibited myopic behavior caused by tunneling, and as a result, borrowed more than the rich.

In a separate trial, the option to borrow was taken away. In this situation, the poor “earned 60 percent more points” and the rich remained unaffected (113).

These results further support Mullainathan and Shafir’s conclusion that “scarcity captures us…and yields a tunneling tax and makes us act myopic” (120).

The poor behave myopically by borrowing in a time of scarcity and end up performing worse than if they wouldn’t have borrowed at all. Mullainathan and Shafir believe that people, facing no scarcity, would not naturally behave myopically. The tunnel simply clouds their vision and induces them to behave in this irrational manner.

The Scarcity Trap

One type of scarcity is unavoidable. It is “a slice of reality handed out” (124). Unavoidable scarcity is the difference between someone living on dollars a day in a developing country compared to someone living on hundreds of dollars a day in a developed country.

Another type of scarcity results from human behavior. A scarcity trap is “a situation where a person’s behavior contributes to [his or] her scarcity” (125). An initial scarcity “is compounded by behaviors that magnify it” (126). There are two key features to a scarcity trap: being one step behind and juggling.

Juggling is “the  constant move from one pressing task to the next” (128).

It is an inevitable result from tunneling. Just as a juggler focuses on the next ball that is about to drop, while tunneling we focus on the next deadline, bill, etc. We still have plenty of tasks “in the air,” but we focus solely on the looming task at hand.

Juggling is why people treat predictable events as shocks. The bill due next week falls outside of the tunnel we created while trying to find a way to pay the bill due this week.

Shocks are a direct result of a lack of slack. Shocks bigger than our slack push us right back into the psychology of scarcity and generally trigger borrowing.

When you “lack savings or a second car, and have no dinners to cancel, this becomes a serious challenge. Where will you get the money? At that moment, you tunnel. You borrow. You start on a path back into a scarcity trap” (137).

The issue is that scarcity originates with mistakes that you make during periods of relative abundance.

As mentioned previously, during periods of abundance, we waste time and money. The rich generally come out fine because they have slack (whether it is time or money). The poor come out with too little slack and are one shock away from falling into a scarcity trap.

In order to avoid scarcity, we must carry enough slack after inevitable overspending or procrastinating to sustain us through worldly shocks and shocks that we impose on ourselves.

The good news is that if we understand scarcity and how it impacts our behavior, we can manage it.

_{Designing for Scarcity: The Poor in Money}

Understanding Poverty

Mullainathan and Shafir have predominately focused their research on the poor in time and the poor in money. There is one key difference between these two types of people: the poor in time can change their situation if they so choose.

This is not to say that there won’t be negative repercussions, however, they do have more power over their scarcity. The poor in money, on the other hand, are living in poverty. One cannot simply choose to vacate poverty.

Here are some general facts, quoted by Mullainathan and Shafir, on the poor in money:

• They are more likely to forget to take their medications, often for serious illnesses including HIV, diabetes, and tuberculosis.
• They are worse parents. They are harsher, less consistent, more disconnected, and less loving.
• They are more likely to be obese.
• They are less likely to send their children to school or to have their children vaccinated.

Many believe that the poor’s own failure causes their poverty. However, after considering the concepts that Mullainathan and Shafir discussed, we should take another look at the impoverished.

What is a possible cause of the poor-in-money’s seemingly irresponsible behavior?

Mullainathan and Shafir attribute their behavior to the bandwidth tax. This tax causes them to be more forgetful, specifically with their prospective memory. Prospective memory is the type of memory that helps you remember things that you’ve planned to do, such as take your medication or call the doctor.

The bandwidth tax also causes reduced productivity at work, reduced ability to process new information, and fewer mental resources to exert self-control. Additionally, thoughts surrounding scarcity have a negative effect on the quality of sleep a person receives, further compromising bandwidth.

The bandwidth tax is the culprit of the poor-in-money’s confused, uninterested demeanor. They are not incapable or unintelligent. Their bandwidth is simply compromised. This provides us a new way to view the poor-in-money’s situation and provides greater insight into how they can be helped.

Improving Lives of the Poor in Money

In anti-poverty training programs, truancy is common and dropout rates are high. When a student misses a class or lets his or her mind wander during class, the next class becomes significantly more difficult. With each class building off the previous class, it is unlikely that the student will recover.

Current “programs’ design presumes that if people are motivated enough, they will make no mistakes. Those who cannot be bothered to get to class on time goes the implicit argument, must not care: they do not ‘deserve’ the training” (170).

Unfortunately, going mistake-free is significantly more challenging for a person in poverty because of their decreased bandwidth.

If our motive is to help others succeed, we could design more fault-tolerant programs. Perhaps programs could offer staggered modules to help students who have missed a class catch up and get back on track.

Additionally, aid-poverty programs seem to be using ineffective incentives. Consider the TANF (Temporary Assistance for Needy Families) government program. A person is only allowed to receive assistance for a total of five years over his or her lifetime.

This is a long-term limit, and thus only enters the tunnel toward the end of its tenure. In order for a program to truly have an effect on behavior, its aspects must enter into the tunnel. This incentive could be achieved by sending reminders of the months remaining on the program or completely changing the structure of the time limit.

Instead of allowing individuals to receive aid from the program for a lifetime total of five years, they could receive aid for a certain number of months every two to three years.

Finally, we can help the poor by creating bandwidth: helping with childcare, providing small loans that can be paid off quickly, providing financial products that help the poor build savings slack, and creating financial instruments that turn lumpy income into smoother monthly payments. All of these actions “can liberate bandwidth, boost IQ, firm up self-control, enhance clarity of thinking, and improve sleep” (180).

Designing for Scarcity: The Poor in Time

Improving Scarcity in Organizations

The best way to improve the scarcity in organizations is to realize slack’s extreme importance. Many systems require slack in order to work well. For example, an underused assistant is highly valuable to a busy executive.

The assistant can focus solely on the tasks that the executive needs and complete them efficiently and effectively, thus reducing the bandwidth tax on the executive. If other executives demanded a share of the assistant’s efforts, the current executive’s last-minute requests would no longer be handled immediately.

A small shock could set the executive behind and force him to start juggling. The assistant’s underutilized time is what makes her so invaluable.

Having an appropriate amount of slack in an organization is important, but too much can make an organization “fat.”

Consider the leveraged buyout wave in the 1980s, when individuals would come in and discipline a company with debt. This led to improved performance and more careful executive spending, which produced greater profits.

Clearly, there is an art to having enough slack in a company. Mullainathan and Shafir suggest hiring an individual whose job is to ensure that the organization has enough slack. This position could provide a third-person point of view and allow someone to focus on what possible shocks might upset tomorrow’s tight schedule.

Organizations also need to make sure that they are managing the right resources (time or bandwidth).

Henry Ford knew what he was doing by enforcing the 40-hour workweek. Today, more individuals work in services rather than manufacturing; however, companies must take mental depletion just as seriously as physical depletion.

We need time to recover from the tasks that we ask our minds to do. Many companies have enacted energy management programs that plan out walk breaks and emphasize the importance of sleep. Our cognitive system is no different than our physical system and should be taken care of as such.

Learning how to manage scarcity in organizations is vital – “businesses often succeed and fail as a function of how they manage scarcity” (203).

Improving Scarcity in Everyday Life

Because we know what generally causes the psychological cycle of scarcity to occur, why not scarcity-proof our lives?

For example, one executive has his assistant come into each meeting when there are five minutes left. She makes a “five-minute” announcement and then comes back at the scheduled end time as well.

This signals to the other party that their time is over, and it keeps the busy executive on time and not fighting against falling one step behind and juggling his schedule day after day.

We can also have influence over what’s inside our tunnel. Exercising might not be a priority because it is never at the top of the mind. However, with a personal trainer’s daily phone calls, it make it hard to forget about. Simple reminders are often unappreciated.

Furthermore, we should take advantage of “neglecting” things.

We experience two types of choices: one-off choices and vigilant choices. One-off choices are done once or infrequently, while vigilant choices have to be continuously repeated. When possible, it is wise to convert vigilant choices into one-off choices.

Automatic 10% deductions from our paychecks and automatic bill pay are two of the most bandwidth creating, one-off choice resources to take advantage of. Some of “the most persistent tunneling problems for the busy these days…are those tasks that cannot be automated” (210).

Car registration, driver’s license renewal, and taxes are items that cannot yet be automated, but individuals should take advantage of neglecting where they can.

Ultimately, we need to economize on bandwidth.

We know that we have a certain capacity to process information each day, so why not think about when we would be most effective doing the tasks at hand?

We can break our day into high bandwidth times and low bandwidth times. Easier, more routine tasks should be performed in low bandwidth times while challenging tasks should be performed in high bandwidth times.

Finally, we should never forget the importance of slack! Why not leave an hour in your schedule open every Wednesday that is designated for the shocks of daily life?

Why Having Too Little Means So Much

Now that we better understand the effect that the bandwidth tax has on our lives, we can better evaluate programs and policies, and scarcity-proof our organizations and our daily lives.

If you follow the thread of scarcity, it generally leads back to abundance over enough time. In times of abundance, we should build a buffer for the shocks to come. In the words of Mullainathan and Shafir, “scarcity plays a starring role in many problems, and abundance sets the stage for it” (234).

Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

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