The Scarcity Mindset

How does being poor change the way we feel and think?

Posted Apr 02, 2015

Economics is the study of how we use our limited resources (time, money, etc) to achieve our goals. This definition refers to physical scarcity. In a recent book titled Scarcity, Mullainathan  & Eldar (2013) broaden the concept of scarcity by asking the following questions: What happens to our minds when we feel we have too little? How does the context of scarcity shape our choices and our behaviors?  They show that scarcity is not just a physical limitation. Scarcity affects our thinking and feeling.  Scarcity orients the mind automatically and powerfully toward unfulfilled needs. For example, food grabs the focus of the hungry. For the lonely person, scarcity may come in poverty of social isolation and a lack of companionship.

On the positive side, scarcity prioritizes our choices and it can make us more effective. Scarcity creates a powerful goal dealing with pressing needs and ignoring other goals. For example, the time pressure of a deadline focuses our attention on using what we have most effectively. Distractions are less tempting. When we have little time left, we try to get more out of every moment. For example, we are more frugal with the toothpaste as the tube starts to run empty, and college seniors tend to get the most out of their time before graduation.

Scarcity contributes to an interesting and a meaningful life. In the words of Professor Todd May, when there is always time for everything, there is no urgency for anything. A life without limits would lose the beauty of its moments, and it would become boring. For example, resolution of midlife crises consists in accepting mortality. Midlife often heightens the feeling that there is not enough time left in life to waste. We overcome the illusion that we can be anything, do anything, and experience everything. We restructure our lives around the needs that are essential. This means that we accept that there will be many things we won’t do in our lives.

Scarcity forces trade-off thinking. We recognize that having one thing means not having something else. If you spend $10 on anything, it is $10 less left for something else. Economists call this the opportunity cost—the alternative use of the money. Doing one thing means neglecting other things. However, slack frees us from making trade-offs. For example, as your budget grows, the purchase of the iPad takes up a smaller and smaller portion of your disposable income. Thus, a bigger budget makes decisions less consequential and lessens feelings of scarcity.

Poverty taxes cognitive resources and causes self-control failure. Poverty means making painful trade-offs (sacrifices). The poor juggle rent, loans, late bills, and count the days until the next paycheck. When you can afford so little, so many things need to be resisted. And resisting more temptations depletes the willpower, which in turns makes them less capable of giving up, say, a smoking habit. This explains why do the poor often fail so badly in self-control. Poverty, at its very core, taxes self-control capacity. The poor lack freedom of mind. They are short, not just on cash but also on willpower.

The context of scarcity makes you myopic (exhibiting bias toward here and now). The mind is focused on present scarcity. We overvalue immediate benefits at the expense of future ones (e.g., procrastinate important things, such as medical checkups, or exercising). We only attend to urgent things and fail to make small investments even when future benefits can be substantial.  To attend to the future requires cognitive resources, which scarcity depletes. We need cognitive resources to plan and to resist present temptations. 

A key concern in the management of scarcity is to economize cognitive resources. Cognitive resource is about allocating our limited information-processing abilities. For example, one could break a big project into progressively smaller chunks that can be completed without the feeling of urgency.  Concentrating your effort on one or—at most—a few goals at a time increases the odds of success. For example, it makes no sense to decide that one is going to quit smoking and diet if one does not actually possess the required willpower to actually carry through with one’s resolution. Research suggests that the best way to get more done in less time requires one to avoid exhaustion and skillfully manage energy by getting sufficient sleep (8 or more hours), more breaks, or daytime naps.