In this exclusive excerpt of Scarcity: Why Having Too Little Means So Much, Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir explore the concept of scarcity: its ubiquity, its challenges, and its silver lining.
Time and Money
Sendhil was grumbling to Eldar. He had more to-dos than time to do them in. Deadlines had matured from “overdue” to “alarmingly late.” Meetings had been sheepishly rescheduled. His inbox was swelling with messages that needed his attention. He could picture his mother’s hurt face at not getting even an occasional call. His car registration sticker had expired. And things were getting worse. That conference one connecting flight away seemed like a good idea six months ago. Not so much now. Falling behind had turned into a vicious cycle. Re-registering the car was now one more thing to do. A project had taken a wrong direction because of a tardy email response; getting it back on track meant yet more work. The past-due pile of life was growing dangerously close to toppling.
The irony of spending time lamenting the lack of time was not lost on Eldar. It was only partly lost on Sendhil who, undeterred, described his plan for getting out. He would first stem the tide. Old obligations would need to be fulfilled, but new ones could be avoided. He would say no to every new request. He would prevent further delays on old projects by working meticulously to finish them. Eventually this austerity would pay off. The to-do pile would shrink to a manageable level. Only then would he even think about new projects. And of course he would be more prudent going forward. “Yes” would be rare and uttered only after careful scrutiny. It would not be easy, but it was necessary.
Having made the plan felt good. Of course it did. As Voltaire noted long ago, “Illusion is the first of all pleasures.”
A week later, another call from Sendhil: Two colleagues were putting together a book on the lives of low-income Americans. “This is a great opportunity. We should write a chapter,” he said. His voice, Eldar recalls, lacked even a trace of irony.
Predictably, the chapter was “too good to pass up,” and we agreed to do it. Just as predictably, it was a mistake, written in a rush and behind schedule. Unpredictably, it was a worthwhile mistake, creating an unexpected connection that eventually led to this book. Here is an excerpt from our background notes for that chapter:
Shawn, an office manager in Cleveland, was struggling to make ends meet. He was late on a bunch of bills. His credit cards were maxed out. His paycheck ran out quickly. As he said, “There is always more month than money.” The other day, he accidentally bounced a check after overestimating the money in his account; he had forgotten a $22 purchase. Every phone call made him tense: another creditor calling to “remind” him? Being out of money was also affecting his personal life. Sometimes at dinner he would put in less than his fair share because he was short. His friends understood, but it didn’t feel good. And there was no end in sight. He had bought a Blu-ray player on credit, with no payments for the first six months. That was five months ago. How would he pay this extra bill next month? Already, more and more money went to paying off old debts. The bounced check had a hefty overdraft charge. The late bills meant late fees. His finances were a mess. He was in the deep end of the debt pool and barely staying afloat.
Shawn, like many people in his situation, got financial advice from many sources, all of it pretty similar: Don’t sink any deeper. Stop borrowing. Cut your spending to the minimum. Some expenses may be tough to cut, but you’ll have to learn how. Pay off your old debts as quickly as possible. Eventually, with no new debts, your payments will become manageable. After this, remain vigilant so as not to fall back in. Spend and borrow wisely. Avoid unaffordable luxuries. If you must borrow, be clear about what it takes to pay it back. This advice worked better in theory than in practice for Shawn. Resisting temptation is hard. Resisting all temptations was even harder. A leather jacket he had coveted went on sale at a great price. Skimping on his daughter’s birthday gift felt less sensible as the day got closer. There were too many ways to spend more than he planned. Shawn eventually sank back into the debt pool.
It did not take long for us to notice the resemblance between Sendhil’s and Shawn’s behavior. Missed deadlines are a lot like overdue bills. Double-booked meetings (committing time you do not have) are a lot like bounced checks (spending money you do not have). The busier you are, the greater the need to say no. The more indebted you are, the greater the need to not buy. Plans to escape sound reasonable but prove hard to implement. They require constant vigilance—about what to buy or what to agree to do. When vigilance flags—the slightest temptation in time or in money—you sink deeper. Shawn ended up stuck with accumulating debt. Sendhil ended up stuck under mounting commitments.
This resemblance is striking because the circumstances are so different. We normally think of time management and money management as distinct problems. The consequences of failing are different: bad time management leads to embarrassment or poor job performance; bad money management leads to fees or eviction. The cultural contexts are different: falling behind and missing a deadline means one thing to a busy professional; falling behind and missing a debt payment means something else to an urban low-wage worker. The surroundings differ. The education levels differ. Even aspirations can differ. Yet despite these differences, the end behavior was remarkably similar. Sendhil and Shawn did have one thing in common: each of them was feeling the effects of scarcity.
By scarcity we mean having less than you feel you need. Sendhil felt harried; he felt he had too little time to do all the things he needed to do. Shawn felt cash-strapped, with too little money for all the bills he needed to pay. Could this common connection explain their behavior? Could it be that scarcity itself led Sendhil and Shawn to behave in such similar ways?
Imagine that you are surfing the web on your laptop. On a reasonably fast computer, you easily go from page to page. But imagine now that there many other programs open in the background. You have some music playing, files downloading and a bunch of browser windows open. Suddenly you are crawling, not surfing, the web. These background programs are eating up processor cycles. Your browser is limping along because it has less computing power to work with.
Scarcity does something similar to our mental processor. By constantly loading the mind with other processes, it leaves less “mind” for the task at hand. Scarcity directly reduces bandwidth – not a person’s inherent capacity, but how much of that capacity is currently available for use.
It may strike you as odd that a person’s “capacity” can be so easily affected, but that is precisely the point—we are used to thinking of cognitive capacity as fixed, when in fact it might change with circumstances. To see the effect of scarcity on fluid intelligence, an aspect of mental bandwidth, we ran some studies with our graduate student, Jiaying Zhao, where we presented people in a New Jersey mall with simple hypothetical scenarios, such as this one:
Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make?
We then followed this question with a series of Raven’s Matrices problems, which are used to measure fluid intelligence and are common on IQ tests. Using self-reported household income we divided subjects, by median split, into rich and poor. In this set-up we found no statistically significant difference between the rich and poor mall-goers. Of course, there may been some difference but it was not big enough for us to detect in this sample. The rich and the poor looked equally smart. For other mall-goers, we ran the same study but with a slight twist. They were given this question instead:
Imagine that your car has some trouble, which requires an expensive $3,000 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make?
All we have done here is replace the $300 with $3,000. Remarkably, this change affected the two groups differently. Coming up with a half of $300 or $3,000 was easy for those who were well off. They could just pay out of savings or put it on a credit card. For the less well off, finding $150 for an important need was not too hard either. Not enough to make them think too much about scarcity and their own finances. Not so for the $3,000 car expense: finding $1,500 was going to be hard for those with low incomes. A 2011 study found that close to half of all Americans reported that they would be unable to come up with $2,000 in thirty days even if they really needed it.
Of course the question we gave the mall respondents was hypothetical. But it was realistic, and it likely got them thinking about their own money concerns. They may not have a broken car, but experiencing money scarcity would mean they had monetary issues close to the top of mind. Once we tickled that part of the brain, the all too real non-hypothetical thinking about scarcity would come spilling out. Coming up with $1,500 would be hard. My credit cards are maxed out. Already the minimum payment due is so large. How will I make the minimum payment this month? Can I afford to miss another payment? Should I take a payday loan this time instead? A little tickle could raise a racket in the brain. And this racket affected performance. The well-off subjects, with no racket, did just as well here as if they had seen the easy scenario. The poorer subjects, on the other hand, did significantly worse. A small tickle of scarcity and all of a sudden they looked significantly less intelligent. Preoccupied by scarcity, they had lower fluid intelligence scores.
We have run these studies numerous times, always with the same results. To understand how big these effects are, here is a benchmark from a study on sleep. In this study, one group of subjects was put in bed at a normal time. Another group were forced to stay awake all night. Pulling an all-nighter like this is terribly debilitating. Imagine yourself after one night without any sleep. The next morning, the sleeping group was awakened, and both groups were given a Raven’s test. Not surprisingly, the sleep-deprived did much worse. In comparison, how big was our effect at the mall? It was even bigger. Picture yourself after a night of no sleep. How smart do you feel? How sharp would you be the next morning?
Our study revealed that simply raising monetary concerns for the poor erodes cognitive performance even more than being seriously sleep deprived.
There is another way to understand the size of our findings. Because the Raven’s test is used to measure fluid intelligence, it has a direct analogue with IQ. Our effects correspond to between thirteen and fourteen IQ points. By most commonly used descriptive classifications of IQ, thirteen points can move you from the category of “average” to one labeled “superior” intelligence. Or, if you move in the other direction, losing thirteen points can take you from “average” to a category labeled “borderline deficient.” Remember: these differences are not between poor people and rich people. Rather, we are comparing how the same person performs under different circumstances. The same person has fewer IQ points when she is preoccupied by scarcity than when she is not. This is key to our story. The poor responded just like the rich when the car cost little to fix, when scarcity had not been rendered salient. Clearly, this is not about inherent cognitive capacity. Just like the processor that is slowed down by too many applications, the poor here appear worse because some of their bandwidth is being used elsewhere.
The Silver Lining
The poor stay poor, the lonely stay lonely, the busy stay busy, and diets fail. Scarcity creates a mindset that perpetuates scarcity. If all this seems bleak, consider the alternative viewpoint: The poor are poor because they lack skills. The lonely are lonely because they are unlikable; dieters lack will power; and the busy are busy because they lack the capacity to organize their lives. In this alternative view, scarcity is the consequence of deep personal problems, very difficult to change. The scarcity mindset, in contrast, is a contextual outcome, more open to remedies. Rather than a personal trait, it is the outcome of environmental conditions brought on by scarcity itself, conditions that can often be managed. The more we understand the dynamics of how scarcity works upon the human mind, the more likely we can find ways to avoid or at least alleviate the scarcity trap.
Adapted from Scarcity: Why Having Too Little Means So Much. Copyright © 2013 by Sendhil Mullainathan and Eldar Shafir. Reprinted by arrangement with Times Books, an imprint of Henry Holt and Company LLC.
Eldar Shafir is a member of The Psych Report Advisory Board.