Scarcity: A book review

I just finished reading a book called Scarcity, by two US academics – a Harvard economist and a Princeton psychologist. It’s an economics book, sort of. But mostly it’s completely innovative.

It contains a theory of a new kind. One I had never thought of, but which I have found very useful.

The theory is that scarcity – no matter what its source – affects your brain. People affected by scarcity have their mental capacities focused on the problem at hand. And that diminishes their ability to deal with everything else.

The authors use four main categories of scarcity in the book.

  • material poverty:  a scarcity of money;
  • being too busy: having a scarcity of time;
  • being on a diet: facing a scarcity of permitted calories;
  • being lonely: having a scarcity of social connections.

For each category they find similar effects on mental capacities.

The person facing scarcity focuses on their own immediate problem, which gains them a limited upside in that sphere – perhaps they scrounge and borrow enough to pay this weeks rent, or remain disciplined enough to not eat dessert tonight. But the focus means other things are ignored to their detriment. They may not be focused at work, for example.

Anyone who has tried to play a computer game and hold a conversation at the same time knows performance and distraction are not compatible.

The theory that scarcity is distracting is well-backed by research. For example, simply reminding people of their financial constraints can lead to a drop in IQ of over 10 points in one famous study.

It is an appealling theory in part because it knits well with a socially progressive view of the world.

The poor, data shows, are worse at sending their kids to school, at taking medicines, at getting their forms filled in at Centrelink, at quitting smoking, eating well, etc. This is a puzzle that would appear to lend credence to a conservative viewpoint that says the poor are lazy.

This theory as expounded in the book helps explains these phenomena by reference to the circumstances of poverty, rather than by blaming the individual.

The authors created a study in which Princeton students had to play Family Feud. They were allocated to either a “rich” group with plenty of time to answer the questions, or  a “poor” group with little time to do so. The poor focused hard. They made more correct guesses per second. But the rich outperformed them overall. Then the authors offered the groups the opportunity to “borrow” time from future rounds for use in the current round. The “poor” group’s performance overall tumbled as they borrowed more and more. The scarcity mindset itself led to poor decision-making.

The book not only describes the problem of scarcity. It suggests interventions that could prove helpful.

The effect of scarcity is described in the book as a “bandwidth tax”. Which is to say that focusing on a single problem of scarcity inhibits the amount of mental bandwidth we have to deal with other scenarios.

Recognising that the “bandwidth” of the poor is especially thin permits better-designed social programs. Rather than intensive financial education programs, a few behavioural nudges will be more effective, for example. And where education is necessary, courses that are cumulative and that fail to accommodate students who miss a class will be far less effective than modules learners can take at their own pace.

They suggest  boom and bust scenarios, such as those issuing from monthly welfare payments or variable pay cheques, can create bigger bandwidth problems as people struggle to manage cashflow. The implication is that stable, frequent, predictable payments are better for bandwidth.

Homelessness – an extreme version of scarcity – is another good example. With nowhere to sleep, wash, prepare food, relax, read or store possessions, it is no wonder the homeless are rarely focused on their health, education or financial futures. Fixing the lack of accommodation in one fell swoop may be more effective than complex incentive structures (and evidence shows that is the case).

The book is excellent at describing scarcity traps, where we get behind – in payments or on a schedule – and constantly borrow from the future, all the while sinking deeper and deeper into the morass.

For those of us not stuck in grinding poverty, the book has some great examples of how to avoid being stuck in a scarcity trap. It is eloquent on the need for “slack” in order for systems to function. Much like when the fridge is literally full to bursting you can access nothing in there easily and things tend to fall out onto the floor, any system that has no slack is inefficient.

A great example comes from a hospital which was able to manage its surgery schedule far better by leaving one operating theatre empty for emergencies. The authors are also advocates of agreeing to fewer commitments than you can manage, and of leaving spare space in your diary so meetings can be moved around without creating disastrous cascades.

The seed of the book, in fact, comes when Professor Mullainathan, writing a book chapter about low-income Americans, sees a great deal of his own time management habits in the budgeting of Americans with payday loans and food stamps. The commonality of the scarcity mindset – which makes a top economist likely to snap at his kids because he’s stressed and busy – is reinforced throughout the book, all the while acknowledging poverty is a more severe, more binding problem than being over-committed at work.

The suggestion scarcity can be better managed with explicit provision for slack could have pay-offs in any number of realms – not least at a national level.

What is our national budget if not a circumstance where every last dollar is committed and deficits keep cropping up most unexpectedly? Is our Treasurer stuck in a scarcity mindset? Is his ability to think clearly about the big picture damaged by his burning desire to fix the budget in this time period? Is the Treasurer more like a 28 year old single mum trying desperately to pay the rent this week, or a 28 year old bond trader with a million dollar portfolio trying to optimise returns across their lifetime? I fear it is the former.

This book got me thinking thoughts like that. And that’s reason enough to recommend it whole-heartedly.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

3 thoughts on “Scarcity: A book review”

  1. But that doesn’t explain the varying experience of social groups.

    Take the experience of Jewish people. Only until the last century have their been places in the world where Jews have not been significantly discriminated against. They’ve been dirt poor; they’ve been marginalised; yet they’ve been incredibly successful any time active discrimination against them has been alleviated or lifted entirely.

    Scarcity has had little effect on whether or not Jewish people have succeeded. Heck, in the longer run, not even the holocaust has had much effect on whether or not the Jewish people have succeeded. Rather, Jewish culture inculcates behaviours in its members that work well within modern societies despite scarcity.

    I am not Jewish. I’m of Greek extraction. But I see the same experience among Greek immigrants: despite experiencing vast scarcity, many Greek immigrants have managed to lift themselves out of poverty because of community-reinforced standards of behaviour. (Funnily enough, those community-reinforced standards of behaviour don’t work so well across the board in Greece, but they do seem to work well in countries to which Greeks have emigrated that are usually more developed than Greece).

    So the scarcity thesis might be correct on a micro level — it’s just that I don’t think it’s anywhere near as important as cultural factors among communities or social groups on a macro level.

    It’s not very fashionable to say it, and one’s likely to be called racist, but I believe cultural standards of behaviour — what the group you’re in says you should be doing — matter greatly, much more than any one person’s experience of scarcity.

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    1. Interestingly the book has something to say about Jewish culture. It talks about the Sabbath as a sort of cultural trick to cut through the perceived scarcity of spare time and force people to spend a day without working, and to spend time with their family.

      So the scarcity hypothesis and cultural hypotheses can co-exist. There may be cultural norms that worsen scarcity – e.g. expectations of spending up your paycheque on the day it comes in. And there may be cultural norms that help people manage scarcity – e.g. in our culture, expectations that you’ll buy a house act as enforced saving and helps you manage your old age, etc.

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    2. What’s normal and therefore what’s scarce are influenced by culture. Do you have any studies that back your culture based hypothesis? There certainly seems to be a widely held beliefs that certain cultural/ethnic groups have certain characteristics but these may not be based on a rigorous study but rather on anecdotes, historical narratives and prejudice.

      Liked by 1 person

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