The basic concept of “scarcity” is rather straightforward – when there isn’t enough of something, that resource is scarce, which may mean it’s something we can’t get, must pay more for, or must find an alternative to, given its scarcity.
Yet recent research finds that the concept of scarcity, and its impact on decisions, goes far beyond just the economic framing of how scarcity may impact price and the economic supply and demand curves. Instead, scarcity also appears to take a more direct toll on our brains themselves and impacts the ways we make decisions in the first place.
In this guest post, Senior Research Associate Meghaan Lurtz explores the recent research of Sendhil Mullainathan and Eldar Shafir on how scarcity can cause “tunneling,” which limits our ability to fully weigh the pros and cons of a decision and also a “bandwidth tax,” which makes it difficult to fully focus on anything when the weighty consequences of scarcity are looming.
And notably, their research finds that it’s more than just financial scarcity that can impact us. Scarcity of time can be similarly damaging to financial scarcity, and the toll that scarcity takes on the brain and our decision-making process is present both in the face of actual scarcity and even just perceived scarcity. In other words, if we think we don’t have enough, it can still impair our decision-making process… potentially leading to less favorable decisions that really do amplify scarcity. A perverse “scarcity trap” that can feed upon itself.
So what’s the alternative? Trying to find “slack,” whether by releasing time commitments or earning more money to actually reduce the objective amount of scarcity. Or trying to deliberately focus more on the times of abundance – even if they’re just moments – to give our brains a break from the toll that scarcity otherwise takes. Although in reality, even those facing near-term scarcity won’t necessarily be facing scarcity in the long run… which means often the best thing a financial advisor can do is simply to put a currently-scarce situation in a longer-term context, reducing the scarcity-induced tendency to tunnel only on the near-term, and setting the pathway for making better long-term financial decisions!