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!
(Michael’s Note: This post was written by Meghaan R. Lurtz, our Senior Research Associate at Kitces.com. In addition to her work on the site, Meghaan teaches at the University of Maryland University College in their CFP program. Meghaan is working on her Ph.D. in Personal Financial Planning at Kansas State University. She can be reached at Meghaan@Kitces.com.)
What is Scarcity?
As taught in Economics 101, “Scarcity” is when the supply of a resource does not meet the demand on that resource.
In those situations, the scarcity of the resource also tells us something about that resource itself (for example, it may be rare), and more importantly, the resource’s scarcity shapes the way we, the consumers, engage with that resource (e.g., we may have to pay more to acquire that rare thing, or may want to consider alternatives that are less scarce). In short, scarcity influences the choices we have, and the factors that we take into consideration when making a decision.
At a high level, these seemingly harmless and common sense descriptions of scarcity certainly impact our decisions and may stir us to action (to avoid “FOMO” or Fear Of Missing Out), but do not generally instill in us a sense of confusion or stress. Scarcity, at a high level, is simply a factor that impacts price and availability.
However, at the individual or personal level, “scarcity” is much more influential, and not always in a good way. In fact, take a moment now and think about what happens when a client believes that they lack the financial resources to meet their financial needs or goals? Or how do you react when you don’t have enough time in the day (another limited and scarce resource) to be able to meet both work and family/social commitments?
Sure, clients could make changes to their spending. You might decide to work late a couple of nights or shift appointments, in order to (re-)balance the time allocated between your life and your work. These are quick solutions that make sense – real-time adjustments in response to resource scarcity.
In fact, sometimes the “stress” of a resource scarcity can be good and motivate us to actually get focused on making a change or taking action in the first place. After all, most of us have had that project where due to time constraints, we hunkered down and managed to crank out a good-enough final project in much less time than we may have spent had we given ourselves more time in the first place. Kelly McGonigal, the stress researcher and TED Talks superstar, talks a lot about harnessing the positive side of stress. We even reward that type of get-focused-when-time-is-scarce-and-the-deadline-looms behavior, describing people who do it often as “good under pressure” or “clutch players.”
Yet when we make real-time adjustments to focus our attention to solve a scarcity problem, we can literally miss out on the bigger picture in the process. Because as recent research reveals, scarcity can actually hijack your brain, providing intense focus to accomplish a task with limited resources… while often failing to recognize that the intense focus in response to scarcity is only good if you are going down the right path to begin with!
How Scarcity Negatively Hijacks Our Brains With Sometimes-Excessively-Narrow Focus
The now-famous Scarcity researchers, Dr. Sendhil Mullainathan and Dr. Eldar Shafir, say throughout their fantastic (and must read) book, Scarcity: The New Science of Having Less and How it Defines Our Lives, that scarcity “captures” the mind. And they use this word – “capture” – for a very important reason. Because according to Mullainathan and Shafir, “this (the scarcity effect) happens unavoidably and beyond our control.” In other words, the scarcity effect “captures” our brain’s attention, and takes it captive, whether we want it to or not.
Notably, “scarcity” is not only used in the financial context (nor does it always imply poverty). Scarcity can occur with respect to any resource, and scarcity can influence decisions regardless of whether it is merely subjective and felt, or objective (i.e., the resource truly is scarce).
Time, for example, has been studied as a scarce resource when thinking about how scarcity influences decision-making. People can truly be in a time scarce environment, maybe working more than 50 hours a week in addition to all of the other things they may do in a week that require committed time (e.g., driving to work, appointments, spending time with loved ones, and folding laundry). But people may also just report that they “feel” rushed even though they do not have an overly committed schedule. And either way, objective or subjective, time or money – scarcity matters, and can impact us in ways beyond just the scarce resource alone.
For instance, prior work by Venn and Strazdins in 2017 investigated the influence of time and financial scarcity on health behavior such as cooking at home and exercising. They found that “feeling” poor (financially) or rushed (time-scarce), as well as actually being in poverty or not having “enough” time, negatively impacted health behaviors. Specifically, they found that income scarcity – being poor – was directly related to a 5% to 9% decrease in physical activity, and even just “feeling” poor had a direct and negative relationship with healthy eating (between 9% and 14%). Similarly, time scarcity – both the feeling of it as well as the reality of it – increased inactivity, between 3% and 6.5%. And in the case of joint-scarcity – being both time and financially poor – the effects were even larger than the sum of individual impacts, with low income combined with time scarcity being associated with a 12% decrease in physical activity (if scarcity is reported for one year, and a 22% decrease after two years). In other words, the mental stress of scarcity was manifested as adverse physical consequences and occurred in response to both actual scarcity and “just” perceived scarcity.
Another important consideration, regardless of the type of resource that is scarce, is that Mullainathan and Shafir also found that “scarcity captures the mind both when thinking fast and when thinking slow,” intentionally making the connection to another famous book, and its author behavioral finance researcher Daniel Kahneman. Because Kahneman’s work has shown that our brain is essentially “of two minds” – a “fast-thinking” largely autonomous system that is responsible for our survival, and our quick reflexes and responses (and also our behavioral defaults that we rely on to make quick decisions that can also form behavioral biases), and a “slow-thinking” mind where conscious rational thinking and decision-making occurs. Yet as Mullainathan and Shafir have found, scarcity impacts both the subconscious level of the “fast” brain and impacts the attention and focus of the rational logical “slow-thinking” brain as well.
More specifically, scarcity negatively hijacks our minds and potentially impairs the decision-making process (and how we decide which of the available choices is best) by raising our fast-thinking mind and, at the same time, limiting the role of our “slow” (logical, rational, thinking) mind in two ways: through “tunneling” and the “bandwidth tax.”
Tunneling In The Face Of Scarcity Decisions
The standard approach to making a “good” decision is to weigh the pros and cons, carefully considering the options, their relative value, and how much weight to assign to each – a classic “slow-thinking” process.
When strained by a scarcity of resources, though, our brains may quickly become compromised in the pros-and-cons process. Our fast-thinking brain tunnels so narrowly on the task or choice ahead that our ability to thoroughly consider all the costs and benefits becomes warped. Certain near-term and immediate factors get disproportionately over-weighted relative to longer-term (but potentially-equally-important) factors, and sometimes the longer-term or otherwise more distant factors just get ignored altogether.
It’s the natural result when you are on a time crunch, such as having an impending deadline at work while you also want to be able to attend your child’s soccer match this evening. The more pressing need is likely going to feel like the work deadline. There will be more soccer matches, but if you mess up at work, you could get fired, and then you can’t afford to pay for soccer anyway. Work, at least this time, trumps the child’s soccer match.
This line of reasoning does not seem surprising or dangerous, right? We all have to do what we have to do sometimes; this is just a description of a simple line of thinking that everyone conducts in their head all the time. And, you are right. Yet, for psychologists, there is a lot more to it than just a simple line of reasoning.
Because in reality, this evaluation of the work-or-soccer decision is focusing (only) on the most salient and immediate goal trade-off… and ignoring the rest of the downstream consequences that may follow.
When scarcity induces a more simplistic form of thinking, psychologists would refer to this as “goal inhibition.” In essence, scarcity not only causes us to focus on the near-term and downplay or ignore the long-term, it can cause us to miss the potential impact on other related goals. And it also may cause us to unconsciously forget and overlook all of the distractions and limitations that could still get in the way of near-term goal – and herein lies even more danger. The scarcity-induced, goal-inhibited, simplistic reasoning is not allowing us to do a more nuanced review of all of the costs and benefits of our decision.
In our example above… perhaps you tell yourself, “missing one soccer match is not the end of the world.” But you overlook other factors, like the fact that this was the game you promised your child that you would not miss this morning over breakfast. Or that this is the game when your child has told you that they will start for the first time. And maybe going, this time, would have created a lasting memory that would stay with you and your child for the rest of your lives.
This example may seem morally heavy, but that’s also the point of how a decision under scarcity (in this case, time scarcity) can compromise the decision-making process. Because scarcity causes us to “tunnel,” and when we “tunnel,” this changes both the range of factors we evaluate and even the breadth of the available options we consider in the first place… and with that more limited set of options, we could inadvertently choose the wrong option or the option that does not reflect our true values. Thus, while most would agree that family should trump work… in practice, time scarcity because of a work deadline can often result in the decision-maker taking another path, where work trumps family instead.
How Scarcity Causes A Bandwidth Tax
Unfortunately, though, scarcity cannot be and is not overcome by simply saying “okay, I get it, I need to make my decisions ‘slower’ and do a bit more soul-searching for my true values as a part of my decision-making process.” Not only is this response unrealistic – because there are many instances where we just do not have the time to think slow – but it is also not possible because of scarcity’s second deleterious effect: the “bandwidth tax.”
Returning to our previous example, assume that you decide to pick your child’s soccer game over the work deadline after all. You get to work early, hustle as fast as you can and work like a mad-person for ten hours straight and give it your all, and then at the end of the day, you go to the soccer game. You promised you would be there, and time with your children is an expression of your true values.
Now, what do you do the entire time you are at the game? Likely (still) worry about the work deadline, and what else you could have done with more time! You are trying to be a great parent and be there for your child, but your mind is constantly flooded by what else you could have done on that project had you stayed at work or missed this game. Which means you end out having a hard time paying attention to the game at all. This is the bandwidth tax – you want to be in the moment, but because scarcity impacts fast and slow thinking unconsciously – you cannot control the fact that only half of your mind is at this game.
This half-minded thinking is also well studied in neuro and cognitive psychology, and as it relates to scarcity, has two important outcomes.
The first is that if you are only there or thinking with half of your brain — because the other half is off worried about what could have been or some other issue in the back of your mind – you are not going to perform as well on the current task. In a series of New Jersey mall experiments, “poor” participants did worse than the “rich” participants – not because they were not as smart, but because the thought experiment they were put through brought to mind other outside worries and stress that impeded the “poor group’s” ability to think clearly. In other words, scarcity distracted their focus and their ability to evaluate the decision clearly in the first place. In fact, in another set of experiments with Sugar Cane farmers, the scarcity researchers actually found that the bandwidth tax of scarcity effectively lowers IQ, equivalent to a lost night of sleep. Simply put, multi-tasking doesn’t work, and the bandwidth tax of scarcity (distracting your focus from the task or decision at hand) can take the same toll of multi-tasking, even if you’re really only doing one task (because your brain is still focused on the nagging needs of some other scarcity-related issue in the background).
Half-minded thinking also makes future planning and the self-control required to implement those future plans very difficult. For example, think of saving for the future. Research has shown that saving is harder for the poor, not only because they lack the slack in their budget to do so, but the more difficult it is to just satisfy basic needs today, the more emotionally draining it is to think about trading off any of those needs today for a future want or need.
In my own research using the Survey of Consumer Finance, the same pattern appears, but in the middle class. Middle class households often put off saving for retirement (a future need) in order to satisfy an immediate need, even if they had more than enough money to save on top of the immediate need. In other words, these individuals in many cases have the money to do both (satisfy an immediate need and save for the future), but they only do the “now” part now, as even just perceived scarcity they may have creates a bandwidth tax that limits their ability to actually focus on saving towards the future goal, too.
Objective And Subjective Scarcity In Otherwise Affluent Clients
As noted above, scarcity can be literal (objectively speaking, their resources are scarce) as well as “felt” (perceived scarcity, even if objectively there are enough resources). It might be the traditional pre-retirement financial planning client who is a workaholic, and really does always miss that soccer match, or show up late to your meetings, because they’re overscheduled and there’s never enough time. Or it could be the client who is retired and yet tells you that things are “so busy” and that they feel “rushed” even if their actual commitments in retirement aren’t very stringent. Either scenario is fairly easy to understand and/or relate to, and you can likely see in your own life how actually running out of time, or at least feeling like you are running out of time, lead to tunneling and/or limited bandwidth.
Conversely, it is probably more difficult to imagine what or how “feeling” poor has to do with your financial planning clients. After all, they are financial planning clients and they have likely come to you because they have substantial resources (i.e., money) and are looking for advice in how to manage, save, or otherwise prioritize those accumulated resources. They are the furthest thing from what would be objective financial scarcity.
Yet in some qualitative research I’m conducting that will be presented at the upcoming CFP Academic Research Colloquium, when clients are in a scarce situation, including those that just “feel” like they are in a scarce situation, it still changes how they interpret taking risks, and where they see risk.
Simply put, those either facing scarcity, or even “just” feeling as though their money is scarce, start to have many more cost-benefit conversations with themselves about the relative risks they face. Which could be good (to more carefully consider real risks)… but can also leave them feeling stressed, still unsure about what to do, and perhaps even more fearful of the “risk” (or multitude of risks they’ve managed to identify) in front of them.
How might this manifest in practice? It’s the client who does not want to take a vacation or enjoy their wealth, because they are too fearful of what else the might “need” that money for when another 2008-style bear market hits (regardless of the actual likelihood that another financial crisis is imminent or not, and whether they have more than enough resources to weather the bear market anyway).
Scarcity can also lead people to interpret differently the cost/benefit trade-off of taking risks. For instance, those facing scarcity and feeling like they are surrounded by risk may actually become more risk-seeking – e.g., a person who only has $500 dollars to their name and decides that they may as well gamble with that $500 or buy lottery tickets, as the possibility of winning feels like a better gamble than just waiting for the $500 to eventually run out anyway. Which they may already view as inevitable when facing scarcity and seeing a plethora of risks everywhere (e.g., anticipating it’s only a matter of time before the car breaks down and uses up the last of their savings anyway).
Lastly, financial scarcity – both real and felt – may impact how and when clients may decide to utilize credit, and how they prioritize their savings goals. As those who are fearful of that “risk” around the corner may choose to put expenses that they could just pay for on a credit card, and essentially prefer to pay interest in order to reserve or keep cash available in an emergency account… even though that is what the emergency account is for! And similarly, some clients may focus on paying down the mortgage faster than the time allotted to them by the loan and forego putting that money into their 401(k), because the half-mindedness of scarcity causes them to tunnel on the “burden” of debt payments rather than consider the long-term growth implications of growing a retirement plan (or not) as well.
The key point: not only have risk tolerance tools long been criticized by financial advisors for not always aligning with client behavior when the bear market actually comes (and recent research suggests there is good reason not to trust the quality of at least some risk tolerance questionnaires), but now, to add more fuel to the fire, objective as well as subjective financial scarcity may also influence how tolerant clients are of risk when the risky moments come. Because the stress of scarcity causes them to tunnel on the risk, and/or the bandwidth tax limits them from being able to really consider all the options and their long-term implications.
Reducing Scarcity: Is Slack The Answer?
So what can be done to reduce scarcity and the toll that it takes on our decision-making process… aside from the obvious answer of just having more resources so they’re not scarce in the first place?
A concept emerging from Mullainathan and Shafir’s work is “slack.” Slack can come in many forms, but at its core, it is related to trade-off thinking. If people feel like they are constantly having to make trade-offs (e.g., foregoing the vacation to fix the car, or choosing between the work deadline or the kid’s soccer game), and that every dollar or minute of the day is accounted for – they are going to hit a scarcity wall. In fact, this type of thinking can be considered the telltale sign that there is not enough slack in the first place, and the barrage of trade-off thinking is taking over. When this happens, individuals end out fixating on the scarce item (i.e., tunneling), and then the bandwidth tax further limits their ability to fully consider all the trade-off options. Basically, without slack, scarcity will ultimately hijack one’s mind.
Slack, though, is a balance; it is not just about creating a lot more time or a lot more money. Too much slack and choices, and nothing gets done as well. Option overload, research shows, leads to inactivity, and remember, it sometimes helps to have a little stress to focus and feel motivated. Even as too little slack, again, leads to scarcity challenges. So what can be done to find that balance of slack?
Mullainathan and Shafir focus on one idea: “slack” occurs when a person recognizes that he/she really can choose “both.” Which they often may not realize, even if it is feasible, because of the very impact that scarcity has: tunneling and bandwidth tax.
For instance, when the client is stressed over being unable to both put more into their savings and also pay down their debt… run the numbers and help them to see they could do “both”… by adjusting their spending rates as the debt pays down to be able to save more over time. In other words, scarcity in the current moment doesn’t mean scarcity forever; it’s the tunneling that often obscures other solutions and long-term thinking for those facing scarcity. In other words, for those facing scarcity, it is hard to see how their situation actually is changing and improving over time (which is itself a manifestation of the tunneling!).
How to handle objective scarcity is a little different, and in many ways, researchers know even less about this topic. Mullainathan and Shafir suggest logical, but from my perspective, maybe not necessarily the most helpful (no offense to them) ideas. For example, they suggest that those living in a financial scarce environment should look for moments of abundance. This is logical if we assume that the average person is not in permanent financial scarcity; there are, then, certainly times when you do have more than you need and, in these moments (if you see them), you can capitalize on them. Thus, if you have a little left over at the end of the month, or you receive an unexpected bonus, Mullainathan and Shafir suggest putting this money away for a rainy day!
For the average person (i.e., someone who is not an Ivy-League behavioral economics professor), though, this suggestion or logical explanation is really tough – in fact, as behavioral economist researchers, they know that the pain of losses (and scarcity) weighs more heavily than the pleasure of gains (and moments of abundance). Which means that it’s not clear how much stress will really be relieved by celebrating moments of abundance, nor is it clear if the average person will even notice the abundance. They notice the pain, but they won’t necessarily notice the pleasure.
Of course, another option, if you do not always remember to count your blessings, is to simply try to make more money in the first place (a more financial-planning approach to the situation): for instance, ask for a raise, change jobs altogether, or take on a side-hustle. Depending on the current level of time scarcity, in addition to financial scarcity, one of these ways to make more money may seem more or less feasible than the others, but considering how to increase income in the face of scarcity is itself an opportunity for a financial advisor to add value.
If mainly suffering from true time scarcity, Mullainathan and Shafir’s advice is pretty similar: find a time when you are not so short on time, and look forward to enjoying it. In my life, I look ahead in my Google calendar… and when I am not as busy, or at least nothing has already been scheduled, I mark down hours for yoga, days for writing and research, and at least a week for some real downtime. It may take a while to get to this time, but eventually, I will reach a place where downtime is a reality.
Alternatively, it’s also important to remember that you can avoid making “bad” decisions under scarcity pressure by reducing the number of decisions that need to be made in the first place, and/or by making decisions in advance so they aren’t scarcity-minded decisions when the time comes. For instance, rather than focusing on how to save more now – which may be difficult or impossible for those facing scarcity – consider instead getting a client commitment to “only” spend 50% of their next raise (and by default save the other 50%). Which focuses the decision on how to spend additional resources to address scarcity (rather than trying to allocate the already currently-scarce resources), yet still allocates 50% of the next raise to savings, which cumulatively can substantially lift the savings rate over time… all without overly focusing on the “impossibility” of saving more in the face of scarce resources today. More generally, programs like automatic enrollment in 401(k) plans also help to manage “bad” scarcity-minded decisions by reducing the number of decisions that need to be made in the first place (as the easiest recourse for those facing scarcity is simply to make no decision at all, which means if the default is to save… that’s what most people will end out doing anyway).
Ultimately, there may not be a perfect solution to a myriad of real-world human situations, but recognizing scarcity and its potential impacts hopefully gives more insight into clients and their (potentially challenged) decision-making processes, and recognizing that a series of “bad” decisions may simply be the result of someone stuck in a scarcity-trap (that they themselves do not even recognize). Which creates an opportunity for the financial advisor to assist clients in escaping the scarcity trap by either creating, or setting the stage to create, some additional slack that leads to positive changes in their financial lives. Or at a minimum, just sitting down with them and talk through their options, to try to overcome the tendency to tunnel in the face of scarcity. And of course, giving advice on how to overcome actual financial scarcity – e.g., by taking steps to earn more in the first place – where appropriate.
The key point, though, is that scarcity-minded decisions don’t necessarily represent laziness or unintelligent decisions, but simply scarcity-minded stressed decisions brought on by tunneling and the bandwidth tax. Which in turn can lead to a “scarcity trap” – another term coined by Mullainathan and Shafir – where scarcity not only captures the mind, but also becomes cyclical unto itself, where one “bad” decision (as a result of tunneling and the bandwidth tax) made under scarcity leads to another and another. And ironically, the scarcity trap is a problem that those facing it often don’t realize, because it’s hard to see the cycle itself when tunneling and facing limited bandwidth! Which also means it can be difficult to see a way out if left only to your own devices… and creates another opportunity for a third-party financial advisor to help.