How scarcity affects the decision making!!

Scarcity has captured the mind set of people trapped into it, says Sendhil Mullainathan, Professor of Economics at Harvard University. He is not a psychologists, but being a behavioural economists, is fascinated by the working of human mind. It is really important to know how the mind sets of people affects their economic and mundane decisions. How do we react when we have too little of something? What is the reflexive action and how are decisions affected when we realise that we are left with too little of money or food to survive on? It can be any resource like time or money or anything in between. Mullainathan and Eldar Safir ( Tod professor of psychology and public affairs at Princeton), collaborated to explore more on this concept in their book Scarcity: Why Having Too Little Means So Much.

Human beings have unlimited wants but only limited resources. Scarce resources force us to make a choice. Hence, it becomes essential to make rational choices. Opportunity cost exists for every choice we make. The decision to make such choices depends upon our mindset. Resources like time and money affect our decisions. There is a trade-off between our current and the future consumption choice. When a poor person gets some money to spend, he thinks to spend that money on his next meal. However, the scenario differs for the other person who is not facing the same scenario as that of poor. That person may save for his future. The scarcity thus hit hard to the ones who are already in the scarce situation.

The podcast on psychological phenomenon of scarcity talks about a situation where a working woman has been terminated of her job as she mistakenly used the company credit card while shopping instead of her personal card. Why such a mistake? She was in hurry due to the lack of time and mistakenly used the wrong card. She paid a huge cost of the mistake she did. She lost her job. Time scarcity led her to take this erroneous decision which took a toll on her. The story does not end here. The stress of not earning grew. Then comes a day when her husband fought and yelled at her as they ran out of toilet papers. She was paying a lot for a stupid mistake she made. Household supplies dwindled, anxiety increased and the only thought in her mind was “ MONEY”. She ordered a new credit card, and ran into the Wal-Mart as soon as she got the card. Bought a family size of toilet paper and a famili size laundry detergent. She used the credit limit at the max in the very beginning of the month, ignoring the other emergency purposes she would have in the near future. She was maxing out the expenditure on the household supplies rather giving a thought about other important demands which were less pressing her that time. The credit card bill being the one of them. Unable to pay the credit card bills post two months, she also realised that she has to pay the gas money. She has no way to buy the gas or pay the credit card bill but the tax refund that she would get the next year. Now, she paid almost the double cost as she was supposed to pay. This way, she got trapped in the debt and had no consistent way to come out of it. Maybe, if her mind was not occupied by the household supplies and money, she could have focused on other priorities as well. If she had made a budget for the whole month at the beginning, she would have realised the important spending to be cared about. But that is why scarcity bias cannot be easily escaped.

The ability to make decisions comes with a limited capacity. The scarcity state depletes this finite capacity of decision-making. Lack of time or the money scarce, either of the two produces anxiety that ends in a poor decision. The scarcity of time leads to procrastination, wherein people tend to do things which are pressing more demand on them at the priority while holding up to do things which may become worse due to delay. The scarcity of money affects the decision to spend that money on the urgent needs while ignoring the other important things which comes with a burden of future cost. The victim under the scarcity bias (or call it a scarcity trap else wise) is so focused on meeting the urgent needs that she forgets about the other important needs to be also taken care. This ignorance leads to the scarcity for tomorrow (the near future). This way, the vicious cycle of the scarcity is made thus explaining the poverty trap that is conceding from years together.

Mullainathan and Shafir call this ignorance a willful negligence. People tend to make mistakes knowingly. A policymaker has to understand that, there is a need of incentives to battle the willful negligence while not negating the fact that it is hard not to make mistakes. Biases are not so easy to escape. The beauty of the policy should be to reduce the effects of the mistakes caused due to the scarcity trap while the prevention of the scarcity being the other important goal.