Book Summary: Scarcity by Sendhil Mullainathan and Eldar Shafir

This summary of Scarcity: The True Cost of Not Having Enough by Sendhil Mullainathan and Eldar Shafir explains how scarcity changes the way we make decisions.

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Key Takeaways from Scarcity

• What is scarcity?
  • Scarcity is when we have less than we feel we need.
  • While the book mainly discusses money and time scarcity, it can also apply to things like counting calories or packing a suitcase.
• Scarcity captures the mind and changes the way we make decision:
  • “Captures” — the process is unconscious and uncontrollable.
  • Scarcity creates a focus dividend, eliminating distractions and helping us concentrate on the task at hand.
  • But it also causes tunnelling — we focus on the short-term and overlook important, longer-term things that fall outside the tunnel.
• Scarcity taxes mental bandwidth:
  • One component of bandwidth is cognitive capacity, the ability to solve problems, apply logical reasoning, etc.
  • The other component is executive control, our ability to plan, pay attention and control impulses.
• The scarcity trap describes how people fall behind and stay behind. Scarcity increases both the risk of failure and the costs of failure.
• The opposite of scarcity is slack or abundance.
  • Slack is a mental luxury that lets us choose without noticing the trade-offs involved, which simplifies decision-making.
  • Although slack can lead to inefficiencies and waste, it also gives us room to fail.
  • Escaping the scarcity trap requires enough slack to absorb shocks.
• Understanding the psychology of scarcity can help us in our own lives and improve the design of social programmes.

Detailed Summary of Scarcity

What is scarcity?

Scarcity is “having less than you feel you need”. While physical limits do play a role, the authors focus more on the subjective feeling of not having enough and the consequences that that feeling produces.

Scarcity can arise in many different domains:

• Money. This is the main focus of the book.
• Time. The authors discuss this a lot to create an ’empathy bridge’, as they expect many of their readers may have experienced time scarcity but not poverty.
• Dieting. Several studies find that people perform worse on various cognitive tests when they’re dieting (and it doesn’t seem to be caused by a lack of calories or nutritional deficiencies).
• Loneliness. Lonely people did better at identifying emotions when shown pictures of different faces, and at recalling details about social interactions when reading diary entries.
• Lab studies. The authors refer to various studies that induced artificial scarcity, with some groups given fewer guesses or ‘lives’ than other groups.
• Organisational scarcity. Many of the concepts discussed apply also to businesses and organisations dealing with scarcity. They’re constantly in firefighting mode and favour the ‘urgent’ over the ‘important’.

This doesn’t mean all forms of scarcity are comparable.

Poverty is a particularly extreme form of scarcity. A person facing time-scarcity can usually choose take on fewer projects or miss some deadlines, while a dieter can take a break from their diet. Moreover, we can often use money to compensate for other types of scarcity. Poverty, by contrast, is inescapable.

Scarcity captures the mind

Scarcity makes us focus on an immediate, pressing need at the expense of any competing considerations. The authors use the word “capture” to describe how this happens automatically and unavoidably.

The focus dividend

Scarcity can make us more attentive and efficient. Sometimes pressure can really motivate us to perform, to do things we never thought we could. For example:

• Many controlled studies show that deadlines, which create scarcity, tend to improve performance.
• Coupons with no expiration date are less likely to be used than similar coupons with such dates.
• The second half of meetings almost always produces more tangible progress than the first half, because the time scarcity forces focus.

It is very hard to fake scarcity. Imaginary deadlines therefore do not produce the same productivity benefits that actual deadlines do.

However, in some domains such as loneliness and diet, increased focus can lead to worse performance. Lonely people who focus too much on a conversation tend to come off clingy, needy, or overly self-conscious. Dieters who focus too much on food find it that much harder to resist temptations.

Tunnelling tax

Scarcity causes us to focus single-mindedly at managing the scarcity at hand. We focus on whatever’s in our tunnel and ignore everything outside it. The authors call this the tunnelling tax. Tunnelling changes how we make decisions.

This is because of a psychological phenomenon called inhibition, where focusing on one thing inhibits competing ideas.

Scarcity can trigger goal inhibition in the same way — when we’re lasered in on the short-term scarcity, other goals don’t even enter our minds.

Tunnelling and borrowing

Tunnelling creates a bias to short-term solutions such as borrowing. Payday loans are attractive because they put out fires quickly — their benefits fall within the tunnel.

Poor people “borrow” in ways other than loans, such as by paying their bills late. This can result in fees just as expensive, or even more expensive, than taking out a payday loan. A 1997 study estimates that nearly 5% of the poor’s annual income was spent on reconnections, servicing and late fees.

It’s important to note that myopia or tunnelling are not personal traits. Everyone tunnels when they face scarcity. Even organisations ‘borrow’ when confronted by scarcity by increasing work hours and forgoing vacations, solving a short-term problem without regard for the long-term costs.

What is the net effect?

Whether the focus dividend or the tunnelling tax is bigger depends on the context and payoffs. The point is that people don’t make calm, cost-benefit calculations when they tunnel.

For example, a busy person who tunnels, rushing to finish a project instead of going to the gym or spending time with his children, may genuinely regret this. The other options may have never even entered into his mind. And even if they did, the tunnel tends to magnify the short-term consequences (finishing the project) over the more distant ones.

When we look back at how we spent our time or money during moments of scarcity, we are bound to be disappointed. We should therefore be cautious to infer preferences from behaviour.

Scarcity taxes mental bandwidth

Bandwidth is not a person’s inherent capacity, but the amount of capacity available for use at any time. It refers to two broad components of mental function:

• Cognitive capacity; and
• Executive control.

We often think of these as fixed — much of what we attribute to ‘talent’ or ‘innate personality’ depends on these two components. However, studies show both of these can change under scarcity. It’s easy to assume that a person is inherently less capable in some way, when they are actually just facing scarcity.

Cognitive capacity

Cognitive capacity refers to our ability to solve problems, engage in logical reasoning and retain information. A central feature of cognitive capacity is fluid intelligence.

Executive control

Executive control refers to our ability to control impulses, plan, and pay attention.

When our bandwidth is taxed, our self-control also diminishes. One study asked people to remember either a 2-digit or 7-digit number, and then let them choose between having cake or fruit as a snack. Those who had to remember the 7-digit number had less mental bandwidth and were 50% more likely to choose cake.

The scarcity trap

People fall into scarcity traps when scarcity causes behaviours that perpetuate and often amplify their scarcity. This is partly why the poor stay poor, the busy stay busy, the lonely stay lonely, and diets fail (of course, other factors matter too).

The scarcity trap occurs because scarcity leads to:

• higher risks of failure; and
• higher costs of failure.

Higher risk of failure

Because scarcity makes us tunnel, we don’t see what’s ahead. We’re therefore more likely to be caught out by things we could have anticipated if we hadn’t tunnelled.

Short-term fixes can build up over time and create a complex, messy patchwork of obligations. For example, research shows that on average, the poor use about 10 different financial instruments. They are more likely to owe and be owed money from multiple sources. Amongst this complexity, navigating the scarcity becomes harder.

Similarly, because scarcity taxes our bandwidth, we’re more likely to make errors or give in to our impulses. Getting out of scarcity usually requires a plan, but long-term planning is harder when you have less cognitive capacity available. Following through on the plan is then likely to require executive control which, again, scarcity compromises.

Higher costs of failure

Even in periods of (relative) abundance, we aren’t perfectly calculating creatures. When we have plenty of time, we fritter it away carelessly and when we have lots of money, we waste it on things we don’t end up using. Both the rich and the poor do this. The difference is that the rich have slack.

With slack, inefficiency doesn’t really hurt. Slack gives us room to fail. The exact same mistake can be much more damaging for a person facing scarcity than for a person with slack.

Escaping the scarcity trap requires slack

To get out of a scarcity trap, you don’t just need to have more resources than desires on average. You need to have enough slack to handle the shocks that may come along at any moment.

The value of slack

Think of packing a suitcase. With a big suitcase, you can pack casually and carelessly and there’ll still be space left over. If you want to add something, you can throw it in without taking anything out. Packing a small suitcase, on the other hand, requires care. You have to pack carefully and make trade-offs along the way.

While everything in life has a trade-off, slack lets us feel as if there is none. If a rich person decides to buy a $10 item, they don’t have to choose to give up something else. Slack gives us the luxury of not choosing and the ability to say, “I’ll take both”.

We all have ‘time suitcases’, ‘money suitcases’ or ‘calorie suitcases’ into which we must fit all our needs. Packing a small suitcase is a logistically harder problem than packing a big one.

Slack is underrated

Even though many systems require slack to function well, we consistently undervalue it. When we have a lot to fit into a suitcase or schedule, our impulse is to pack tightly and use up every bit of available room. Slack feels inefficient.

But life is filled with unpredictable shocks. When we face scarcity, we need slack. Otherwise, we may end up having to ‘borrow’ at high interest.

Policy implications

Why do the poor perform so badly?

There’s an issue that many poverty researchers are reluctant to discuss. Decades of research across multiple fields show that the poor do worse on many measures:

• they tend to be worse parents (i.e. they are harsher with, more disconnected from, and more likely to take out their own anger on their children);
• they tend to be more obese;
• they are less likely to send their children to school or vaccinate them; and
• they’re less likely to wash their hands or treat their water before drinking it (in places where that is needed).

One prevailing explanation is that failure causes poverty — the poor are poor precisely because they are less capable.

However, the authors argue that causality runs at least as strongly the other way. Poverty and scarcity causes failure, because so many behaviours — eating well, being a good parent, performing at work — require mental bandwidth. Worries about not having enough money also impact sleep quality, which may further compromise bandwidth. For example, one study showed that poor people tended to be worse parents towards the end of the month, when their food stamps are running low.

The authors believe that the bandwidth tax may be strong enough to explain all of the poor’s failings. It can also explain failures across multiple domains, times, and countries.

Why do interventions to help the poor often fail?

The psychology of scarcity helps explain why so many interventions to help the poor don’t work. Public health programs rely on the poor to absorb and apply new information. Job-training and vaccination programs rely on the poor to show up.

All of this is challenging when your bandwidth is heavily taxed.

Designing social programs

The problem is not, as people often assume, a lack of motivation. Instead, the authors suggest ways to design social programs with scarcity in mind.

Some examples:

• Fault tolerance. Under scarcity, errors will occur no matter how motivated someone is. If training programs were more fault-tolerant — e.g. giving people opportunities to get back on track even if they miss a class or two — it could increase chances of success
• Near-term incentives. Incentives that fall within the tunnel are more likely to work. Simple reminders can bring important but non-urgent things (e.g. savings) into the tunnel, so can be a surprisingly effective way to change behaviour.
• Economise on bandwidth. Bandwidth is a scarce resource. Make people’s lives easier with things like:
  • pre-populating forms using tax data where possible;
  • automating bill payments or savings;
  • financial literacy courses that focus on useful ‘rules of thumb’ over traditional, comprehensive accounting principles and frameworks. In one example, the shorter, simplified course was such a success that many participants said at the end they would even be willing to pay for another class themselves (this was remarkable as financial literacy classes are usually unpopular); or
  • timing education programs to coincide with points where people are likely to have more bandwidth — e.g. just after a harvest.
• Focus on timing. Finding ways to eliminate the inefficiency and waste during times of abundance can eliminate scarcity down the track. For example, we could break up long deadlines into smaller chunks, or provide financial products to smooth out ‘lumpy’ income.

Practical suggestions for dealing with scarcity

The authors suggest various things you can do to prevent bad decisions while tunnelling. For example:

• Plan in advance — e.g. stock your pantry with healthy options so you don’t reach for the junk food when you’re busy; set up automatic bill payments so you don’t forget to pay your bills.
• Follow simple rules to economise on bandwidth — e.g. no work on the Jewish Sabbath, no carbs on the Atkins diet.
• Work on high-bandwidth tasks during high-bandwidth times — The Power of Full Engagement discusses this more fully.
• Build in slack — e.g. leave some wiggle room in your schedule and in your budget.

Other Interesting Points

• During brief and highly focused events (e.g. car accidents and robberies), people are more attentive and their brains process more information in the same amount of time. This causes a “subjective expansion of time” — i.e. people feel that the events last longer than they really do.
• Poor people know the true value of a dollar — they behave like rational economic actors and are far less vulnerable to cognitive biases such as those caused by framing effects (when they’re not tunnelling, anyway).
• Some estimate as many as 1 in 10 items bought in the grocery store will become “cabinet castaways” (e.g. the soups, jams and canned foods that are never used).
• Henry Ford instituted the 40-hour work week after his experiments showed that it increased output compared to the 60-hour weeks that were previously standard.

My Review of Scarcity

I thought Scarcity was well-written and persuasively argued. The structure was reasonably clear and the book was easy to read with lots of compelling examples. I especially liked the parts on slack (which I agree is underrated) and thought the ’empathy bridge’ between time and money scarcity was clever and effective.

Overall, I found Mullainathan and Shafir to be trustworthy writers and measured in their conclusions. They conducted quite a few of the experiments described in the book and gave careful disclaimers about the limits of their findings. They also addressed alternative explanations for their results — for example, in the farmers study, they explain why the lower cognitive capacity observed pre-harvest was unlikely to be because the farmers were eating less, working harder, or more anxious about what the harvest may bring.

The policy suggestions were also surprisingly solid. Partway through, I started to worry that the authors would make broad, politically unworkable solutions like “give poor people a lot more money” or “abandon all means-testing”, without discussing their downsides. (Sort of like in Evicted or How Democracies Die.) So I was heartened to see that most of their suggestions were more modest and practical, requiring thoughtful design rather than buckets of money. Even as Mullainathan and Shafir highlight how government bureaucracy strains poor people’s already-limited bandwidth, they acknowledge that there are often good reasons for requiring people to fill out forms.

A few minor criticisms:

• Some parts felt a bit repetitive, but the book is pretty short (304 pages), so this wasn’t too bad.
• The lack of footnotes was very annoying (there are endnotes, but these are much harder to navigate). This is why I haven’t included links to studies in this summary.
• A couple of suggestions toward the end were a bit silly — e.g. “Why not also measure Gross National Bandwidth?” I mean, I think mental health and cognitive impacts are important, but a GNB sounds more like a gimmick than anything else.
• The suggestions for dealing with scarcity in your everyday life felt ‘tacked on’. They weren’t bad per se — they just echoed a lot of self-improvement advice covered better elsewhere.

Let me know what you think of my summary of Scarcity in the comments below!

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