Most of microeconomics is about allocating resources in a constrained world. It starts with budget constraints (or income constraints), but it could also be time, or any resources. In their book “Scarcity – Why having too little means so much”, the authors Sendhil Mullainathan and Eldar Shafir focus on the psychological framework when one is choosing under tight constraints. Although the microeconomic theory says that we all choose under constraints, there is something different in the way we feel that we are constrained when we are poor or rich. The authors state that poor people feel scarcity in a way rich people don’t because scarcity creates a frame of mind that makes people choose differently from people who do not experience scarcity. Thus, scarcity deserves a special focus.
In their book, the authors draw parallels between different types of resources. Of course, the classic definition of scarcity deals with lack of money, but they show that the same psychological mechanisms are at stake when one lacks time, social interactions or calories, and so on. There are two main psychological mechanisms: focusing and tunneling.
On the one hand, focusing means that scarcity forces you to focus and to get the best of the little you have. If you have already experienced working under tight deadlines, you might have thought you were much more efficient when the deadline comes closer. The authors show that similarly, the poor people are much more efficient with their money than the rich people are: they are able to get more from one euro. This mechanism can be tested using lab experiments: creating a video game (similar to the famous “Angry birds”), some individuals were given more trials than others. The trials-poor individuals were performing better per trial (their overall performance was lower, because of the number of trials).
On the other hand, tunneling is in some sense the flip side of the coin of focusing: because your mind is focused on how to get the best out of the little you have, it makes it harder to focus on something else. The consequences of the choices we make today to achieve the goal on which we are focusing often fall out of the tunnel. Poor people tend to borrow from money lender at a very high interest rate in order to pay the bills and the rent for today. The difficulties to pay back the loan tomorrow fall out of the tunnel. Because I’m focusing on this important work I have to submit in a few days, I put off things I should do today: I’m borrowing time from the future, ignoring that the future deadlines will be tight tomorrow and I’ll have to put off things tomorrow as well.
Focusing and tunneling can be summarized into one common mechanism: they capture our mind, they exert a pressure on us, which has the consequence to reduce mental space, or as the authors phrase, it is a “bandwidth tax”. We are less prone to think, to focus, to self-control ourselves under scarcity, because our cognitive resources are scarce.
This idea could have important consequences on the way we see and fight poverty. Let’s consider the case of over-borrowing. One traditional way to think about over-borrowing is that if people are taking bad decisions, it may be related to the fact that their financial knowledge is pretty bad. So they should be taught financial literacy. Using the framework proposed by the authors, financial literacy might not be the problem per se. Although the consequences of borrowing today at a high interest rate are difficult to understand and written in small lines, they might be well understood when one finds himself under normal circumstances, but not under the pressure of making ends meet this month. The problem is to connect what happens tomorrow to what happens today, to put the consequences of borrowing today within the tunnel. Another traditional way to think about over-borrowing is that people have a strong preference for present. So the decisions they take are not bad per se, as they are taken according to their preference. But the preference for present story is closely related to the taxed bandwidth story: when I’m focusing on making ends meet, I might have a strong preference for present.
The best way to avoid bad decisions is to save on the mental bandwidth, to protect as much as possible our cognitive abilities. Thus, the solutions to avoid taking bad decisions under scarcity go into two directions: either we make things much simpler to be understood even when the bandwidth is taxed, or we try to change as much as possible the timing in order to avoid taking decisions when the bandwidth is taxed. The best solution might depend on the situation, but the two directions are similar: the goal is to save on the mental bandwidth, which is also a scarce resource. Most of programs to help the poor are not as successful as they could be because they charge them a lot of bandwidth: for example, many services require filing in a 40-page form. Helping people to fill the form has been proven to increase the take up of the service. People poor in time tend to put off activities (for instance making sport) because the benefits fall out of the tunnel, as they’ll happen in a far future or they are too abstract (making sport is good for my health, but my future health status is somewhat abstract): the solution might be to find a way to commit to do those activities, when the bandwidth is not taxed. For example, registering to a gym with a personal coach is a one shot decision that helps to make sport without taxing the bandwidth, as long as the decision is already taken – maybe I don’t have time to make sport today, but I have to go, because the coach is waiting for me. Similarly, compulsory saving through contributions forces people to save for their pension – although today, the benefits might fall off the tunnel.
To conclude, this book sheds a new light on scarcity and poverty. It proposes a new definition of scarcity and poverty, stating that it is a state of mind. It shows how psychology and economics are connected to each other and how a better understanding of our way of thinking is key for the design of public policies.
Sendhil Mullainathan and Eldar Shafir, Scarcity: Why Having Too Little Means So Much, Times Books, 2013
Pierre-Yves Geoffard “Du temps des pauvres et des «pauvres en temps»”, Libération, January 13, 2014
Maria Konnikova “No Money, No Time”, New York Times, June 13, 2014