Why do successful people get things done at the last minute? Why does poverty persist? Why do organizations get stuck firefighting? Why do the lonely find it hard to make friends?
Back in 2013, authors Sendhil Mullainathan and Eldar Shafir wrote a book called ‘Scarcity: Why Having Too Little Means So Much’, which tried to answer these questions. In it, the two show that scarcity creates a similar psychology for everyone struggling to manage with less than they need – busy people or groups of people fail to manage their time efficiently for the same reasons the poor and those maxed out on credit cards fail to manage their money.
This mindset often manifests itself in ways that make people feel ‘bad with money’. Knowledge is power, so let’s try and understand the mindset, and explore ways in which it may be overcome.
What Is It?
As the founders of scarcity theory define it, scarcity means "having less than you feel you need."
“This feeling of being deprived of a key resource can impact our behaviours for the worse. Research has even found that a scarcity mindset can impact our neural mechanisms when making decisions, decreasing activity in the part of the brain (the dorsolateral prefrontal cortex) that plays a role in goal-directed choice,” explains Morningstar behavioural researcher Samantha Lamas.
She goes on the note that it is important to remember that a scarcity mindset can come into play in a variety of contexts, for example, when faced with too little money, time, food, or drink.
“When it comes to financial scarcity, researchers have found that people who are experiencing financial scarcity take out loans at higher interest rates, save less, and are more present biased,” she says.
How to Identify It?
In the ‘Scarcity…’ book, Mullainathan talks of his own poor time management, and his tendency to over commit. The authors also discuss the case of a man who tries to avoid it but is unable to get out of debt. Both are examples of scarcity.
“A scarcity mindset usually results in tunnelling, which is a minute focus on whatever resource we are lacking. It almost becomes an obsessive focus of all our attention. For example, ever notice that the second you decide to stop eating chocolate, you can’t seem to get it out of your mind? That is an example of tunnelling,” Lamas says.
Overall, she warns, a scarcity mindset is bad news.
“One of the dangers of a scarcity mindset is the impact it can have on our cognitive capacity. Because scarcity prompts us to focus so much on what we are lacking, we can neglect everything else. A scarcity mindset takes up our cognitive space and bandwidth, prompting bad decisions and behaviours.
How to Counter It?
Researchers, including Lamas, recommend creating slack.
In the case of the broader economy, slack is defined as, “the difference between the economy's productive capacity -- the amount of goods and services that could be produced if all labour and capital were fully and efficiently employed -- and the actual level of economic output.”
Simply put, ‘Slack’ means having an extra, unused amount of something. For the purposes of this article, slack means having some buffer, like an emergency fund for example.
“For people facing financial scarcity, slack means building up an emergency savings fund, so that you never feel completely resource-scarce—which can be easier said than done. I would suggest setting up some rules and barriers to get you there with as little guesswork as possible,” Lamas says.
Some tips she offers as an example include setting up an automatic transfer from your checking to your savings account as soon as you get your paycheck. “Even if it is a little amount, it will add up,” she says.
Also, remember that ‘Treat Yourself’ is special only if it is an occasional treat – not a daily occurrence.
“If excess spending is your issue, create a personal rule where you can buy one ‘fun’ object a month. If sticking to this rule is hard for you, share your goal with a mentor to help keep you accountable,” Lamas says.
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