1. Scarcity: In short supply

Scarcity: In short supply

THIS EXCITING work by Sendhil Mullainathan, professor of economics at Harvard University, US, and Eldar Shafir, professor of psychology and public at Princeton University, US, studies scarcity in depth and detail.

By: | Updated: October 4, 2015 12:13 AM

Scarcity: Why Having Too Little Means So Much

Sendhil Mullainathan &
Eldar Shafir
Times Books
Pp 302
Rs 374

THIS EXCITING work by Sendhil Mullainathan, professor of economics at Harvard University, US, and Eldar Shafir, professor of psychology and public at Princeton University, US, studies scarcity in depth and detail. Examining scarcity of different types—time, money, bandwidth—the book introduces attention span or bandwidth, a concept of focus, which compels individuals to become prisoners of the ‘problem of the moment’ irrespective of what they are seemingly engaged in doing.

Scarcity: Why Having Too Little Means So Much dwells on the constraints and stress that scarcity has the capacity to impose, saying its overarching presence governs and determines all individual actions. The book draws on cognitive psychology and behavioural science to unravel its story and to reach its conclusions to understand the effects of psychological, social, cognitive and emotional factors. These factors bear the supposedly rational and economic decisions of individuals and institutions, as well as the consequences for market prices, returns and resource allocation.

Scarcity is a marvellous book written simply and with engaging lucidity. It is divided in three segments. Part one discusses the twin issues of focusing and tunnelling. Part two, titled Scarcity Creates Scarcity, has an interesting take on packing and slack, where the authors explain packing a tight box, leaving no slack, and a large box, leaving some extra space for last-minute packing. Part three is titled Designing for Scarcity and has three segments: Improving the Lives of the Poor, Managing Scarcity in Organisations and Scarcity in Everyday Life.

The essential thesis that the authors develop and carry forward is that all of us are constrained in one way or the other and have to make ends meet when we are compelled to manage with less than we require. The busy are short of time, the poor short of money and the dieters short of sugary donuts. This book does not present just a diagnosis, but very real solutions. For instance, understanding the psychology of scarcity can dramatically alter the way anti-poverty programmes are designed. Of course, this does not provide a magic bullet to end poverty, as the problems are too deep. However, an awareness of the psychology of scarcity and the behavioural challenges it yields can improve the modest returns of anti-poverty programmes.

On direct benefit transfers, for instance, the authors take great pains to explain that essentially the energies of the poor are spent on firefighting. What is inherent in these fires is that they are acute and there is an urgent need for cash. The need is not for big investments, but for small amounts—to buy, for example, a school uniform. It is what the poor most want and what the money lender is quick to offer: small sums of money provided quickly and repaid quickly to help an immediate need. Instead, the kind of money that is offered to the poor is often built on the opposite principle—modest to large amounts of money provided judiciously and slowly. Such loans can be helpful for investing, but if people are busy fighting fires, they will not have the bandwidth for investing. Thus, despite the presence of micro-finance institutions, the really poor remain more comfortable with money lenders. In the developing world, income flows are often lumpy and volatile because workers lack formal steady employment. Even in developed nations, many low-income individuals who are employed face a great deal of volatility in incomes

and earnings.

As we saw earlier, income volatility is a major source of the eventual need to juggle. So why not try to mitigate it? A greater focus on the creation of dependable jobs and stable incomes for the poor across the world could be psychologically transformative. But we can go further than that. We tend to focus on big shocks such as medical emergencies or rainfall insurance. Surely, these are important. Yet when one is juggling, small shocks can have equally large effects. For a poor farmer, a sick cow can reduce his daily income enough to cause a slide into a scarcity trap. We should, therefore, look to insure the poor against these apparently ‘small’ shocks.

Behavioural economics by itself is a fascinating field of study and it becomes infinitely more so when the related field of behavioural finance is linked to it. So when a professor of economics teams up with one of psychology, the result is a brilliant book like this one. But for purists, there is one thing lacking: empirical data backing the sweeping analysis. The authors have no doubt engaged in empirical research to reach their conclusions. If they had shared this, it would have further enriched the book.

Deepali Pant-Joshi is executive director, Reserve Bank of India, Mumbai.

Views expressed are personal

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