Article19 October 2020

The feeling of scarcity

At some point, there will likely come a time when we face the prospect of being scarce of something. This may range from money, food, time or any such limited resource. How we manage to be short of resources can be as problematic as the scarcity itself. Here, we look at how thought processes are impacted by scarcity and how this may stifle rational thinking

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With more people now than ever working from home, traditional office hours are becoming a thing of the past for some. It’s not uncommon to hear those who have kept their jobs say they work longer hours now than they did before the lockdown. Evidence supports this.

Microsoft has found that 54% of parents in a survey of six countries said it’s been difficult balancing household demands while working from home while LinkedIn research alongside the Mental Health Foundation found that those working from home during the pandemic are racking up an extra 28 hours of monthly overtime since lockdown began.

This amounts to almost an additional four days’ work per month. For those working from home, managing their time can be difficult because it is scarce. And precisely because it is scarce, they may not manage their time well. 

Defining scarcity 

Scarcity is defined in the Oxford English dictionary as “insufficiency of supply”.

When it comes to economics, however, the term has a slightly different sense. The influential textbook on Economics by Greg Mankiw defines scarcity as the limited nature of society’s resources and economics as the study of how society manages its scarce resources. This subtle, yet important change, leads to discussing topics such as efficiency, equity, rationality and opportunity cost. 

Another twist to the definition of scarcity was introduced by behavioural economist Sendhil Mullainathan and psychologist Eldar Shafir’s in their 2013 book, “Scarcity: The true cost of not having enough”. They argue that scarcity is more than a physical event. It has psychological effects. They argue: “Scarcity is more than just the displeasure of having very little. It changes how we think. It imposes itself on our minds.”

If Mullainathan and Shafir are correct that scarcity changes the way we think, this has important implications for both traditional and behavioural economics.

Scarcity affects decision making 

Mankiw’s textbook argues that “Rational people think at the margin”. This is one of Mankiw’s ten principles of economics. Rational people are those who systematically and purposefully do the best they can to achieve their objectives. 

People who are more inclined towards a behavioural approach to economics have long argued the traditional idea of rationality used in economics – homo economicus - is flawed. A common rebuttal is that people think either fast or slow – instinctively or deliberately. This idea provided the title of the book by economics Nobel prize laureate Daniel Kahneman, “Thinking Fast and Slow”. 

Mullainathan and Shafir go further. They argue that scarcity is not just a physical constraint but also that it changes the way that people think. Even slow and deliberate thinking systems can be compromised. They write: “As the psychologist Daniel Kahneman would say, scarcity captures the mind both when thinking fast and when thinking slow.”

It is important to recognise that scarcity is not simply an accounting concept. It is an emotional response. People exposed to scarcity feel they are rushed even if they may not be. As a result, they narrow their thought processes leading to a tunnelling process that focuses on one objective while ignoring wider effects. The feeling of scarcity means that they have little mental bandwidth to concentrate in a way that allows either rational or slow and deliberate thought. 

There is plenty of scarcity

Scarcity affects almost everyone. Various experiments show that when people are placed into an environment where a particular item is scarce, their decisions differ from those who are placed into the same environment but with a relative abundance of the same item. This is irrespective of their background. 

Typically, the items that can be controlled in these experiments are money and time. Interestingly, those who have plenty of money but are so busy that time becomes scarce, appear to make decisions when it comes to time that echo the monetary decisions of those for whom money is limited. 

Many of us would have seen it or experienced it. When time is tight, meetings may be booked back-to-back throughout the day or week. Unfinished work is pushed to the end of the day, creating long working hours and exhaustion. You turn up late to the restaurant for dinner with friends despite guaranteeing them that you would be on time. They are already on the main course and annoyed with you. 

These time allocation problems are similar to the monetary allocation problems seen for those for whom money is tight. Bills are not paid on time so they are delayed, risking late payment fees or default. You may have borrowed money from a friend or family member just to tide you over until pay day but an unexpected bill arrives and you pay your friend back late. 

Managing scarcity

The easy answer to managing scarcity is to have more of what is scarce. But that is tautology. The required item would not be scarce if there was more of it. Therefore, the scarce item must be identified and managed.

When it comes to time, Mullainathan and Shafir recommend that having external factors force a change in how time is used. They cite the example of the assistants to busy executives who interrupt meetings five minutes before the end to let everyone know that time is almost up and then deliberately close the meeting five minutes later as an example of an external force. A day each week deliberately set aside to meet with family and others, such as followed by some religions, is also cited as another example.

It can be more difficult with money. Using auto payments to ensue bills are paid on time and budgeting expenditure to ensure it is spread evenly so you do not run out of money before you are next paid can help. But when money is very tight, this may not be possible. Difficult choices may be unavoidable and persistent.

Scarcity and pandemic 

You could dismiss those complaining about the pressures of working from home as people who are poor at managing their time. 

The Institute for Fiscal Studies in the UK has calculated that during the pandemic, mothers combine paid work with other activities (almost always childcare) in 47% of their work hours, compared with 30% of fathers’ work hours

For some, they may truly have less time because working from home allows others to place an extra call on their time. Parents, especially women, with children may face this problem For example, the Institute for Fiscal Studies in the UK has calculated that during the pandemic, mothers combine paid work with other activities (almost always childcare) in 47% of their work hours, compared with 30% of fathers’ work hours.

For others, the pressures of working from home and the difficulty of allocating their time may have changed the way they think about it. An external intervention allowing them to change the way they make decisions may be necessary. And as experiments have suggested, nobody is immune to the effects of scarcity.