10  Scarcity

10.1 What is scarcity?

Mani et al. (2013a) report an experiment in which people in a New Jersey mall were presented with hypothetical scenarios such as the following:

Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or a difficult decision for you to make?

After the scenario, they were given series of Raven’s Matrices problems, a test of fluid intelligence. When the results were analysed by whether the experimental subjects were rich or poor, there was no difference in performance on the Raven’s Matrices problems.

However, when the scenario was tweaked such that the car trouble “requires an expensive $3,000 service”, a gap between the rich and poor emerges. The rich subjects did just as well on the Raven’s Matrices after being told they would require an expensive service as for the $300 service. But the poor scored lower, an effect equivalent to as decline of between 13 and 14 IQ points. This is larger than the effect that would be expected from missing a full night’s sleep.

Mani et al found a similar effect in a field study involving sugarcane farmers in India. The farmers were given cognitive tests before harvest, when they face considerable financial pressure, and post-harvest. Those farmers showed diminished cognitive performance before harvest compared to after harvest.

This effect has been branded scarcity. People have limited cognitive capacity. The poor must manage sporadic income and expenses that they may not be able to meet. Even when they are not making a financial decision, these issues may preoccupy their minds. These preoccupations consume cognitive resources, leaving less “bandwidth” available for decision making.

10.2 The consequences of scarcity

Shah et al. (2012) examined the consequences of scarcity across a set of lab experiments. When participants were “poor”, in that they were given a lower endowment of shots in a computer game, they tended to use the shots well and score more points per shot than the “rich”. However, when given the opportunity to “borrow” shots from later rounds, they tended to overborrow and degrade their overall performance. Similar effects were found when they could borrow time in a trivia game. The poor overborrowed.

Shah et al argued that scarcity elicits greater engagement, which can be a good thing, as evidenced by the better usage of shots by poor participants in the computer game. However, focus on some problems leads to neglect of others, such as neglect of the future costs of borrowing.

10.3 Robustness and replication

The concept of scarcity has been subject to considerable debate. Wicherts and Scholten (2013) argued that the Mani et al. (2013a) results were only achieved because income was bifurcated into “rich” and “poor” rather than treated as a continuous variable. Mani et al. (2013b) resurrected their effect by pooling three experiments, although this does raise questions about the robustness.

Camerer et al. (2018) reported a replication of experiment 1 in Shah et al. (2012), and found no effect. This led Shah et al. (2019) to conduct a replication across all of the experiments in their original paper, confirming the failure to replicate the first experiment, but finding most of the others did replicate.

Carvalho et al. (2016) examined cognitive function, risk preferences and time preferences in low-income households before and after payday. They found an effect on time preference when considering monetary rewards, but no effect on cognitive function, risk taking or the quality of decision making.

Finally, in a replication of scarcity papers by O’Donnell et al. (2021): “Of the 20 studies that were significant in the original, four of our replication efforts yielded significant results.”

10.4 Watch