Scarcity and Tough Decisions
Scarcity theory explains several behaviors and decisions of people who face scarcity in a particular area of life. Mullainathan and Shafir (2013) define scarcity as "having less than you feel you need" (p. 4).
5 Scarcity can be experienced in several contexts, e.g., when people are dieting, when being thirsty, by facing deadlines, in the case of loneliness, and when facing poverty (Cannon et al. 2019). The theory builds on cognitive psychological research regarding several features of human cognition that affect (economic) decision making. The key idea of scarcity theory is that scarcity itself induces a specific mindset by affecting how people think and decide, and subsequently affect human behaviors. Poverty is the key domain to which scarcity theory has been applied (Zhao and Tomm 2018).
Figure 1 reflects the theoretical framework of scarcity theory applied to poverty and economic decision making.6 In this framework, poverty affects economic decisions and behaviors via three routes stemming from two core psychological mechanisms (tunneling and cognitive load).7 First, poverty causes an attentional focus that enhances resource efficiency and facilitates memory-encoding, and an attentional neglect that leads to forgetful, neglectful, and overborrowing behaviors (arrows 1 and 2). This process of attentional focus and neglect is also referred to as tunneling. Second, poverty-induced focus causes trade-off thinking (3) which creates a more stable frame of value and consistent consumption decisions (4). Third, poverty reduces mental bandwidth (cognitive capacity and executive control) (5) and subsequently increases temporal discounting and risk aversion (6). Scarcity theory assumes that cognitive load underlies the negative effect of poverty on cognitive capacity and executive control.
Theoretical framework reflecting scarcity theory applied to poverty and economic decision making
As reflected in Fig. 1, scarcity theory contains a poverty cycle in which poverty itself causes poverty-reinforcing behaviors via specific psychological mechanisms (routes 1–2–7 and 5–6–7). Increased temporal discounting and overborrowing may ultimately reduce the overall payoff of the poor. Similarly, increased risk aversion can discourage long-term investments (e.g., in education or health) that would result in larger future payoffs. Subsequently, these behaviors reinforce the condition of poverty. As a consequence, it becomes more difficult to escape the situation of poverty. Otherwise, the trade-off thinking route may positively affect the economic condition of the poor (route 1–3–4–7). We will discuss each of these three routes in more detail in Sects. 3–5.
Studies testing the hypotheses of scarcity theory reflect three types of study designs. First, laboratory experiments often exogenously induce scarcity by varying levels of resources (e.g., time, attempts, budgets) to be used in a task or game (see e.g., Shah et al. 2012, 2019; Spiller 2011; Zhao and Tomm 2017). Because the researcher has full control over the environment, this method helps to detect the causality of relationships and to gain insights into its underlying mechanisms. Second, cross-sectional and quasi-experimental studies investigate the consequences of poverty outside the lab. Cross-sectional difference studies typically investigate whether low- and high-income participants do react differently to a particular cue or a specific scenario (see e.g., Shah et al. 2015, 2018). Quasi-experimental studies typically investigate how variation in income interacts with other factors to reshape cognition and behaviors (see e.g., Mani et al. 2013a, b; Plantinga et al. 2018; Shah et al. 2015, 2018). Although these studies build on an ecologically valid approach, they face difficulties in establishing causality. Third, scientists use natural and field experiments to establish causality in a real-world environment. These studies typically test how fluctuations in income, wealth, or perceived financial situation affect outcomes (see e.g., Carvalho et al. 2016; Mani et al. 2013a, b; Ong et al. 2019). Each of these methods has its pros and cons, reason why it is important to provide a review of the integrative evidence of empirical studies.
We observe a mismatch between the poverty definition of scarcity theory and the instruments used in empirical studies to measure this concept. Building on the general scarcity definition ("having less than you feel you need"), scarcity theory defines poverty as "the gap between one's needs and the resources available to fulfill them" (Mani et al. 2013a, p. 976). Hagenaars and De Vos (1988) distinguish three types of poverty definitions. First, objective absolute poverty defines poverty as having less than a defined minimum income. Second, the objective relative poverty definition classifies people to be poor when having a relatively low income or when lacking certain commodities that are common in society. Third, subjective poverty refers to feelings or perceptions of having not enough to get along (see also Van Praag and Frijters 1999). Following this categorization of poverty definitions, scarcity theory builds on the subjective poverty definition, which concentrates on having not enough financial means to fulfill one’s felt needs. Remarkably, almost all cross-sectional and quasi-experimental studies use income as a measurement instrument of poverty consistent with the objective relative poverty definition.8 This mismatch is remarkable because Mullainathan and Shafir (2013) already concluded that income is "at best a crude proxy for scarcity" (p. 72). Not all low-income individuals experience feelings of having less than they need. Furthermore, "some of those whom we classified as well off might well have been experiencing scarcity, for example, some were surely burdened by mortgage payments, credit card debt, college loans, or large families" (Mullainathan and Shafir 2013, p. 72). According to scarcity theory, the extent to which one feels that one has enough to fulfill one's needs defines subjective poverty, not the level of income.9
This mismatch between the poverty definition and chosen measurement instruments can be problematic. Using a measurement instrument that only roughly measures financial scarcity may prevent detecting the effects of financial scarcity on hypothesized outcomes. We recommend future empirical studies to use measurement instruments aligning the subjective poverty definition. To facilitate this alignment, an inventory of both existing measures and the development of new instruments is needed.10 The next three sections discuss the evidence for the propositions of our framework.