How a Lack of Money Impacts Economic Decision-Making

This article is an excerpt from the Shortform book guide to "Scarcity" by Sendhil Mullainathan and Eldar Shafir. Shortform has the world's best summaries and analyses of books you should be reading.

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How does a lack of money affect economic decision-making? Why are poor people more rational decision-makers?

According to behavioral science researchers Sendhil Mullainathan and Eldar Shafir, financial scarcity forces people to become experts at making a dollar stretch further. As a result, poor people tend to make more rational economic decisions.

Here’s how a lack of money affects economic decision-making.

Using Scarce Money Efficiently

In their book Scarcity, Mullainathan and Shafir explain that poor people tend to make more rational economic decisions because scarcity forces them to make every dollar count. With each purchase, they have to consider what else they’ll have to give up to cover the cost. On the other hand, when we have enough money that we don’t have to analyze every dollar spent, we’re more susceptible to biases and inconsistencies. 

(Shortform note: Although the authors don’t explicitly mention this nuance, their argument here only seems to apply to economic decision-making with short-term consequences, like buying a cheaper item in a grocery store, which results in immediate savings. Later, the authors argue that poor people make worse economic decisions in situations where there are long-term consequences to consider, like taking out loans.)

For example, wealthy people (those who don’t experience scarcity when it comes to money) are more susceptible to relativity bias. This is the phenomenon where someone is willing to go out of their way to save $5 on a $20 purchase, but not willing to do so to save $5 on a $100 purchase. The savings are the same in both situations, but the lower relative savings as a proportion of the total cost makes wealthier people feel like it’s not worth the effort. 

How a Lack of Money Impacts Economic Decision-Making

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  • An exploration of the good and bad sides of a scarcity mindset
  • Strategies to counteract the negative cognitive effects of scarcity
  • How policymakers should redesign social programs

Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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