Scarcity: Why Having Too Little Means So Much (12 page)

This allows a look at the conditions of scarcity through a new lens. Late fees are a penalty for misplanning or forgetting, yet they create an even more hostile environment for those living with scarcity. Readily available junk food may cause obesity in the poor and the busy, who are, in turn, more exposed and less attentive; it is less of a threat for the rich and the relaxed. The hard-to-read disclosures on low-cost mortgage forms will be particularly misunderstood (and
carry bigger consequences) for those living with financial scarcity. Environments that create room for errors, which are then penalized, are a challenge for us all. But they are particularly challenging for those in contexts of scarcity.

Scarcity does not just mean less room to fail. It also means a greater opportunity to fail. In our earlier story of Alex and Ben, the leather jacket was a temptation—buying it was a mistake for both men. But imagine we had written the story as follows:

Alex and Ben walk by a clothing store. Each sees a leather jacket. Neither owns one but both have always wanted one. This one is perfect. It just costs too much, $200, and it’s not terribly practical. Alex, who is flush with cash, decides, “Why not?” It’s not as if he has obviously better uses for his money. Ben, who is tight on cash, realizes it is an ill-advised purchase. He must resist.

Here, buying the leather jacket is a mistake for Ben but not for Alex. This, after all, is what abundance affords us. It allows us to buy more things. Wealth transforms temptations into affordable luxuries. The same good can be a temptation when you have little but a mere frivolity when you have plenty. The dieter must avoid the same cookie that the nondieter eats thoughtlessly. The busy must avoid distractions—having a drink with friends or watching mindless TV—that the nonbusy enjoy without thinking.

Scarcity not only raises the costs of error; it also provides more opportunity to err, to make misguided choices. It is harder to do things right, because many items—time commitments for the busy, expenses for the poor—must be carefully made to fit into a constrained budget. To see this, think again about packing. Imagine that the two of us—Sendhil and Eldar—are invited to a picnic. Sendhil has to bring fruit for a fruit salad, and Eldar’s job is to bring the jellybeans. Sendhil must carefully consider how best to pack: one watermelon and much of the space in his bag is taken. And even the pineapple makes it hard to fit much else. Maybe he can align some
bananas around the edges or fit a few grapes or strawberries in between the apples and the pears. There are nontrivial logistics to his packing problem: finding the best arrangement is a challenge. Contrast this with Eldar’s much simpler task. He simply pours in some watermelon-flavored jellybeans and some orange. He shakes his bag to let the pile settle, then pours in a few other flavors. Eldar may also have to make some trade-offs; he may not be able to fit all the flavors he wants. But once he has made his choices, his packing is inherently easier. No ingenuity is required to pack the jellybeans. What distinguishes the two tasks is granularity. The fruit are bulky items, whereas the jellybeans are small, almost like grains of sand. The complexity of packing gets easier as the items get more granular.

In life, do you pack grains or bulky items? It depends on your budget. On a small budget, that iPod feels bulky, taking up a large fraction of what you will spend this month. As your budget grows, the iPod takes up less and less room. It becomes a smaller and smaller fraction of your disposable income—it gets more and more granular. A bigger budget does not just make decisions less consequential; it reduces the complexity of packing. Small budgets make for bulky items and for complex packing; large budgets make for granular items and for easier packing.

Of course, even with a big budget, large enough items still create complexity. Serving as a juror on a major (and long!) criminal trial will produce complexity even for someone with lots of free time; the decision to buy an elegant summer house will require attention even from the person who is well off. But with abundance, your choices on average get more and more granular. They stop straining your budget or your planning.

All this suggests an additional layer. While our focus here is on the psychology that comes from scarcity, the effect of scarcity may be more than psychological; it can be a mathematical fact. Scarcity may create a logistically
harder
packing problem. The mind, challenged by the psychology that emerges from scarcity, may find itself
needing to navigate a world that is computationally more complex
.

We opened this book with a definition of scarcity: a subjective sense of having more needs than resources. This is above and beyond actual physical limits—only so much money, time, and so forth—that all of us necessarily face. The concept of packing brings this distinction into sharp focus. Physical limits and trade-offs are always there: suitcases, no matter how large, are of a fixed size. But we do not experience them that way. A small suitcase makes us feel scarcity. We notice trade-offs; we feel we have too little space. A small suitcase can also make scarcity objectively more complicated to manage. A big suitcase does not just permit more room; it removes the feeling of scarcity. We not only feel we have enough space; we do not even notice trade-offs. While actual limits and trade-offs are universal, the experience is not.

In this sense, the concept of slack cuts to the core of the psychology of scarcity. Having slack allows us the feeling of abundance. Slack is not just inefficiency; it is a mental luxury. Abundance does not just allow us to buy more goods. It affords us the luxury of packing poorly, the luxury of not having to think, as well as the luxury of not minding mistakes.
As Henry David Thoreau observed
, “
A man is rich in proportion
to the number of things he can afford to let alone.”

A few years ago, Sendhil and a PhD student (call him Alex) were on the outskirts of the city of Chennai in India, looking for an auto rickshaw to take to their next meeting. It was a location where rickshaws were rare, and the wait could be long. And painful: the day was humid and sticky, the air filled with dirt and grit; the thermometer reading of 98 degrees did not fully capture the misery. (South Indian summers need their own temperature corrections, the heat equivalent of the northern “wind chill.”) Ten gritty minutes later a rickshaw stopped, and Sendhil was relieved, prematurely, it would turn out.

Everything in Chennai requires bargaining. Their ride normally would have cost
40 rupees (80 cents)
, but with Alex there the driver saw a chance to charge a foreigner a higher fee. He started at 100, but with some haggling, he inched down to 60, from which he would not budge. Sendhil was about to hop in; the heat was oppressive and they had a meeting to get to.

Alex was adamant, however, that he would not pay 60 rupees,
and he told Sendhil that he wouldn’t take this ride. “Another auto will come by. Let’s wait,” he said. Sendhil cursed himself for bargaining in English rather than Tamil, but he was too depleted to argue, so they let the auto go. Ten grueling minutes passed before another one stopped. Luckily for them, this driver agreed to 40 rupees, and Alex got in. Sendhil got in behind him, pledging to work in the future with more sensible PhD students.

Why did Alex not take the initial offer? His refusal was partly driven by fairness: no one wants to be overcharged. But Alex had been in India for a while, enough time to adjust to the reality that being overcharged was nothing personal, merely a fact of life. He viewed these transactions in purely monetary terms. “I am happy to pay more,” Alex said, “but not 50 percent more!” Alex had made a clear choice: he decided he would suffer through ten or more minutes of heat and dirt in order to avoid paying a 50 percent surcharge.

Now, suppose in another context, Sendhil had proposed, “Alex, I want you to spend ten minutes in a sauna with your clothes on, with the sound of car horns blaring in your ears. Oh, I’ll also occasionally throw some dirt in your face. But to make it worth your while, here’s fifty cents.” Alex would likely not have accepted; more likely he would have looked for a new faculty adviser. Yet this was the trade-off he accepted in Chennai. He didn’t just accept it; he insisted on it. Why?

On a separate occasion, Sendhil found himself bargaining with another rickshaw driver over a few rupees on behalf of a foreigner. This time the driver switched from English to Tamil. “Why are you bargaining for this amount?” he asked. “This amount of money means nothing to him!” In a way, of course, the driver was right: such small amounts
shouldn’t
mean much to well-off people. In a way, though, he was wrong. People act—at least at times—as if these small amounts mean a lot.

To psychologists who study judgment and decision making, Alex’s behavior is highly predictable and, of course, you don’t have to go to India to see it. It fits in with some of the oldest and most persistent
findings on how people make choices. Take this example, of subjects who are presented with one of two scenarios:

Imagine you have spent the day shopping
. One item you have been shopping for is a DVD player. At the end of the day, you find yourself at a store that has the brand and model you want for $100. This is a good price but not the best you have seen today. One store—a thirty-minute detour on your way home—has it for $65. Do you buy the $100 DVD player and go home, or do you instead decide to take the detour to buy it for $65 at the other store? Think about what you would do.

Imagine you have spent the day shopping. One item you have been shopping for is a laptop. At the end of the day, you find yourself at a store that has the brand and model you want for $1,000. This is a good price but not the best you have seen today. One store—a thirty-minute detour on your way home—has it for $965. Do you buy the $1,000 laptop and go home, or do you instead decide to take the detour to buy it for $965 at the other store? Think about what you would do.

Both scenarios offer a chance to travel a half hour in order to save $35. And what you find is that most people choose to take the detour for the DVD player but not for the laptop. This contradicts the standard economic model: the exchange rate between time and money ought to be constant. Yet here it varies dramatically. To make this precise, one can ask people to explicitly state what savings they would need in order to make the detour; one can calculate the value people are (implicitly) placing on their time. The results are striking. By varying the price,
one can change the value of an hour
from $5.64 (for those considering a $3 pen) to $1,364 (for those considering a $30,000 car). This means our frugality has a perverse consequence. We pinch pennies on small items, yet we blow dollars on big ones. Our frugality is thereby largely wasted. We spend hours surfing
the web to save $50 on a $150 pair of shoes. Yet we forgo a few hours’ search to save a couple of hundred dollars on a $20,000 car.

These findings are important because they demonstrate how people routinely violate economists’ standard “rational” models of human behavior. If the value that a person attaches to a dollar changes so easily, traditional analyses of economic behavior are severely stretched. These and related findings have fueled the rise of “behavioral economics,” the attempt to incorporate psychology into economic models. Their impact has been large because the results are broadly applicable. They describe not only Alex’s curious behavior in India but also the behavior of
college students, MBAs, professional gamblers, and executives of all stripes
. We had always presumed this basic finding was a fact about everyone’s behavior.

Along with a PhD student, Crystal Hall, we ran
a version of the laptop/DVD question
:

Imagine that a friend goes to buy an appliance priced at $100. Although the store’s prices are good, the clerk informs your friend that a store forty-five minutes away offers the same item on sale for $50 less. Would you advise your friend to travel to the other store to save $50 on the $100 expense?

As with the laptop/DVD question we manipulated what people saw. For some, the appliance was priced at $100; for others, it was $500, and for others still, it was $1,000. The savings was always the same ($50). We began by testing a sample of relatively well-off people. When we ran this study among commuters at the Princeton, New Jersey, train station, we found what many others before us had found: 54 percent of people would recommend going to the other store when the appliance cost $100; 39 percent when it cost $500, and
only 17 percent when it cost $1,000. The $50 savings looked smaller and smaller as the background price got bigger and bigger; for a big-ticket item, it seemed hardly worth the effort.

But then we ran the exact same study twelve miles away, in a soup kitchen in Trenton, New Jersey. As with most American soup kitchens, the visitors to this soup kitchen varied greatly in age, gender, and race, but they shared one trait: for them money was very tight. This led us to predict that they would be more willing to travel to save money. In fact, that’s what we found. For the $100 item, 76 percent now thought one should travel to save $50. Now, this is not 100 percent and could be so for a variety of reasons. Perhaps time was also tight, or there were other things to take care of, or perhaps travel is unappealing, since many of the poor do not have cars. Perhaps the people at the soup kitchen—like anyone else—put some value on their time.

What made the study remarkable, though, is what happened when we raised the background price. When the appliance cost $500, the percentage willing to travel barely changed; it was 73 percent. And when it rose to $1,000, the percentage willing to travel actually went up slightly, to 87 percent.
The slight increase may be due to the feeling
that one really must try to save when spending so much.

For most people, a $35 savings looks large for the $100 DVD player (35 percent off!), but small for the $1,000 laptop (a mere 3.5 percent savings). Yet those at the Trenton soup kitchen seemed unmoved by all this; their responses barely changed. How did scarcity—in this case in money—upend this traditional finding?

To understand how, we need to take a detour into the psychophysics of perception.

A German physician by the name of Ernst Weber, considered one of the founders of experimental psychology, discovered an important
fact about how our senses operate. In one of his pioneering experiments,
a blindfolded subject held in one hand
a plate with weights on it and was asked to signal when he noticed a change in weight, as metallic filings were silently added. How much additional weight was needed for a person to detect it? What was the “just noticeable difference”? Weber found that the just noticeable difference is a constant fraction of the background amount. For weight, the constant is roughly one-thirtieth. So if you are holding a three-pound weight, at least one-tenth of a pound needs to be added for you to detect a difference. But if you were to hold a thirty-pound weight, a full pound would have to be added before you noticed.

Weber showed that perception was highly relative. For example, the eye is not a light meter. It judges luminosity relative to the background. When you stand in a dark cave, a struck match can produce a bright flare of light, powerful enough to illuminate your surroundings. That same match struck at an outdoor cafe on a sunny afternoon would be barely detectable. Similar effects in the perception of relative size, for example, often show up in our daily lives. Makers of laundry detergent realized long ago that
people use more detergent when the cap is larger
. Filling almost to the top is satisfying in a small cap. With a bigger cap, the fill line accounts for only a fraction of the available space, and because we are moved by relative rather than absolute amounts, that looks like very little. So people fill a little more, and more detergent is sold. Money, at least to some extent, is also judged relative to background. That’s why we care more about saving 40 percent on a $20 book than about saving 1 percent on a $1,000 refrigerator. In Chennai, Alex simply saw money a little bit the way his eyes would see a match: relative to the background. Sixty rupees looked like too much when the fair price was forty.

While relative perception is inherently part of how the mind processes information, experience and expertise allow us to transcend it. A study conducted by the psychologists Simon Grondin and Peter Killeen asked two groups—one of nonmusicians and the other of
musicians who had received between eleven and twenty-three years of musical training—
to replicate intervals of six, twelve, eighteen, and twenty-four seconds
. Nonmusicians behaved as expected. They committed errors proportionate to the length of the interval: the longer the tone, the greater the variance. They were approximating length in relative terms. In contrast, subjects who had received extensive training in music exhibited decreasing relative variability with interval length; for longer tones these musicians committed less-than-proportional errors. They appeared to be judging closer to an absolute scale.

What this tells us is that expertise, a deeper understanding of the units, can alter perception. Musicians who are expert in time intervals have an
internal
metric—they do not rely on intuitive heuristic estimates of time lengths. Studies have shown that more experienced bartenders are better at pouring and are
less likely to be affected by bottle height
when asked to pour a certain amount.

Scarcity also makes us experts—expert packers. Without the luxury of slack, we come to understand the value of each inch of space in our suitcases. The poor ought to know the value of a dollar, the busy the value of an hour, and dieters the value of a calorie.

Marketing researchers have studied this expertise in a very specific way. They stop
shoppers exiting a supermarket
for a quick survey. They take the shoppers’ receipts and ask questions like, “How much was the Crest toothpaste you just bought?” Affluent shoppers do not do well on this quiz. “The price of the Crest toothpaste? Something like three dollars? Maybe five?” Most don’t even know how much they spent in total, the size of the bill they had just paid minutes before. But the lower-income shoppers do. They are more accurate in knowing both how much they spent and the prices of the items they bought. We found this in a study of our own, which we devised carefully so as to separate knowledge from frequency of experience. We asked
commuters in Boston
the fare at which the taximeter starts. The rich gave the correct answer only 12 percent of the time; the less affluent were correct three times as
often. This despite the fact that the rich take taxis much more frequently.

Knowing prices often involves more than just reading the label. It requires vigilance since what you see is often not what you pay. Cigarette taxes, for example, come in two varieties. The excise tax shows up in the posted price, but the sales tax does not; it is added at the register. If you look at just the posted price, you will miss the sales tax. When excise taxes—the visible price—change,
rich and poor smokers respond
. Both smoke less. Not so for a change in the sales tax—the hidden price. Only low-income consumers respond to that. Only the low-income weigh sales and excise taxes equally (as they ought to). They not only notice prices;
they are better at deciphering that the total price
is more than the one posted.

Low-income consumers are savvier in other ways as well. When you shop at a supermarket—say for a bag of chips or a can of tuna—you naturally assume that buying the bigger package must be cheaper per unit and thus will save you money. As it turns out, you often would be wrong. The bigger package can cost you more per unit; there might be a “quantity surcharge.” One survey found that
25 percent of brands
that offered more than one size imposed some form of quantity surcharge. These surcharges are not errors.
Consumer Reports
has called them a “
sneaky consumer product trick
.” The trick works best on consumers who don’t pay much attention to prices, who just assume the bigger package will be the better deal. (How often have you done this?) One study examined which supermarkets practice this “trick” and found just what our discussion so far would have predicted:
supermarkets in low-income neighborhoods
are the least likely to have quantity surcharges. It is harder to trick someone into paying more when she is careful to squeeze the most out of every dollar spent.