Scarcity: Why Having Too Little Means So Much (13 page)

The poor, in short, are expert in the value of a dollar. They have their own internal metric by which to assess a dollar’s worth. They do not rely on the environment to get a sense of how much to pay. The pressing needs that are top of mind help generate their own internal
scale. Having this internal metric means that the background affects them less, like the precise beats of expert musicians. The participants in the soup kitchen did not show the same bias as Alex in Chennai, or countless other higher-income subjects, because they were less prone to using arbitrary features of the context to value money.

Think of how striking this is. The poor in these studies behave more “rationally.” They are closer in this case to the rational economic ideal, closer to
homo economicus
. This not only tells us something about poverty; it also tells us something about behavioral economics. That money is valued in relative terms is considered a classic finding in behavioral economics: presumably something that characterizes everyone’s thinking. Yet here we see that scarcity overturns—or at the very least waters down—this classic finding. In fact, scarcity alters many other findings as well.

One day when Sendhil was an undergraduate he was contemplating buying a Walkman. (For those of you who don’t know what that is, it is like an iPod, but for cassettes. For those of you who don’t know what cassettes are, well, never mind.) The Walkman cost $70. Was the Walkman
worth
$70? Should he buy it? Certainly the price was fair: he had looked and it wasn’t available for less elsewhere. But what would he prefer to have—$70 in cash or the Walkman? What was $70, really? It’s hard to make sense of what a dollar is truly worth. Sendhil had developed a technique for decisions such as this. At the time, his primary food (really his only food) was bean burritos at Taco Bell. Though he did not understand dollars very well, he understood burritos. So he decided to put everything on a bean burrito scale. Instead of asking whether he would rather have the Walkman or $70, he could ask himself whether he wanted the Walkman or seventy-eight bean burritos. The burritos seemed more tangible, more real than dollars.

Why
is there the need to construct a benchmark, some way to make sense of $70? Because of slack. Abundance means freedom from trade-offs. When we buy something under abundance, we do not feel we have to give anything up. Psychologically, this is pleasing. But it can be a hindrance when making decisions. If you do not know what you are giving up, it is hard to figure out what something costs and whether it’s worth it. Slack, and the absence of trade-offs, means we have no intuitive, easy way of valuing things.

Of course, the burrito metric was not a raging success for Sendhil. But it is not too far from what some experts suggest. One psychologist who studies decision making has suggested an iPhone app that would do something similar: “
You would say, ‘I like vacations in the Bahamas
, shoes, lattes, and books.’ And now, when you are tempted to buy something, that thing translates in terms of the things you are interested in. So, it [asks you], ‘Hey, this particular item is like half a day in the Bahamas, two [pairs of] shoes, and one latte.’ ” Other experts have suggested using a “time price.” Assume you earn $20 an hour where you work (net: after deducting travel costs, taxes, and so on). When you buy an $80 ice-cream maker, you’ve just committed to four hours of work; and when you opt for a monthly cable package that’s $60 pricier, you’ve just committed to three more hours of work every single month henceforth. (A daily tall skinny latte would require another roughly fifty work hours a year.)

While deliberating about the Walkman, Sendhil realized how misleading this reasoning was. He was already eating all the burritos he wanted. Suppose he chose not to buy the Walkman. He would not go out and eat seventy-eight
more
burritos. He was not trading off the Walkman against seventy-eight burritos. For this thinking to work, he needed to know where the money saved would be spent. It certainly would not have gone to bean burritos, any more than refraining from buying something would send you on vacation to the Bahamas. Making the trade-off concrete requires tracing the money
that was saved and understanding how it would be spent. This was true of the other suggestions as well: how should we pick the items to compare in a way that makes tangible sense?

Instead, people tend to look for comparisons to similarly priced items. And that can be terribly misleading. Many such items may not be things that you would buy in any case. Similarly, the time price (“this is like four hours of work”) is misleading because in many cases you wouldn’t be able to opt for fewer work hours if you refrained from buying an item, nor would you work more hours if you were to buy it. Looking at the best use of the money is equally misleading. If I spend $40 on an amazing dinner, it is unfair to say that every $40 I spend should provide the same pleasure. Even if I spend correctly, very few $40 expenditures will match this terrific buy. But how many terrific dinners a day can I have? The principle of diminishing returns says that the last $40 I spend—the one I am deliberating about, the one I am making trade-offs on—will not produce anywhere near that pleasure.

The problem with all these benchmarks is that they are not real. Thinking trade-offs under slack is like trying to have your cake and eat it, too. Since we do not actually make many trade-offs, they remain largely an invention. Without such trade-offs, the value of small amounts is not something you ever really need to bother yourself with. If you had $20 more, what would you buy that you haven’t bought thus far? If you are financially well off, that is a question you never really need to answer—or even think of asking. If you wanted that small something, you would have bought it.

These problems arise because we do not, under abundance, have a sense of what $10 is worth. And this ambiguity can leave us open to manipulation. Purchases can be made to look more or less attractive through judicious comparisons. Upgrading to a better room on your vacation is a pittance if you think of it as a fraction of what you pay in rent. But it can seem a fortune if you think of it in terms of the terrific desserts you could eat instead. Marketing agencies—and nonprofits—use this strategy. Supporting a child in Africa or buying
a vacuum cleaner only costs you pennies a day. With slack, of course, those pennies feel like they come from nowhere.

We have some well-off friends who are frugal. Often, when we tell them about our work, they nod along and say, “That’s the way I am: very focused on money.” But frugality does not capture the experience of scarcity. The frugal have a principled conscientiousness about money. The poor must be vigilant about trade-offs. When making a purchase, the frugal consider whether the price is “good.” The poor, in contrast, must ask themselves what they must give up to afford that price. Without engaging in real trade-offs, the frugal, like all those who live with abundance, have a hard time making sense of a dollar. So they rely on context. Such was the case with Alex and the rickshaw. He sold his time so cheaply (and inconsistently) because he used his context to determine the “reasonable” price for a rickshaw ride. Alex was frugal but not poor.

A friend of ours, also a behavioral researcher, recently
purchased a cognac truffle for $3
. When later asked if it was worth it, he considered what else he could have purchased: “six Snickers bars, a copy of
The Sporting News
, or a finer glass of wine with dinner.” Or he could have saved the money—it’s not much, but if he made other sacrifices, maybe he could get a bigger apartment next year. He also recalled that satellite TV costs $49 a month and that he’d hardly been watching any TV lately. With the $49 he’d save, he could have all the truffles he wants. He finally admitted, “I don’t know.” Abundance leaves us less able to know the value of a dollar.

Many biases and inconsistencies uncovered by behavioral economics are really about people struggling to make sense of a dollar. Without a clear sense of how to value a $50 savings, people in our study with Hall used the base price as background against which to value the $50. The poor, in contrast, because they
do
face $50 trade-offs, have an expert’s internal metric (possibly a rough one) for what $50 is worth. Consequently, they are less prone to inconsistency. Under this interpretation, there ought to be situations where scarcity gives the poor a sense of the value of things that those who live with
abundance will lack. And when lacking a clear value leads to predictable errors, in those cases the poor will avoid the errors that those with abundance commit.

Research on perception gives us another clue into how people might go about making sense of an uncertain value. In perception the brain uses plenty of contextual cues to interpret visual data. And once you understand the cues that the brain uses, you can manipulate them a little, which sometimes leads to perverse outcomes.
The checker-shadow illusion
, by Ted Adelson of MIT, is one of our favorite visual illustrations that take advantage of this knowledge:

In this remarkable illusion, square A clearly looks darker than B. What makes it an illusion is that A and B are the exact same shade of gray. You probably don’t believe this; even we occasionally feel compelled to check again, because it seems so wrong. If you don’t want to take our word for it, take a sheet of paper and cut a couple
of holes in it that show just squares A and B. You will see that the two squares are identical in color. Why are our eyes fooled so badly?

Here the visual system uses background cues in the image to make sense of things. Background cues affect how items in the foreground are seen. Square B has a different background from square A. Not only is it surrounded by darker squares; it also sits in the cylinder’s apparent shadow. Because things in shadows look darker, the eye will correct for the shadow, making the item appear lighter. Perceived color, much like perceived distance, depends on surrounding cues. And as it turns out, so does perceived value.

A classic experiment once reported by the economist Richard Thaler does the equivalent of this optical illusion for money. We recreated this experiment along with Anuj Shah. We had subjects consider two scenarios that differ only in the bracketed words—a grocery store in one case, a fancy resort in the other:

Imagine you are lying on the beach on a hot day
. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite brand of beer. A friend gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold [a small, run-down grocery store] [a fancy resort hotel]. He says the beer might be expensive and so asks how much you are willing to pay for the beer. He says that he will buy the beer if it costs as much or less than the price you state. But if it costs more than the price you state, he will not buy it. You trust your friend, and there is no possibility of bargaining with the bartender. What price do you tell him?

Respondents who are well-off show a classic decision making bias, as Thaler had originally reported. They will pay more for the same beer in the context of a fancy resort. Much like Alex’s behavior, this difference in willingness to pay is an inconsistency. A beer is a
beer (and they’ll be consuming that same beer on that same beach). That beer will quench your thirst equally whether it comes from the grocery store or the resort. The well off, however, not sure what to pay, use the context to come up with a value.

The poor behaved quite differently. Their reported willingness to pay was much closer in the two contexts. It is not that they gave larger or smaller amounts. They simply gave more consistent answers. Note that what subjects are being asked here is not what they would
expect
to pay. Both the poor and the well off report the same answer when you ask them: of course the resort will charge more. The two groups differ only in what they themselves would be
willing
to pay. This is what we would predict: the poor are able to make better sense of what to pay. Unmoved by context, they can rely on their own internal metric of what a dollar is worth.

This gives us a recipe of sorts for where to look to “overturn” traditional behavioral economics findings, namely, those findings that depend on construing value from arbitrary local context. Along these lines, people have been shown to think of money as compartmentalized into separate accounts. For example, studies have found that
when gasoline prices go up
, people substitute lower quality gasoline. We act as if we’re “poorer” even when the added cost of gas does not materially affect our overall budget. And even then, we act as if we’re poorer “in gasoline.” (Think about it—if money were the problem, you could just as easily save by buying cheaper cookies or by golfing less.) This is because money is kept in local accounts: a negative shock to the gas account (higher prices) leads to penny pinching (and lower quality) in that account. This idea of mental accounting has many implications. For example, it is the reason we might spend a $2,000 tax refund very differently from a $2,000 increase in the value of our stock holdings. We are wealthier by $2,000 in both cases, but we treat the two accounts (“free money” versus “retirement account”) as separate and unequal, often with very different propensities to consume from the two accounts.
The poor should be less prone to show this effect
.