How Not Having Enough Shapes Decisions
Welcome
I love sharing insights with my Wharton students and Choiceology podcast listeners about the science of making good decisions. But my overflowing inbox suggests I’m not keeping up with everyone’s thirst for new knowledge. The goal of this newsletter is to fix that!
Since my favorite way to learn is through conversation, this newsletter will be chock full of (drum roll please) conversations. Each month I’ll share an interview I’ve conducted with a leading behavioral scientist (or two) about their research and how it can help us all make better choices. If you have even 10% as much fun reading these Q&As as I have doing them, you’re going to love this newsletter.
Oh, and if you do like what you see, please spread the word.
Before I dive into today’s featured Q&A, here are some other tidbits you might enjoy…
Recommended Listens and Reads
A Bundle of Nerves: A new season of Choiceology kicked off August 3rd. On our first episode, I talked with Harvard Business School professor Alison Wood Brooks about ways to cope with the anxiety you feel before a big event like a high-stakes test, presentation or stage performance. The secret has to do with the way you label your emotions.
The Biggest Bluff: Maria Konnikova, the psychology PhD turned journalist turned poker champion, wrote a terrific new book called The Biggest Bluff: How I Learned to Pay Attention, Master Myself and Win. I interviewed Maria about what becoming a professional poker player taught her about making better decisions for Knowledge@Wharton.
Decision-Making during a Pandemic: I recently joined Scott Galloway, the founder of RedEnvelope, on his popular podcast The Prof G Show to chat about what behavioral science can teach us about making better decisions about risk, stress and even goal achievement during a pandemic.
Maintaining Your Well-being: Yale psychology professor Laurie Santos, host of The Happiness Lab podcast, shared research-based insights with me about how to maintain your well-being during the COVID-19 crisis in this Washington Post story.
Q&A: How Not Having Enough Changes the Way You Think
Today I’m sharing an interview I conducted for Choiceology with two professors of behavioral science at the University of Chicago’s Booth School of Business: Anuj Shah and Sendhil Mullainathan. Anuj and Sendhil walked me through why and how being short on time, money or any other precious resource can affect our decisions and offered some advice on what to do about it. In the midst of a pandemic, when we’re all facing new challenges and deprivations, understanding the psychology of scarcity feels more important than ever.
Me: Anuj, could you define the concept of scarcity? Why do we have to worry about it?
Anuj: Scarcity is exactly what it sounds like — not having enough of a resource to cover the demands of that resource. It can be not having enough money to cover your expenses, but it can also be not having enough time to cover the demands of your time.
When you’re dealing with a budgetary or time crunch you get incredibly focused on the resource that’s scarce, so you start thinking about each dollar you’re spending or each minute you’re spending. That focus can pay a lot of dividends, but it can also come at a cost. When you focus too much on one thing, it leads to less attention on other things. You might forget somebody’s birthday or forget to do something on the home front.
Me: How else does scarcity affect our decisions?
Anuj: When you’re dealing with a limited budget and you want to buy something like a cup of coffee, you don’t just ask yourself, “How much do I want this coffee?” You also have to ask yourself, “If I buy this coffee, what do I have to give up?”
In some ways, the poor become very adept at a form of thinking economists argue we should all engage in, which is thinking about trade-offs or opportunity costs. That can change how they think about value in ways that are fundamentally different from how those who are living comfortably might think about it.
Me: Sendhil, what first got you interested in studying scarcity?
Sendhil: I spent a long time trying to wrestle with how people think about the lives of the poor. When you look from the outside, it's very tempting to say, “Wow the poor make a lot of mistakes.” From the inside, the lives of the poor are very, very complex. It’s almost like you're watching someone try to solve a very hard puzzle and you don't appreciate how hard it is.
Me: I know you’ve done some fascinating research about how scarcity of money affects people’s choices. Could you say a bit about it?
Sendhil: One study personally took me back to the area where I grew up. It was work on sugarcane farmers, and what’s interesting about sugarcane farmers is that their entire earnings for a year roughly show up at one moment. It's like getting your salary on June 1st. July and August are good months. But by the following March, April, May, the money starts to run dry. So you get to see the same person when they're poor and when they're rich, across seasons.
What we found was that they actually did much worse on a bunch of cognitive tests, effectively acting as if they had less cognitive capacity when they were poor. When they got rich they suddenly look smarter. That was really illuminating to me. It showed me that, in some contexts at least, there is a big effect of poverty on mental load.
Me: You’ve also found settings where scarcity improves performance, right?
Sendhil: A lot of the things you and I might do that are not that rational, the poor don’t do. Imagine I said to you either, “Hey, Katy, I’m buying a $20 thing and I saw it on sale for $15 on the other side of town. It's 30 minutes away. Should I go?” Or, “I'm buying a $500 thing and it's on sale on the other side of town 30 minutes away for $495.” Most of us would think it's foolish to travel for a $5 savings on $500, but would happily travel for a $5 savings on $20. That's because we think in percentages. Five dollars off of $20 is a big saving, $5 off of $500 is not.
But, of course, you’re not saving a percentage, you’re saving $5. You can do this study on any well-off population and you'll find this way of thinking in percentages. But the poor act totally rationally. They save the $5 no matter what.
It’s a nice reminder that while poverty taxes the mind, the poor also have developed an expertise because they need to focus on dollars.
Me: Given that most of us face scarcity to some degree in our lives, even if it's not poverty, what advice do you have on how we can avoid bad decisions when facing different kinds of scarcity?
Sendhil: This work has given me some insights I tend to implement in my day-to-day life when I’m feeling short on time.
We often think we're in the business of time management, which I think is highly misleading. I think we're actually in the business of bandwidth management, and bandwidth operates according to different rules than time.
For example, if you see your calendar and say, “Wow, I have 45 minutes free right here, I'll put in a meeting.” What you're thinking is that you can show up at that meeting and be there and be present physically. But can you be present mentally? Is this a meeting where you just need to show up and give 25 percent of your bandwidth or is this a meeting where you need 100 percent? And how much bandwidth did the meetings before it require?
Maybe a meeting beforehand is going to create anxiety that will carry on to the next meeting. Bandwidth doesn't just switch like time does. So you almost need to think of arranging your calendar not like “does this squeeze into there?” but like “does this fit conceptually next to this?” Find your high-bandwidth meetings and build your calendar around them. Then the rest can slot their way in.
To learn more about scarcity, check out Sendhil Mullainathan and Eldar Shafir's book Scarcity: The Science of Having Less and How it Defines Our Lives or listen to the episode of Choiceology about scarcity.
This interview has been edited for clarity and length.
That’s all for this month’s newsletter. See you in September!
Katy Milkman, PhD
Professor at Wharton and host of Choiceology, an original podcast from Charles Schwab