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Scarcity: Remember the Big Picture

Posted: Mateo Salmeron

The current state of the economy was the hot topic in the first half of 2022. The rapidly rising inflation rate, the lowest returns on bonds in over 200 years, low stock returns, and an increase in all living expenses has placed immense pressure on our daily routines. In this blog, I will address the effects scarcity has on consumers and talk about what to keep in mind as we progress through the rest of the year.

A basic topic that is taught in economics is scarcity. Scarcity is when the supply of a resource cannot keep up with the demand of the product. That resource is reflected by how much money is spent while filling up at the pump, or time needed to complete your tasks for the day. Scarcity can have a suffocating effect as people attempt to rebalance budgets to apply temporary fixes to their finances. These temporary fixes might have bigger impacts to the big picture of your finances if you allow them to take control.

In 2014, Dr. Sendhil Mullainathan and Dr. Eldar Shafir wrote a book[1] detailing how scarcity can capture the mind and affect our decision-making process. Our brains are split into “two minds,” one geared towards the short-term and one focusing on the long-term. Our short-term minds are fast thinking and autonomous, relying on quick reflexes and responses to any behavioral decision. Our long-term minds are much more slow thinking and methodical for more difficult decision-making. Scarcity’s effect increases the decisions needed in our fast-thinking, short-term mind while limiting the role of our long-term mind. This inverts each mind’s role and may place short-term events at a higher priority when the long-term is what should be the primary focus.

The tendency to make more short-term decisions because of scarcity limits our mind in a major way called “tunneling.” Tunneling forces our brains to become narrowly focused on the task or choice ahead to the extent that our ability to weigh all options become warped. Tunneling then leads us to make decisions that could be the wrong option or an option that doesn’t reflect our true values and ignores the bigger picture.

The solution to this tunneling that scarcity creates is giving yourself enough slack to realize that all your goals can be achieved. Scarcity now does not mean there will be scarcity forever. It’s the tunneling effect that often obscures other solutions and long-term thinking. Identifying ways to give yourself more room within your finances will help decrease decisions needed to be made. In summary, when faced with scarcity, put in place easily reversable changes to your finances to keep the focus on the big picture of your financial goals.

 

[1] Mullainathan, S., & Shafir, E. (2014). Scarcity: The new science of having less and how it defines our lives. Picador/Henry Holt and company.

 

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