There is a lot of discussion in the personal finance community about whether you have a scarcity mindset or an abundance mindset.
Knowing that this is an area in which I spend a lot of time, a friend recently recommended the book Scarcity: Why Having Too Little Means So Much.
The book takes a deep dive into the scientific research behind scarcity to try to better explain the scarcity mindset. What the studies show is that scarcity actually has a direct effect on the functioning of your brain in ways that can negatively affect your life.
Tunneling and Bandwidth
According to the research, there are two main effects of a scarcity mindset. The first is tunneling, and the second is a bandwidth tax.
Studies have found that scarcity increases your focus. This explains why you feel that you are more creative when you are facing the pressure of an impending deadline.
At first, this seems like a good thing. You have an increased focus and you are working towards solving whatever problem you face. The issue is that this focus is single-minded.
The authors of Scarcity call this single-minded focus tunneling. You are focused only on the area in which you are facing scarcity. Everything else gets pushed outside of your tunnel and ignored. This means that while you are working towards addressing your scarcity, every single other part of your life is suffering from lack of attention.
The other effect is one that the authors call a bandwidth tax.
Essentially, scarcity is always resting in the back of your mind. Even if you don’t realize that you are thinking about your area of scarcity, your mind is quietly churning in the background, creating a constant worry and a constant drain on your brainpower.
This has been shown in experiments. People who are facing problems of scarcity have decreased cognitive capacity in the similar way to people dealing with severe sleep deprivation.
In addition, the brain constantly going in the background leads to decreased willpower and worse decision-making.
Scarcity Leads to More Scarcity
Our brain’s natural attempts to try to address scarcity end up making the problems worse.
Tunneling is our brain’s way of trying to fix the problem by setting off the alarms. Our brain is saying “This is top priority! Solve this first!” This makes sense. Scarcity can be a challenge to survival, and so battling scarcity is something that is an evolutionary priority.
But tunneling works only to solve the short term scarcity. Our brain works to solve the immediate crisis before moving on to the next issue.
This means that instead of trying to solve the problem of not having enough income, we are trying to solve the problem of paying the next electricity bill. This shortsightedness leads to decisions that can solve the immediate crisis, but will make our long-term situation worse.
A payday loan will help you cover your bills when there is no money left in your bank account. Problem solved. Except that next month you will have the payday loan bill due on top of all of the other bills that you were already struggling to pay. This is how people end up in a payday loan debt spiral, taking out further loans to cover the fees from the first loan.
Tunneling solves the short-term problem while making the long term problem worse.
In addition to this, the decreased bandwidth caused by scarcity makes it much easier to make bad decisions and much harder to dig our way out.
Studies have found that this decreased bandwidth causes lower self-control, which makes it harder to put ourselves in a position to make good decisions. They have also found that scarcity causes reduced ability to learn and process new information, worse memory, and reduced productivity, which severely undercuts our ability to learn about and think through long-term solutions.
On top of all of this, decreased bandwidth from scarcity also leads to decreased sleep, which compounds these effects.
This research helps explain why plans to decrease poverty through increased education have come up short.
What Can We Do?
If we are already in a scarcity mindset, it can be very difficult to get out.
One thing that we need to do is recognize and try to adjust for the shortcomings that we now know will come with scarcity. Recognize that we will instinctively tunnel and focus on short-term solutions and consciously try to lean away from that.
This is certainly not an easy task, but knowing that it is a problem to watch out for is better than continuing blindly along the path of least resistance.
Another thing to recognize is that it is easy to make better decisions by changing our environment than by changing our thoughts. Recognize that you will have less will power and will struggle to make good decisions. Adjust for this by creating good habits that you do without thinking. Automate as much of your life as you can so that you don’t give yourself the option of making bad decisions.
The best approach to solving problems of scarcity, though, is to work to avoid them in the first place.
The book stresses the importance of slack in avoiding problems caused by scarcity. Think about driving to a job interview. Google Maps says that the drive should take 28 minutes. Do you leave exactly 28 minutes before the interview?
Probably not. You probably build some slack into the schedule. You leave extra time in case there is unexpected traffic or you miss a turn and take longer than planned.
This is the idea behind having an emergency fund. When we’re living paycheck to paycheck, a single unexpected expense can throw our budget into chaos. An emergency fund allows us to absorb those shocks without having to tunnel to solve the problem.
The key is that we need to create this slack when we are in an abundance mindset. We need to plan ahead and assume that things will go wrong and that we will face future struggles. We need to build ourselves cushions in the good times to fall back on when we hit the bad times.
It is inevitable that you will hit bumps in the road, so make sure that you are able to absorb the shock.