Are You Caught in a Scarcity Trap?
Fixing an ingrained scarcity mindset requires more than extra money.
Do you ever feel like you have less than you need? This can mean insufficient money, time, food, social connections, or other essentials. All these circumstances are problematic: When we have too little food, we get "hangry"; when we have too few social connections, we get lonely; when we have too little time, we get stressed. And that usually prompts us to make decisions we may later regret. This behavior can then quickly snowball, where one bad decision made under pressure can set the stage for others. Researchers call this cycle the scarcity trap.
One might think that a financial “scarcity trap” only applies to those with obvious scarcity--such as people experiencing food or housing insecurity--but that’s not the case. There are numerous reasons that people may feel money is scarce beyond their income level: In fact, around 60% of Americans reported money-related issues as a significant source of stress in their lives. Also, more than half of U.S. households do not have enough emergency savings to cover regular household expenses for at least three months in the absence of income.
Eldar Shafir and Sendhil Mullainathan, the founders of scarcity theory, define scarcity as "having less than you feel you need." This feeling of being deprived of a key resource--whether that be money, time, food, or drink--has the potential to affect our behaviors for the worse.
The mental bandwidth of those experiencing scarcity may be taxed by the added stressors that come with their situation. For example, people experiencing financial scarcity may have to devote more attention to decisions like how they will pay an unexpected car expense or a larger utility bill than usual. Also, under certain circumstances, when we experience too much scarcity, we can fall prey to an ingrained, always-on scarcity mindset.
A scarcity mindset usually results in tunneling, which is a singular, almost obsessive focus on the resource we are lacking. Have you ever noticed, for example, that the second you decide to stop eating chocolate, you can’t seem to get it out of your mind? That’s because tunneling prompts us to excessively focus on what we lack, to the point that we can neglect everything else.
These psychological effects can then have an impact on our brains, decisions, and behaviors. Research has found that scarcity can affect our neural mechanisms when making decisions, decreasing activity in the part of the brain that plays a role in goal-directed choice.
Also, when it comes to real-world financial decisions, researchers have found that people who are experiencing financial scarcity take out loans at higher interest rates, save less, and are more biased to the present.
To break out of the scarcity trap, researchers recommend creating slack—in other words, creating a buffer for your future self. For people facing financial scarcity, this means building up an emergency savings fund. Accordingly, Morningstar research has found that households who had emergency savings were more likely to be financial resilient, even during extreme events such as the coronavirus pandemic.
However, building an emergency savings fund is easier said than done. If you’re having trouble building up your savings, here are a few behavioral tips to help you stay on track: