An interview with Eldar Shafir, William Stewart Tod Professor of Psychology and Public Affairs at Princeton University, and co-founder and scientific director at ideas42, a social science research & development lab. Download a transcript of the video [PDF].
We have an analysis of vendors in a market in India where they take a loan every day to buy their produce. It’s very hard to call them procrastinators or myopic. They work extremely hard, yet they were borrowing at 5% a day—and you could see that if they rearranged their loans and payments, they could take a loan every 3 days, but instead they kept borrowing every day at 5%—and something looked very extreme there. Examples like that have led us to what we now call the “psychology of scarcity,” and the general argument is that not having enough creates particularpsychologies that yield particular behaviors that are endemic to focusing on how to make ends meet.
And the next step we’re talking about is the scarcity trap. Once you end up there, it’s often very hard to get out because now you owe interest, so you’re poorer next month. So it’s the moment that gets you into the trap that makes it hard to exit. Scarcity leads you to borrow in ways that are not insightful; the same person would do much better had they just been a little bit less poor. And, of course the implication of all this is that people like you [have] a real role to play because if you do the right things to diminish the stress of scarcity, you can really make a big difference.
So when you’re dealing with scarcity, the tendency to overborrow and be myopic is one of the features. Another one is you’re just doing less well in divided attention and cognitive control. Your fluid intelligence is significantly lowered; in some metrics it compares to roughly 12 points on the IQ scale. We need a renewed awareness of the challenges that come with living under scarcity. And, what that means is your bandwidth, your ability to attend to things, is severely diminished, and whatever I can do to help you on that could make a big difference. We tend to be very blind to all that.
If you take somebody [dealing with scarcity], the last thing you want to do is impose more demands on them of the kind that require cognitive control and attention. So any financial institution, any policy maker needs to be super aware: what can I do to facilitate those issues? It could be getting payments weekly, rather than monthly, that might facilitate to some extent your management of everyday scarcity. It could be defaulting you [the client] into the right thing, as opposed to requiring you to remember to apply and do it.
The general microfinance pride in being very rigid is a question here. Is it your job to educate the person or help them deal with their bandwidth? If it’s the latter, it may very well be [that] being flexible and giving me two extra days can make a big difference. It could really alter a bit how beneficial we think it is to be rigid if we take seriously the difficulties you have dealing with scarcity as opposed to negligence or personality issues.
It’s very clear: it doesn’t have to take a psychologist or economist to agree. You really have to understand the nuances before you can come up with solutions. The idea that you can do just a standard formula is passé.
Photo credit: Eldar Shafir
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Table of Contents
- Executive Summary
- Reaching Fewer
- The Promise of Mobile Technology
- The Psychology of Scarcity
- Developing Appropriate Products
- Conclusion and Recommendations
- Get Your Copy