Give a group of well-educated college students a game to play in which they experience scarcity, and how do they behave? Much like people who live in poverty of one form or another, it turns out. They borrow more than they should, economically speaking, and they are willing to pay a high price to borrow.
That is what Eldar Shafir, William Stewart Tod Professor of Psychology and Public Affairs at Princeton University, found in his experiments with Princeton students. Shafir, along with Sendhil Mullainathan, Professor of Economics at Harvard, have developed a concept they call the “Psychology of Scarcity.”
They compare living with scarcity to packing a suitcase. If you have a small suitcase, you have to think a lot about what you put in and how much space it will take up. For every new thing you put in, you have to decide what you will take out to create space. On the other hand, people packing large suitcases spend very little time thinking about what they will put in, since there is plenty of space for all that they might need.
Shafir and Mullainathan describe three effects of living with scarcity:
- Tunneling: Time horizons shorten as people focus on managing the next imminent crisis or need, which also causes them to neglect other needs or crises.
- Borrowing: People will borrow from the future to take care of immediate needs, sometimes at very high rates, even if this makes them less well off in the long term.
- Distraction: Scarcity creates stress, which causes people to perform less well in decision-making tasks. 
This research helps explain some of the psychology that can lead to an over-indebtedness crisis such as what happened in Andhra Pradesh. Scarce resources lead to a high demand for borrowing and a willingness to pay a high price for doing so, allowing microcredit to grow rapidly. If a lending institution focuses on its own growth, and not the well-being of its clients, it can make loans that may make their clients worse off financially in the long term.
 Eldar Shafir and Sendhil Mullainathan, 2012, “On the Psychology of Scarcity,” presentation to the 2012 Social Enterprise Leadership Forum, Columbia Business School, New York, NY, May 18, 2012, http://bit.ly/Shafir-Mullainathan2012.
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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