How Having Less Can Make You More Rational
By Alex Shaw, Haotian Zhou
Poverty and scarcity are a huge burden on people and during the cold winter month, the negative influence of scarcity becomes even more apparent. Of course scarcity has negative effects on one’s health, but it can also have disastrous consequences for one’s cognitive function and overall well being. Indeed, research at New Paths to Purpose is currently investigating the negative effects that poverty and deprivation can have on people’s purpose. While scarcity can have a myriad of negative effects, is there any sense in which scarcity can have positive effects? Anuj Shah, Eldar Shafir, and Senhil Mullainathan recently investigated whether scarcity might cause people to be more rational in their decision-making in some contexts.
These authors reasoned that those individuals who are experiencing scarcity (e.g., lower income individuals) would perform more rationally on some economic decision-making tasks. There is a large literature in economics that demonstrates that people make economically irrational decisions in some circumstances. For example, people tend to value discounts and gambles less or more than they rationally should. Shah and colleagues hypothesized that lower income individuals would be less susceptible to these irrationalities because they have a better sense of the value of money and goods as compared to their more well-off counterparts.
Image ©: Hamed Parham 2009
To test this hypothesis, these authors had participants complete some classic studies from economics that have been used to demonstrate biases in decision-making and then examined whether low-income individuals were less susceptible to these biases. They defined lower income individuals as those in their sample who were below the sample’s median income. These authors tested a number of biases, but in one representative experiment they investigated how people value discounts. These authors asked participants about their willingness to go to another store in pursuit of a $50 discount either on a $300, $500, or $1000 computer tablet. If the participants were being rational, they should be equally willing to go to another store for the $50 discount. However, previous research has found that people are much more willing to go to a new store in pursuit of a $50 discount if it is applied to a $300 computer than if it is applied to a $500 or $1000 computer. In line with this previous research, higher income individuals were more likely to pursue the discount at another store if the discount was on the cheaper item. The lower income individuals were much less susceptible to this bias; they generally opted to pursue the $50 discount regardless of the item the discount was applied to. Across a number of tasks (including questions about valuation of consumer goods and gambles) lower income individuals engaged in more rational decision making than higher income individuals. The authors argue that this pattern of results occurs because lower income participants have a better sense of what a dollar is really worth as compared to higher income participants.
The current research shows that scarcity can have a counterintuitive positive influence on people’s decision making. This fact of course does not negate the vast negative influences that scarcity can have on people. The message of these different research streams seems to be that we should count our blessings in more than one sense. Obviously we should be grateful for the things that we have and that we are not constantly plagued by poverty and deprivation. However, there is another sense in which we should really count our blessings and realize that resources are indeed scarce for everyone—whether you are below the poverty line or part of the 1%, money is never limitless. Making smarter decisions with our money and appreciating the value of a dollar means we can spend our money on more purposeful pursuits, like taking a class to learn a new skill or donating that money to a charity to help those who are less fortunate.