However, poverty is more, much more than just not having enough money. Poverty is lack of shelter. Why can't opportunity cost exist without scarcity? If there was no scarcity, there would be no need to get the next best thing because you wouldn't need an alternative. Does an economy that is inside its production possibilities curve face any trade-offs?
Often scarcity is caused by a combination of demand and supply induced effects. A rise in demand, e. One of the defining features of economics is scarcity, which deals with how people satisfy unlimited wants and needs with limited resources. Scarcity affects the monetary value people place on goods and services and how governments and private firms decide to distribute resources.
In a free market, it can be expected that the price will increase to the equilibrium price, as the scarcity of the good forces the price to go up.
When a product is scarce, consumers are faced with conducting their own cost-benefit analysis; a product in high demand but low supply will likely be expensive. Performance on these tasks can be affected by pre-existing differences between experimental groups, learning effects, interview-related load, and floor and ceiling effects. In field settings, it is hard to fully control for these potential artifacts possibly leading to spurious effects.
To solve this issue, we recommend to specify the cognitive mechanism under investigation a-priori and design the experimental study accordingly. Just adding a particular task or test somewhere in the experimental procedure to control for cognitive function as a potential explanation is not enough.
Both lab and field studies should clarify that their study design captures the temporary effect of facing financial scarcity on mental bandwidth. Additionally, besides selecting a suitable control group, careful task selection and extensive piloting of the full test and interview procedure in the target population will help to minimize measurement problems see Schilbach et al.
Specifically, more attention is required for using the Raven test as a measurement instrument for fluid intelligence. All studies that measured the effect of poverty on fluid intelligence used a small subset of Raven matrices. However, it is unknown whether this abbreviated version did affect its reliability and validity. Footnote 30 As the use of abbreviated Raven tests becomes increasingly popular in economic studies, we recommend the development of a standardized protocol.
This protocol should shed light on selecting an appropriate number of matrices, whether or not including the progressive component of the original Raven test, and how the number of matrices affects the reliability and validity of the measure.
Time discounting and risk aversion are central elements of a broad range of economic decisions and behaviors. Several studies have shown that poverty increases both time discounting and risk aversion see for an overview: Haushofer and Fehr , while stress and negative affect Haushofer and Fehr and rational responses to liquidity constraints Carvalho et al. Scarcity theory hypothesizes that financial scarcity increases temporal discounting and risk aversion via cognitive load Schilbach et al.
Footnote 31 We review the evidence for this hypothesis in two parts. First, we discuss evidence for the effect of cognitive load on both temporal discounting and risk aversion. We then review studies that have investigated the impact of financial scarcity on both outcomes and discuss whether cognitive load acts as an underlying mechanism.
Several studies have examined the impact of cognitive load on economic decision making. Some of these studies show how the decision-making process alters due to cognitive load.
Cognitive load increases the reliance on shortcuts and heuristics in making choices Kahneman ; Kahneman and Frederick According to the dual-processing model, cognitive load affects the controlling operations of the deliberative, reflective thinking system System 2 resulting in increased reliance on the intuitive cognitive system System 1.
As a consequence, cognitive load potentially contributes to more errors in making decisions. Other studies address the question of how decisions change as a result of cognitive load. In their overview of empirical research, Deck and Jahedi show consistent evidence that cognitive load increases risk aversion. Evidence of a detrimental impact of cognitive load on temporal choices is mixed.
While some studies suggest that cognitive load makes people more impatient, others do not support this hypothesis. Additional experiments conducted by Deck and Jahedi confirmed the above results and showed that cognitive load increased both risk aversion and money-related impatience.
Recently, researchers have begun to investigate the effect of poverty on economic decision making via the scarcity mechanism. Studies consistently show that facing financial scarcity increases temporal discounting Bartos et al. In a lab-in-the-field experiment among low-income Ugandan farmers, Bartos et al. Similar to the manipulation used by Mani et al.
Thereafter, they had to make a consequential decision about the timing of consuming entertainment early and delaying work effort. The results show that poverty-induced thoughts increased the farmers' preference for consuming entertainment earlier and delaying work effort, reflecting increased time discounting.
The authors suggest that poverty-related thoughts directly reduce the ability to exercise self-control, possibly via cognitive load. As the cognitive load was not directly measured, the exact mechanism still remains unclear. Footnote 32 In their study among Singaporean low-income households, Ong et al. However, they found only weak descriptive evidence of a mediating role of cognitive control underlying this effect. Other studies exploiting variation in payday Carvalho et al.
Both studies propose that increased time discounting might reflect rational adaptations of the poor to changes in liquidity constraints rather than increased cognitive load. The literature shows mixed evidence for the hypothesis that financial scarcity increases risk aversion, while evidence of cognitive load as an underlying mechanism is almost absent.
In their study among Vietnamese retailers, Dalton et al. Furthermore, induced financial worries increased perceived stress, but not fluid intelligence as discussed in Sect. These results contradict both the hypothesis that financial scarcity increases risk aversion and findings that cognitive load increases risk aversion Deck and Jahedi The authors propose that acute stress rather than cognitive load function as underlying mechanism.
In their payday study, Carvalho et al. Only a study of Ong et al. Similar to the effect on time discounting, suggestive evidence for a mediating role of cognitive control was weak. Overall, the literature provides consistent evidence that financial scarcity increases temporal discounting, although evidence for cognitive load as underlying mechanism is weak. The literature does not provide consistent evidence that financial scarcity increases risk aversion, while evidence for the cognitive load as the underlying pattern is almost absent.
These findings raise two issues. First, it is unclear how financial scarcity affects risk aversion as studies have shown positive Ong et al. Under poverty, people may have the tendency to take less risk for a potential financial gain see e. Thus, financial scarcity might strengthen loss aversion, which refers to people's tendency to prefer avoiding losses over acquiring equivalent gains Kahneman and Tversky Indeed, lower income is associated with increased loss aversion Vieider et al.
Second, we question whether the effect of poverty on economic decision making operates via cognitive load. While our literature review shows consistent evidence that poverty increases time discounting, evidence for an effect of cognitive load on this outcome is mixed Deck and Jahedi Similarly, the cognitive load literature confirms that cognitive load increases risk aversion Deck and Jahedi , but evidence for the hypothesis that financial scarcity increases risk aversion is mixed at best.
We note that financial scarcity can affect other economic outcomes via cognitive load. In a recent study among Indian workers, Kaur et al. Workers receiving an earlier payment increased their productivity by 5. This increase in productivity almost doubled for poorer workers. Additionally, early payment reduced attentional errors suggesting that facing lower financial strain improves cognition and subsequently productivity.
Future studies should examine what exactly happens when people face financial scarcity and how that affects cognition and subsequent economic decisions and behaviors. Our work aimed to review scarcity theory applied to the context of poverty. To this end, we reviewed the evidence for three fundamental hypotheses of this theory. Below, we will shortly summarize the status of the evidence for each hypothesis, discuss the overall status of scarcity theory applied to poverty, and provide some general directions for future research.
Scarcity theory applied to poverty hypothesizes that poverty affects economic decisions and behaviors via three mechanisms see Fig.
We briefly state the status of the evidence for each relationship. As we showed in Sect. It is still unclear whether overborrowing results from attentional focus and neglect. Additionally, evidence for the ecological validity of the attentional focus mechanism is weak as field studies examining this mechanism in real-world contexts are scarce.
As discussed in Sect. However, methodological issues and some inconsistent findings prevent a firm conclusion. As reported in Sect. Additionally, the literature consistently shows that financial scarcity increases time discounting, while evidence for a positive effect on risk aversion is mixed.
However, the current literature does not support the view that cognitive load underlies the effect of financial scarcity on temporal discounting and risk aversion. This overview brings us to a remaining question: How should we evaluate the overall status of scarcity theory? Following the definition of Kerlinger and Lee , "a theory is a set of interrelated constructs, definitions, and propositions that present a systematic view of phenomena by specifying relations among variables, with the purpose of explaining and predicting the phenomena" p.
We apply the properties of a useful theory proposed by Dennis and Kintsch to evaluate the status of scarcity theory applied to poverty. Building upon reasonable claims that cognitive resources are limited, scarcity theory applied to poverty provides an original, coherent, and parsimonious explanation that a single phenomenon financial scarcity explains a variety of behavioral phenomena economic decisions and behaviors operating via two core psychological mechanisms tunneling and cognitive load.
Furthermore, these mechanisms do not only operate under poverty but also under several other forms of scarcity e. Importantly, the theory provides testable and falsifiable hypotheses. However, the theory lacks precision in defining key mechanisms as researchers use different names, definitions, and operationalizations for the attentional and cognitive load mechanism and predicting economic outcomes which are rather empirically driven than theory-based.
Furthermore, we showed that the theory does not fully accord with the available data. More specifically, while the literature provides mainly consistent evidence for the attentional focus and neglect mechanism and related borrowing and consumption behaviors, evidence for the cognitive load mechanism and associated behaviors is mixed at best.
As the strength of a theory relies on the evidence, the current evidence limits the strength of scarcity theory. We recommend two general lines for future research in additional to the specific recommendations in Sect. First, more theoretical work is needed. Currently, scarcity theory is stated verbally. We recommend researchers to translate the theory into formal models e. Second, future work should focus on improving our understanding of the mechanisms enforced by facing financial scarcity.
Brain research might help to detect which brain activities underly the effect of facing scarcity on downstream behaviors. In an initial study, Huijsmans et al. Additionally, we need to know whether other mechanisms are at play, besides tunneling and cognitive load, and how these mechanisms compete with each other. At least stress and negative affect seem to play a role Haushofer and Fehr but it is unclear to what extent these mediators coincide with each other.
Finally, future studies should deepen our understanding of when facing scarcity improves and when it impairs performance. Scarcity theory predicts that facing scarcity makes people both less via trade-off thinking and more via attentional neglect and cognitive load susceptible to biases in decision making. However, it is not fully clear how scarcity triggers either mechanism. For example, the shopping task Spiller and the Angry Blueberries Shah et al.
We suggest that choice architecture might also play a role. Future studies should address this issue. In conclusion, we have reviewed the evidence for the key propositions of scarcity theory applied to poverty and evaluated the overall status of this theory. Although scarcity theory coherently and parsimoniously explains how financial scarcity affects economic decisions and behaviors, the theory does not fully accord with the available data.
In general, both building models and testing implications contribute to a virtuous cycle of theory development Smaldino While building formal models will help to enforce precision, rigorous testing will help to unravel empirical patterns.
We recommend increased efforts on both elements of the theory development cycle. Finally, these efforts will contribute to a stronger theory explaining how financial scarcity affects economic decision making.
See Tables 1 , 2 and 3. Scarcity theory is part of the behavioral economic view proposing that the behaviors of the poor reflect a psychology of poverty. Living in poverty creates specific psychological outcomes e.
The book received positive reviews from Nobel Prize winners Daniel Kahneman and Richard Thaler, several other leading behavioral economic experts, and popular media.
According to The Economist , "the book's unified theory of the scarcity mentality is novel in its scope and ambition" The Economist Mullainathan and Shafir did not provide a single umbrella term for the theory discussed in their book. Others refer to the theory as "psychological responses to scarcity" Zhao and Tomm or "resource scarcity" Hamilton et al.
We will consistently use the term "scarcity theory," referring to the title of their book. Almost half of the reviewed studies appeared in or Most of these studies were not included in previous reviews. This definition highlights the subjective nature of scarcity. Others define resource scarcity as "the condition of having insufficient resources to cope with demands" Zhao and Tomm , p. We derived this framework from Mullainathan and Shafir and the literature overview of Shah In our review, we focus on the routes proposed by Mullainathan and Shafir This claim is based on our literature review.
As Tables 1 , 2 and 3 shows, nearly all cross-sectional and quasi-experimental studies use income as measure of poverty. This claim does not carry over to other study designs lab and natural experiments. Of course, factors such as having a relatively low income compared to others or lacking commodities that are common in society will at least partly explain subjective poverty. See Hagenaars and De Vos for some existing subjective poverty measures that might be useful. Additionally, Shah et al.
The authors proposed that small-budget participants would engage more deeply in the game which might cause cognitive exhaustion. Indeed, this initial study shows that poor participants performed worse compared to richer participants on a cognitive control task.
However, this result was not replicated in studies containing much larger samples Camerer et al. A study of Sharma and Alter suggests that financial scarcity elicits a greater focus on scarce cues more generally. Participants were asked to recall a situation in which they were financially worse better off than their peers.
Next, financially deprived participants were more likely to attend to and consume scarce rather than abundant stimuli and goods.
These results suggest that financial scarcity leads to paying more attention to what is scarce in the environment. This finding not only held under financial scarcity but also under scarcity of time and food. People facing scarcity limited time or a diet showed fewer inconsistencies in valuing loss of time or fattening in fast-food-frames.
Similarly, farmers were more likely to use proportional thinking after being exposed to little rainfall compared to more rainfall. We note that the authors used the relativity bias task as part of a tunneling measure see Sect. This prediction assumes that half of those who are indifferent between both goods will also exchange.
In line with this finding, Lichand and Mani did not find differences in sensitivity to the anchoring effect before versus after payday. We note that they incorporated the anchoring measure into a cognitive load index measure see Sect. This scenario was previously used by Frederick et al. The study of Fehr et al.
Inhibitory control was measured using a spatial incompatibility task. Participants had to alternate between congruent and incongruent actions. For some stimuli, they had to press a button on the same side of the screen. For other stimuli, they had to press a button on the opposite side. Inhibitory control was measured using a numerical Stroop task which is appropriate to test low-literacy participants. To perform well on the test, participants had to neglect their automatic response. When they see 4 4 4 on the screen, they had to respond with the number of digits 3 instead of the digit 4 the intuitive response.
Scarcity theory focuses on the financial and material dimensions of poverty, more specifically on the effects of feelings of having less than one needs. This neglects the social context social class, stigmatization , physiological issues lack of nutrition and physical obstacles lack of sleep that surround individuals living in poverty. Beyond the scope of scarcity theory, poverty may also induce cognitive load via these external stimuli.
Recent studies have begun to unravel how poverty impairs cognitive function and economic performance via a lack of sleep Bessone et al. See Dean et al. Furthermore, Wicherts and Zand Scholten argued that the median split income procedure, applied by Mani et al.
They reanalyzed the data without dichotomization of income for each of the three core experiments and found insignificant interaction effects financial scenarios vs. However, Mani et al. Furthermore, they found a significant interaction effect on fluid intelligence when analyzing the data of the three core experiments together. Overall, we consider the effect on fluid intelligence as robust. Overall, results of this study did confirm the trade-off thinking but not the mental bandwidth tax hypothesis of scarcity theory.
The cognitive function tests included the Cognitive reflection test System 1 vs. System 2 thinking , the Flanker task inhibitory control task , the working memory task, and the Numerical Stroop Task cognitive control. More specifically, this study measured the effects on cognitive load using an index including scores on executive function measured using an attention and inhibitory control task, and a working memory task and an anchoring scenario.
This latter measure deviates from others because it incorporates decisions that might be affected by cognitive load. Some studies have found that particular cognitive functions even improve under scarcity. Dang et al. These findings suggest that poverty-induced thoughts improve procedural-based cognitive functions. Additionally, Zhao and Tomm showed that scarcity-induced focus facilitates memory-encoding of task-relevant information see Sect.
As far as we know, no study attempted to fully replicate the effects on both fluid intelligence and cognitive control in a similar experimental setting. As discussed, Dean et al. Because the literature might suffer from a publication bias, we searched for unpublished direct replications among Google references to the original paper of Mani et al. Using the search term "replicate," we found hits. Among these hits, we found three Master theses that attempted to directly replicate the effect of poverty on fluid intelligence.
First, Graves did not find a significant effect of poverty on fluid intelligence. However, this replication was underpowered as noticed by the author.
Second, Joy found a significant effect on fluid intelligence similarly to that of Mani et al. Third, Plantinga did not find a significant effect of scarcity on both cognitive control and fluid intelligence in an online experiment. An abbreviated Raven test might perform almost equally well as the full version [see e. However, it is unknown whether this is also the case for the versions used by Mani et al. This hypothesis was proposed by Schilbach et al. We note that Mullainathan and Shafir did not provide specific predictions for these economic outcomes in their book.
The authors investigated whether attentional distraction underlies the effect on temporal discounting. However, they did not find differences between experimental conditions in decision-making time, distraction while making the decision, and patterns of information acquisition.
In sum, these results do not support the view that poverty reduces attention. We note that this study does not provide a formal test of the attentional mechanism of scarcity theory as discussed in Sect. The study tested whether poverty-induced thoughts reduced attention during the decision-making process, rather than changed attentional allocation. Aarts, H. On the psychology of drinking: Being thirsty and perceptually ready.
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The following article offers a clear overview of each of these terms and outlines the similarities and differences between the terms. A person can be called poor when he earns an income that does not fully cover all his necessities. The reason for being poor maybe because of a career path that they have chosen, economic distress in the country, financial distress, and other circumstances personal or general.
A poor person may or may not have the ability to get out of their circumstances of financial distress. However, just like high income earners, people who fall under this category may still strive for better jobs, to earn a higher income, to go back to school and earn a higher education with the aim of bettering their future. A person in poverty is someone who is merely trying to survive. People in poverty may not even have the very basic necessities in life, including food, clothing and shelter.
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