Behaviour, Scarcity and Public Policy

by Ken Gibb

I have written in the past about my enthusiasm for broadening economics and incorporating the insights of psychology and institutional analysis. Pretty late in the day I have just read the 2013 book ‘Scarcity’ by Sendhil Mullainthan and Eldar Shafir (Picador). It is a well-constructed argument that pulls together a lot of the behavioural economics canon around a few overarching themes and then applies them to a range of economics, time management, self-control and social isolation topics. The policy recommendations are nudge-style redesigns aimed at helping people and organisations overcome cognitive capacity problems.

The authors use a lot of stories and metaphors as well as reporting experiments by themselves and others. This includes quite a lot of what is now familiar or classic results from the behavioural economics field e.g. Thaler’s mental accounting. They are particularly interested in development and poverty, so much of their work relates to evidence collected from the global south. It is noteworthy that much of the 2015 World Development Report from the World Bank is a direct application and extension of their work. [1]

Scarcity is a concept widened from its usual economics setting and refers rather to scarcity of mental resources. While it is acknowledged that concentrating on a priority can produce a focus dividend, it also leads to problems associated with tunnelling i.e. neglect of other parts of one’s life, our work, confusing what is urgent for what is important and actually impairing our mental performance (experiments suggest that IQ can be significantly reduced while tunnelling). Their argument is that scarcity captures attention, as we tunnel, we juggle priorities, debts, family time, commitments to dieting or exercise and we have less attention on longer term questions or indeed regular commitments. This is of course considerably worse for people in poverty but it is this group who better understand the opportunity cost of decisions and the economic trade-offs that follow – however, they are nonetheless most trapped in the tunnel in part because they have no room for slack and no buffer against shocks.

Why is this so? Fundamentally, because scarcity imposes a tax on our cognitive capacity, our bandwidth, in terms of both fluid intelligence (logical reasoning in the abstract) and our executive control (planning, attention, initiating decisions, impulse control, etc). The tunnelling effect means that impaired cognitive capacity leads to poorer decisions e.g. we exhibit present bias, myopia or hyperbolic discounting which makes important longer term decisions, investments and insurance, less likely to enjoy the focus of the short urgent priority. This is critical to keeping the poor in poverty. It also helps us understand the vigilance required to diet and exercise and the need to break out of time management enslavement of peaks and troughs of multiple deadlines and work stress.

The argument is not surprisingly stronger as a diagnosis or an explanation of behaviour rather than a basis for actual policies to improve outcomes. Instead we have a set of modest nudge redesigns of policies, most of which are eminently sensible (encouraging savings, insurance, opting-out clauses, etc and personal behaviours that encourage vigilance re self-control) but by the authors’ own recognition will not change the world. Thus, they argue that the bandwidth tax puts pressure on people in poverty to make bad errors of omission e.g. not maintaining vital medicine consumption, something which might have technical solutions such as designing a pill bottle that actively reminds users to take a pill. There is also especially in the UK quite a lot of resistance to nudge policies. While some of this is merited, I think there is plenty of sense in aspects of the work too.

In any case, I think the fundamental public policy value of this book is the idea that cognitive capacity and scarcity ought to feature in the initial assessment or design of all interventions – i.e. that we take a broader set of criteria into the development of policies and a wider frame with which we look for mechanisms and improvements as a result of an intervention. A scarcity test could be part of any policy impact assessment. With this methodological contribution, I think the authors might be on to something. It is also a useful set of tools to add to those we already use to assess and evaluate policy.

My original interest in behavioural economics stemmed from its many applications to housing choices. Alex Marsh and I wrote a paper in 2011 [2] which alluded to the important connection from biases and other non-rational substantive behaviour by decision makers to earlier work by Simon on bounded rationality and Conlisk’s contribution regarding economising on cognitive capacity.

In reading this book I was struck by the application of these ideas to welfare reform and its impacts on the poor in the UK, as well as the insidious effects of zero hours contracts on decision making jugglers (I am also reminded of Ehrenreich’s Nickel and Dimed [3]). In rereading reviews of Scarcity I saw that similar ideas also struck the Guardian’s book reviewer. There is also an interesting discussion about scarcity in organisations – how do we reduce firefighting, focus more on the important rather than the urgent, manage risk in a scarce environment and how, above all, do we focus on managing the right scarce resource? Post credit crunch, the authors point to the implementation of chief risk officers in major US banks who report directly to the CEO focusing exclusively on the implications of new business risks and on-going risk. In a changing context confronting new and incompletely understood risks, all of these questions seem relevant to non profit organisations like housing providers too.

Just to be clear: this book has shortcomings, for instance, it is light on policy and one or two of the policy perspectives I have difficulty with (e.g. lifetime benefit limits in the USA), but as a way of understanding or interpreting decision making and the real world pressures people face, it is thought provoking and potentially helpful. And, as a way of broadening our thinking about what makes policy work, scarcity to my mind definitely offers something.

World Bank (2014) World Development Report 2015: Mind, Society and Behaviour. World Bank Group.
Marsh, A and Gibb, K (2011) ‘Uncertainty, Expectations and Behavioural Aspects of Housing Market Choices’, Housing, Theory and Society, Vol. 28, pp. 215-35.
3. Barbara Ehrenreich (2001) Nickel and Dimed. Henry Holt and Co.