Sendhil Mullainathan
How Scarcity Fuels the Cycle of Poverty
Intro
Working at the crossroads of psychology, economics, and public policy, Sendhil Mullainathan has studied behavioral economics for the past three decades. His work seeks to find ways for governments, institutions, and individuals to turn research into action and make better decisions in times of public social crises. As behavioral scientists and decision professionals know, intention does not always equate to action, and when it comes to world issues like poverty, lapses in decision-making can have detrimental global effects. Named a Young Global Leader by the World Economic Forum and one of 50 people who will change the world by WIRED Magazine, Sendhil Mullainathan teaches us why poor people make poor decisions―not the other way around―and what we as a society can do to help them make better ones that will promote a better future for everyone.
Being poor, for example, reduces a person’s cognitive capacity more than going one full night without sleep. It is not that the poor have less bandwidth as individuals. Rather, it is that the experience of poverty reduces anyone’s bandwidth.
– Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
On their shoulders
For millennia, great thinkers and scholars have been working to understand the quirks of the human mind. Today, we’re privileged to put their insights to work, helping organizations to reduce bias and create better outcomes.
The bandwidth tax
“If you have urgent current expenses to cover, then future priorities like college and retirement fall off your radar because they are simply less pressing. Scarcity of attention prevents us from seeing what's really important. The psychology of scarcity engrosses us in only our present needs.”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
The bandwidth tax―the toll taken on the mental capacity of those affected by economic or other types of scarcity.
Imagine there’s a poor single mom at your child’s school who doesn’t read the principal’s letter home about a discounted lunch program being offered, and as a result, she fails to sign up despite her high needs. Perhaps she also doesn’t pick up medication she needs for her illness, despite it being free and available at the drugstore nearby. Other moms in the schoolyard begin to talk, and it just doesn’t make sense to anyone why the poor woman isn’t even trying to help herself.
“When scarcity captures the mind, we become more attentive and efficient.”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
While these tasks may seem simple to someone in a more financially fortunate position, a poorer person may just not have the bandwidth to consider completing them. Ironically, this poor woman might be too busy worrying about putting food on the table that night to think about or plan for her family’s longer-term needs. As a result, she makes worse decisions than those who are more fortunate, despite the decisions meaning much more for her in the long run. This bandwidth tax creates the unfortunate effect of reinforcing her negative circumstances―the epitome of a vicious cycle.
“The poor stay poor, the lonely stay lonely, the busy stay busy, and diets fail. Scarcity creates a mindset that perpetuates scarcity.”
― Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
Scarcity―the gap between what you have and what you want―affects more than just the weight of your wallet or the size of your lunch. It also affects your mental capacity, and can therefore reinforce negative circumstances.
Along with his colleagues Frank Schilbach, Eldar Shafir, and Heather Schofield, Mullainathan’s study, “The Psychological Lives of the Poor,” proves that having less physical needs met reflects in one’s mental capacities and decision making abilities, fueling a vicious cycle. This finding has major implications for the decisions people make―or lack thereof― as a result of their economic circumstances.
“January is always a good month for behavioral economics: Few things illustrate self-control as vividly as New Year's resolutions. February is even better, though, because it lets us study why so many of those resolutions are broken.”
―Sendhil Mullainathan
The idea of scarcity was first introduced into economics by British economist Lionel Robbins in 1932. In essence, scarcity is the bedrock of economics: it is the idea that every resource is limited―or, scarce―and that decisions therefore need to be made by individuals and societies about how much resources cost based on their relative availability, or supply.
With studies in mind of impoverished people who statistically made worse decisions than more fortunate people, Mullainathan sought out to connect the dots. He had impoverished people take IQ tests under their normal circumstances. After asking them to consider paying for a $1000 car repair and then taking the IQ tests again, Mullainathan found that their scores dropped by an average of 14 points. His hypothesis was correct: under stress, people make worse decisions, and as a result of their unfortunate circumstances, poor people are more often under more stress.
“We pinch pennies on small items, yet we blow dollars on big ones. Our frugality is thereby largely wasted. We spend hours surfing the web to save $50 on a $150 pair of shoes. Yet we forgo a few hours’ search to save a couple of hundred dollars on a $20,000 car. These findings are important because they demonstrate how people routinely violate economists’ standard ‘rational’ models of human behavior.”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
It’s not new to us that stress can impede our decision making skills, and it seems quite obvious: surely, under the stress of time or other factors, you’ve made choices you regret. Why, then, are people so reluctant to empathize with the poor? Why do people so often blame them for their poor choices, rather than the other way around?
“Here was an expert who had spent years perfecting her craft, yet one of her best dishes was created under intense pressure, in a couple of hours.”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
As you can see, understanding the bandwidth tax can have huge effects for our society’s conception of poor people, and therefore for how we respond to their needs. The circumstances of the poor are not a result of character―rather, they come from a lack of cognitive resources exacerbated by the continued experience of poverty.
In practice, the systems in place can do their part by making it easier for poor people to gain resources, and therefore absolving them of some of the decisions they would have to make to get there. One of Mullainathan’s suggestions is opt-out savings accounts, rather than opt-in; this way, poor people would be automatically set up to succeed, rather than having another decision to make.
“I worry about growing income inequality. But I worry even more that the discussion is too narrowly focused. I worry that our outrage at the top 1 percent is distracting us from the problem that we should really care about: how to create opportunities and ensure a reasonable standard of living for the bottom 20 percent.”
―Sendhil Mullainathan
In summary, poor people are just as good at making decisions as anyone else, but lack the resources to be able to live up to their full decision-making potential. By recognizing the threat that a lack of resources poses to our decision-making skills, we can help those at the bottom of our financial ladder make decisions that can propel them upward.
“This is how scarcity taxes bandwidth. The things that distract us, that occupy our mind, need not come from outside us.”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
Historical biography
Mullainathan was born in a small farming village in India in 1973, and moved to the Los Angeles area by the time he was ten years old.
He received his BA in computer science, mathematics, and economics from Cornell University. He completed his PhD in economics at Harvard University.
Mullainathan started his PhD studying behavioral economics: how choices that would be economically-motivated differ from choices that are motivated by societal, cultural, or psychological factors. His work is well-known in the realms of corporate governance, discrimination, and corruption.
“To be free from a scarcity trap, it is not enough to have more resources than desires on average. It is as important to have enough slack (or some other mechanism) for handling the big shocks that may come one’s way at any moment. Social scientists—and especially economists—have understood for quite some time the importance of uncertainty”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
With Marianne Bertrand, Mullainathan published a series of papers explaining how increasing financial rewards for CEOs could corrupt companies and the economy.
Mullainathan is today most known for ideas about scarcity, specifically the bandwidth tax. He wrote the popular book, Scarcity: Why Having Too Little Means So Much (2013) with Eldar Shafir.
Mullainathan is also well known for his study on cigarettes, conducted with Jonathan Gruber, which proved that a tax increase on cigarettes could yield a positive result in social welfare.
“Web searching and cellphone use both flourish in the wee hours. Before the dawn of the web, I would stay up watching television. But there is something soporific about television: I would often nod off. Not so when I'm online. As technologies expand, these problems may only worsen.”
―Sendhil Mullainathan
After spending six years as a professor at MIT, Mullainathan worked at Harvard from 2004-2018. He currently works as a Professor of Computation and Behavioral Science at the University of Chicago Booth School of Business.
Mullainathan is also the founder of ideas42, a nonprofit organization that aims to solve social problems using behavioral science research. He also founded J-PAL, the MIT Poverty Action Lab, a research center that aims to reduce poverty by promoting scientific evidence.
At age 29, Mullainathan received the MacArthur Foundation genius grant: a prize awarded annually to experts in any field who have shown “extraordinary originality and dedication in their creative pursuits.”
“Abundance means freedom from trade-offs.”
―Sendhil Mullainathan, Scarcity: Why Having Too Little Means So Much
More recently, in November 2018, Mullainathan received the Infosys Prize, one of the highest monetary awards in India which recognizes excellence in science and research.
He has also worked with economists William Congdon and Jeffrey Kling on his book Policy and Choice: Public Finance Through the Lens of Behavioral Economics (2011).
Mullainathan is known as an engaging speaker and respected scholar in the field of behavioral economics.
“Busy people all make the same mistake: they assume they are short on time, which of course, they are. But time is not their only scarce resource. They are also short on bandwidth. By bandwidth I mean basic cognitive resources - psychologists call them working memory and executive control - that we use in nearly every activity.”
―Sendhil Mullainathan
Books, articles, and lectures
“Think Better” Talk for University of Chicago Booth School of Business: Mullainathan’s talk for the Centre for Decision Making at University of Chicago describes how behavioral science is being used to advance people’s lives and solve social problems.
Speaker Series Talk at Stanford: At Stanford University in 2018, Mullainathan spoke about how technology and machine learning can make strides in worldwide poverty alleviation.
Scarcity: Why Having Too Little Means So Much (2013): Written with psychologist Eldar Shafir, this book discusses the role of scarcity in perpetuating and alleviating poverty, and suggests ways people can overcome scarcity to achieve success.
2016 Talk at J-PAL: In this speech, entitled “The Psychological Lives of the Poor,” Mullainathan hints toward themes in his book about scarcity, explaining how “the poor stay poor and the busy stay busy.”
Policy and Choice: Public Finance Through the Lens of Behavioral Economics (2011): Written with economists William Congdon and Jeffrey Kling, this book examines how psychological underpinnings of the human brain can be used to advance public policy around finance and economics.
2009 TEDTalk: Mullainathan’s TEDTalk describes how behavioral economics can influence our perceptions of complex social problems, our solutions to them, and why there’s often a gap between our intentions and our actions.
References
Boyle, M. (2021, January 16). Scarcity definition. Investopedia. https://www.investopedia.com/terms/s/scarcity.asp
Burkeman, O. (2017, November 29). Scarcity: Why having too little means so much by Sendhil Mullainathan and Eldar Shafir - review. The Guardian. https://www.theguardian.com/books/2013/aug/23/scarcity-sendhil-mullainathan-eldar-shafir
Mullainathan, S., Schofield, H., & Schilbach, F. (2016, May 5). The psychological lives of the poor. American Economic Association. https://www.aeaweb.org/articles?id=10.1257/aer.p20161101
Scarcity (psychology of). (2019, April 1). BehavioralEconomics.com | The BE Hub. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/scarcity-psychology-of/
Sendhil Mullainathan. (2004, December 16). Wikipedia, the free encyclopedia. Retrieved January 22, 2021, from https://en.wikipedia.org/wiki/Sendhil_Mullainathan
Why mental bandwidth could explain the psychology behind poverty. (n.d.). Knowledge@Wharton. https://knowledge.wharton.upenn.edu/article/bandwidth-explain-psychology-behind-poverty/
About the Authors
Dan Pilat
Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.
Dr. Sekoul Krastev
Sekoul is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. A decision scientist with a PhD in Decision Neuroscience from McGill University, Sekoul's work has been featured in peer-reviewed journals and has been presented at conferences around the world. Sekoul previously advised management on innovation and engagement strategy at The Boston Consulting Group as well as on online media strategy at Google. He has a deep interest in the applications of behavioral science to new technology and has published on these topics in places such as the Huffington Post and Strategy & Business.
