Why Scarcity Is Devastating For Both The Rich And The Poor

Getty Images/Matt CardyScarcity of anything - time, money, food, etc. - can decrease our mental capacity to handle setbacks.What does a single mom earning minimum wage have in common with a millionaire CEO with a calendar packed with back-to-back meetings?

They both struggle to find a basic element needed to succeed: The mom never has enough money, and the CEO is constantly running out of time.

While they have different needs, the effect of critical scarcity on their mental capacity to handle their problems is similar, according to a new book by Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir.

In "Scarcity: Why Having So Little Means So Much," Mullainathan and Shafir use a number of experiments to explore how the struggle to find things we lack can both help and hinder us in our daily lives.

"When you have scarcity - it could be money, food, or time - the argument is that scarcity occupies your mind and leaves you with less bandwidth for other things," Shafir told Business Insider.

Scarcity is the reason that the time-strapped CEO might be so focused on his workload that he misses his son's baseball game or accidentally double-books a meeting with important clients. Scarcity is also the reason that the single mother might be so focused on not having enough cash to pay rent that she ignores the 300% APR on a payday loan and signs up anyway.

Rich or poor, every human being only has a certain amount of bandwidth to tackle life's daily challenges, Shafir says. Take away part of that bandwidth, and that's where we begin to unravel.

Shafir described a study he performed that shows how distracting scarcity of money can be:

"We went to a mall in New Jersey and put volunteers in front of a computer screen. We presented them with financial scenarios. For example, your car breaks down. While you're thinking about these problems, we give you a simple test to complete. Then we tell you that your car will cost $150 to fix, which for most people is manageable. The rich and poor did well on these tests.

"Then, we give them the same car but tell them now it's gonna cost $1500 to fix. For low income people $1500 is a serious challenge. We found that the poor did significantly less well than the rich on the tests in this example. These are people who perform equally well on this test when they weren't thinking about these difficulties."

But unlike the rich CEO in our earlier example, a poor single mother can't take care of her bandwidth limitations as easily. The CEO can hire an assistant or delegate work to others. She's on her own with limited resources to change her state.

"When you're poor, you can't say 'Hey, let's be rich for a week! I'll be poor the week after,'" Shafir says. "That's what makes scarcity [for the poor] so overwhelming and all-consuming. It's persistent."

What we can learn from scarcity

Shafir and Mullainathan have used their research to call for reforms in policy surrounding public assistance programs in the U.S. For example, they argue that one of the reasons a large number of low-income people still don't sign up for basic public assistance programs is that the process is too lengthy and time-consuming. They simply don't have the bandwidth to deal.

"When you give [a low-income person] a 30-page application form, you've given them a huge tax on bandwidth," Shafir explains. The focus instead should be giving poor people tools to minimize problems and free up more bandwidth.

"In Europe for example, you've got childcare from 7 a.m. to 7 p.m. everyday. That gives you a lot of bandwidth. If we give you better childcare, better transportation, better baning, then we'd eliminate your bandwidth. You'd eat better, maybe take your medication on time, all of those things that there's plenty of evidence that the poor don't do."

The scarcity principle can be applied in the workplace as well. How often are employees distracted by email, phone calls from home or are over-committing themselves to projects they don't have the bandwidth to complete?

"[If you get] an email that distracts you before you go into the meeting, like an angry email from a spouse or a reminder of a deadline, then you will have damaged your performance in your meeting," he says. "I think about being distracted in moments when I shouldn't be distracted. We talk about slacking [in a negative way] ... but there is value to introducing slack into the system."

Shafir himself has found himself stretched too thin often enough to realize he has to schedule a block of time in his day to catch up on work and breathe or else it won't happen. By freeing up that time in his schedule, he's making sure has time to increase his bandwidth and can tie up loose ends on lingering projects without having to shove them off for later.

"It's our responsibility to be the first ones to facilitate [that space] in our lives a little bit," he says.