Decision-Making Under Scarcity

Read this blog post to learn more about:

• How the ‘scarcity’ effect reduces cognitive bandwidth

• Why financial strain may focus on short-term survival rather than long-term

• How fiscal policies like Austerity subconsciously reinforce behavioural constraints

Usually, human decision-making is assumed to have come from rational and logical reasoning, where most individuals weigh costs and benefits to encourage the perceived best outcomes (Zhu, M. and Ratner, R.K. (2021)). Yet, this assumption can be questioned when considering the psychological conditions of poverty. Furthermore, decision-making in conditions of scarcity (e.g., when something is not easy to find or obtain)easy to find or get (Cambridge Dictionary (n.d.)) is often shaped by cognitive constraints,altering how many individuals comprehend information ( Mani, A., Mullainathan, S., Shafir, E. and Zhao, J. (2013)).For example, individuals experiencing financial scarcity may prioritise immediate expenses such as rent or food bills over long-term financial planning, even when such planning would be more beneficial in the long run. Overall, this raises vital questions: does poverty impair cognition, or does it simply reshape decision-making in ways that reflect adaptive responses to constrained environments?

For example, people of lower socio-economic status have less disposable income and, as a result, are more likely to accrue higher credit card debt or other forms of debt with high interest rates. This financial pressure often shifts their focus toward generating short-term income to meet immediate repayments, rather than investing in longer-term projects or resources that could improve their future economic stability (Figure 1). (who said that)

Figure 1. Overview of the Relationship Between Poverty, Cognitive Bandwidth, and Behaviour

Scarcity significantly alters cognition, and this can be understood through the “scarcity effect.” This psychological concept explains how limited resources increase attention, forcing individuals to focus less on the long-term consequences of their decisions and more of the deficits of their current experiences (Mullainathan & Shafir 2013). This narrowing of attention is linked to cognitive bandwidth theory, which suggests that the mental load imposed by scarcity reduces an individual’s capacity for complex reasoning, planning, and self-control (Shah, A.K., Mullainathan, S. and Shafir, E. (2012) ‘Some consequences of having too little’, Science, 338(6107), pp. 682–685.). As a result, poverty does not merely constrain material resources, but also imposes cognitive constraints that shape behaviour. 

Research has also shown that people who endure financial scarcity tend to perform poorly on cognitive tasks due to the mental burden of managing scarcity, not because of their ability (Mani, A., Mullainathan, S., Shafir, E. and Zhao, J. (2013) ‘Poverty impedes cognitive function’, Science, 341(6149), pp. 976–980.). For example, individuals who experience financial strain have a decline in cognitive performance to a level comparable to the effects of sleep deprivation. Overall, this suggests that poverty consumes the cognitive resources which most individuals require to perform well. Thus, scarcity acts as a tax on cognition,  the mental bandwidth necessary for long-term planning. However, it would be oversimplified to imply that individuals who experience poverty generally have cognitive impairment, as not all individuals show reduced decision-making capacity, and doing that risks undermining fundamental structural issues (Thaler, R.H. and Sunstein, C.R. (2008) Nudge: Improving Decisions About Health, Wealth, and Happiness. New Haven: Yale University Press). Yet, there are things which mitigate the cognitive effects of scarcity, such as education and social support (Chetty, R., Hendren, N., Kline, P. and Saez, E. (2014) ‘Where is the land of opportunity?’, Quarterly Journal of Economics, 129(4), pp. 1553–1623.) Additionally, being able to distinguish between temporary and permanent poverty is important because permanent poverty could lead to sustained habits and decision-making patterns over time.

Nevertheless, there is evidence that such policies may have unintended negative effects.Austerity-driven cuts to public services, specifically within the NHS, may indirectly reinforce the issues and outcomes that they seek to prevent (Marmot, M. et al. (2020) Health Equity in England: The Marmot Review 10 Years On. London: Institute of Health Equity).  Reduced funding often leads to lack of support, complex issues, placing additional cognitive and emotional strain on individuals already experiencing stress, ill health, or socioeconomic disadvantage (Chetty, R., Hendren, N., Kline, P. and Saez, E. (2014) ‘Where is the land of opportunity?’, Quarterly Journal of Economics, 129(4), pp. 1553–1623). Overall, this worsens long-term system costs.Accordingly, simplifying decision-making environments and providing support can alleviate strain and improve outcomes, such as increasing pressure on emergency services such as A&E, and contributes to longer waiting times for treatment.

In summary, poverty does not simply limit material resources but can also reshape cognition through the scarcity effect and decreased cognitive bandwidth. Although it may be overarching to imply that all individuals who experience poverty develop cognitive impairment, research continues to highlight   how scarcity increases cognitive burden in ways that markedly influence decision-making. Furthermore, these effects are not purely psychological but are deeply intertwined with structural conditions. Understanding poverty, therefore, requires moving further from individual blame and recognising the interaction between environment and cognition. Decision-making under scarcity is not a failure of logic, but a reflection of the constraints within which individuals operate.

References:

Mullainathan, S. and Shafir, E. (2013) Scarcity: Why Having Too Little Means So Much. New York: Times Books.

Mani, A., Mullainathan, S., Shafir, E. and Zhao, J. (2013) ‘Poverty impedes cognitive function’, Science, 341(6149), pp. 976–980. Available at: https://pubmed.ncbi.nlm.nih.gov/23990553/

Haushofer, J. and Fehr, E. (2014) ‘On the psychology of poverty’, Science, 344(6186), pp. 862–867. Available at: https://pmc.ncbi.nlm.nih.gov/articles/PMC10176429/

Zhu, M. and Ratner, R.K. (2021) ‘Scarcity and consumer decision-making’, Theory and Decision, 90(1), pp. 1–22. Available at: https://link.springer.com/article/10.1007/s11238-021-09802-7

(Cambridge Dictionary (n.d.))

Chetty, R., Hendren, N., Kline, P. and Saez, E. (2014) ‘Where is the land of opportunity?’, Quarterly Journal of Economics, 129(4), pp. 1553–1623.

Marmot, M. et al. (2020) Health Equity in England: The Marmot Review 10 Years On. London: Institute of Health Equity.