Grameen Jameel

Contemplating Scarcity and its Implications for Microfinance and Poverty Alleviation

Alex Countsby Alex Counts

The field of behavioral economics – the intersection of psychology and economics – is fairly new.  This is a partial explanation of why its lessons have not yet been applied much to microfinance and anti-poverty programs generally.  But this is clearly changing, and none-too-soon, as microfinance in particular is in need of reinvention and rebranding.

In fact, I am coming to believe that thoughtful applications of behavioral economics can be a central part of defining and realizing the idea of “responsible microfinance” that the Microfinance CEO Working Group and others are championing and also “full financial inclusion” that moves the dial on poverty.

An excellent new book titled Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir (Times Books, 2013), will make this process of leveraging the insights of behavioral economics into microfinance much easier.  Drawing on decades of research, it focuses on an analysis of the phenomenon of scarcity – having too little of anything important to the human experience – and the implications of that analysis for policy and practice.

A note of caution.  Lest behavioral economics becomes a new fad in international development and microfinance, or worse yet that I receive part of the blame for that, let me say something clearly.  I see behavioral economics as an important lens, which is to say a powerful vantage point to look at efforts to reduce poverty and improve the human condition.  Gender is another powerful lens.  Race, political economy, biology, mental health, and asset building are also potentially useful lenses.

Now, let me explore a bit what the world looks like when viewed through this lens.

Understanding Poverty through the Psychology and Economics of Scarcity

The study of scarcity through the discipline of behavioral economics tells us something profoundly important.  When the human mind perceives scarcity of anything important – money, time, or human contact, to cite three examples – it starts behaving in fundamentally different ways.  It focuses on managing and alleviating the short-term scarcity, and in general it does that very effectively.  The authors call this the “focus dividend.”  Research cited in the book shows, for example, that many dimensions of performance are improved in a situation of scarcity.

Examples of this enhanced performance can be a bit startling.  Poor people, it turns out, have a deeper understanding of pricing information than those who are wealthier.  For example, when grocery stores try to trick you into believing that buying in bulk saves you money (when in fact it does not), poor people are better able to discern this ruse than wealthier people, despite their generally lower levels of education.  Another study focused on how people tend to overestimate the value of certain price reductions and underestimate others.  It turns out that the poor people are better able to properly weigh their options in such contexts than professional economists (a large group of whom took the same test)!

The authors’ conclusion: “[The poor] have a specific skill: they are better at making ends meet today.  They make a dollar go further.   They become experts in the value of money.”  Interestingly, this improved performance cannot be created artificially.  In other words, the mind cannot be tricked into a false sense of scarcity as a way to improve certain dimensions of performance.

But these benefits, in the form of elevated performance, come at a surprisingly significant cost.  To use the authors’ terminology, focusing on managing scarcity takes up a lot of a person’s finite mental “bandwidth” or cognitive capacity.  (To illustrate this, they describe how individual farmers score significantly higher on IQ tests post-harvest, compared to scarcity-prone pre-harvest – moments in time separated by a just a few weeks.)  As a result of the absorption of bandwidth (or attention) that scarcity causes, all of the other issues that a person faces, including long-term choices that impact the scarcity they are experiencing (and long-term thinking generally), are neglected.  In other words, performance in all other areas declines, often much more dramatically than one would imagine.

The authors give an example of how their ability to score on their favorite video games dropped off significantly as they were approaching the hard and challenging deadline for completing their manuscript, a situation where they were experiencing time scarcity.  They were not surprised by the drop-off itself, but by its magnitude.  And these are some of the world experts in the behavioral economics field!  This suggests how easy it is to underestimate the impact of the mono-focus that scarcity causes on performance in other areas (i.e., those areas unrelated to managing that immediate scarcity).

The lower performance in those other areas is a result of what the authors call “tunneling,” their term for describing how people focus on managing scarcity and tend to ignore almost everything else.  I suppose they gravitated to this term due to the popularity of the expression “tunnel vision” (which Merriam-Webster defines as “a tendency to think about only one thing and to ignore everything else”).  They say tunneling is effectively a “bandwidth tax” – and one of unexpectedly large proportions.

Sometimes, the tunneling mentality leads to actions that alleviate scarcity in the short-term, but reinforce scarcity in the long-term.  The greater the scarcity, the more pronounced the degree of tunneling.  One of the most tangible examples of what happens when human beings tunnel is “borrowing.”  This can be in the form of a loan (borrowed money) to alleviate immediate financial needs.  Or it can be allocating excessive amounts of one’s schedule to meet an impending deadline, a phenomenon the authors term “borrowing time” and which they argue functions much like borrowing money.  The only hope to get people to mentally focus on things other than managing the immediate scarcity is to “get inside the tunnel,” which is difficult but not impossible to do.  (The book outlines some techniques for getting people who are tunneling to pay attention to other issues, but this is clearly an area for further research and experimentation.)

Another important concept is “juggling” – the fact that people and organizations managing scarcity tend to be unable to get out in front of their problems because it is all they can do to catch the ball that is about to fall and throw it back up in the air.  This is why predictable expenses, such as school fees or the need to buy fertilizer, are experienced by the poor as if they were unexpected “shocks,” such as a flash flood or a sudden illness.

“Juggling is why predictable events are treated like shocks,” the authors explain. They extend this thought with some additional observations that reinforce and explain the complex financial behaviors described in Portfolios of the Poor: “[M]anaging scarcity leads to a messy balance sheet….  As we reach repeatedly for the most proximate solution to our most immediate problem, over time these short-term fixes create a complex web of commitments.  The result is a messy patchwork of assets and obligations.  For the busy, this means burdened and contorted schedules … [and] for the poor, it means complicated financial lives.”

Through the lens of behavioral economics and its analysis of scarcity, many perplexing behaviors exhibited by poor, overcommitted and lonely people are much more easily explained.  I will resist the temptation to summarize more of them here, which is perhaps my way of encouraging you to read the book!

Among the interesting implications of the authors’ analysis is that this phenomenon – managing scarcity – applies equally to the rich and the poor, to the educated and the illiterate, and to those whose scarcity is in money or in time (though they recognized that money scarcity, or poverty, has some special dimensions).  The implications for public policy, managing groups and organizations, designing anti-poverty programs, and leading one’s personal life are drawn out in some detail.

Alex Counts
“The growth and development of the microfinance sector in the region have been possible thanks to the resourcefulness of the social entrepreneurs who lead Arab and Turkish microfinance institutions and the clients who borrow from them. Crowdfunding through Kiva platform will bring in the region additional resources to bring opportunity to even more borrowers”

Fady Jameel
“The role of youth in the region needs to be fostered to allow them to play a significant role in the positive changes that are happening across the Middle East and in the region. All of us, individually, could make a difference by supporting those who do not have access to capital and who face staggering unemployment.”

Zaher Al Munajjed
“For more than a decade, Grameen-Jameel mission has been of tackling poverty and job creation in the Middle East. This partnership with Kiva is a new milestone in our journey to play a vital role in engaging individuals to support with generosity all the underprivileged and unemployed individuals in our region regardless of where they reside.”