Scarcity

There is nothing in the prospect of a sharp, unceasing battle for the bare necessities of life, to encourage looking ahead, everything to discourage the effort.

A recent report by the Center for Responsible Lending featured the story of Sandra Harris:

Once a student in the Head Start child development program for low-income families, Sandra had come to serve on the board that administers Head Start in New Hanover County. She was honored as 2003 Employee of the Year for her work at the University of North Carolina, Wilmington (UNC-W), and Wilmington residents knew her as a radio personality on WMNX. But all was not well for Sandra underneath the surface. Her husband had lost his job as an executive chef. The couple, who had always been a month ahead on their rent and bills, found themselves in a cash crunch. Their car insurance was due, and Sandra simply could not pay the bill.

Then Sandra came across a solution: a payday loan. The idea was simple. She’d get cash now and pay it back along with a fee when her paycheck arrived in a couple of weeks. Exactly what she needed. She took the loan and paid her insurance bill on time. And on her next payday, Sandra was ready to pay off the small loan and the $50 fee.

“You know, you can renew,” the payday clerk told her, and the thought of her unpaid light bill flashed into her head. Sandra thought, “You’re right. I do need it.”

Sandra had started a chain. Next month was no easier than this one. Money was even tighter, and because of the fees, the amount she owed was even bigger. In the coming months, she kept rolling over the loans—taking a new loan to pay off the previous one. On some months she would even roll over the fees.

After a round of rollovers, the first lender demanded full payment of the loan. Sandra could not pay it off, so she went to another payday lender, Urgent Money Service, and took out a loan to pay back the first lender. She kept getting in deeper. Within six months, Sandra was paying rollover fees on six different payday loans. In June 2003, Sandra and her husband were close to being evicted from the apartment they had lived in for six years. Sandra wrote, “Basically, we ended up having to use one loan to pay off another loan, and ended up paying $495 to $600 per month in fees, never paying the loans down.”

This went on for at least six months. This money did not support a lavish lifestyle, Sandra said. “People think you’re living above your means,” she said. But she was paying bills, not buying clothes. Sandra was working diligently to manage her family’s bills during a tough financial time.…

Sandra bounced checks. Her car was repossessed. She increased her tax exemptions so she’d have more money to pay her bills and ended up owing thousands of dollars in back taxes. She finally broke and spent a shift at the radio station wiping tears away between segments.

“It takes a lot for me to cry,” she said.

The data suggest that Sandra’s story is fairly typical. In 2006, there were more than 23,000 payday lender branches in the United States, which was more than all the McDonald’s (12,000) and Starbucks (almost 9,000) locations combined. Sandra’s practice of rolling over and accumulating fees is also common. Three-quarters of all payday loan volume comes from rollovers, ultimately accounting for $3.5 billion in fees each year.

Why do those strapped for cash take on such extreme loans that they cannot afford to pay back? Why do they allow themselves even to start down such a slippery slope? Such questions typically lead to debates about the importance of personal responsibility or about how unscrupulous businesses prey on low-income individuals; they fuel discussions about the myopia of the poor and the need for financial education. Consumer advocates bemoan the payday loan industry as predatory and push to ban these loans. Others point out that when you’re in real need, a loan, however expensive, can be better than no loan. We raise this example not because we want to enter this debate. We raise it because it provides an important window on scarcity.

The problem is more than just with payday loans. The cash-strapped borrow in many ways, not just through payday loans. They “borrow” by paying their bills late. About one of every six families in the lowest income quintile (the bottom 20 percent) pays at least one bill late in any given year. At the extreme end of this are “reconnect” fees. One study found that 18 percent of the poorest families have had their phone disconnected and 10 percent have had a utility shut off within a twelve-month period. Paying $40 to have your phone service reconnected after failing to pay the bill in time is similar to paying a $40 fee for a loan to avoid the disconnection in the first place. A 1997 study estimated that nearly 5 percent of the annual income of the poor was spent on reconnections and servicing and late fees, a number that we suspect has risen dramatically since then. Sandra Harris also “borrowed,” first by reducing her tax withholdings and then by falling behind on her tax payments. The poor around the world borrow, often from informal moneylenders who charge rates every bit as extreme as the payday lender (and sometimes more). And yet poor borrowers pay these rates, not once but continuously, setting in motion the same slippery slope of rolled-over debt.

This phenomenon is not unique to the poor. Busy people borrow time, often at similarly high rates. To make room for a project due soon, the busy borrow by putting off other work. And just like a payday loan, the bill comes due: the work that was postponed must now get done. And there is often a “fee” for borrowing time as well: putting off work can increase the time it takes to do it. Mailing your tax returns via certified mail would have taken minutes, but on the last day, there’s a line around the block at the post office. Because of an impending deadline, you put off typing up your handwritten notes from an interview. Later, you must decipher those notes, which takes longer than it would have when the interview was fresh in your mind. And just like the payday borrowers, the busy also roll over their debts. Something you were going to do today now needs to be put off because of something you postponed till today from yesterday. How many tasks are delayed time and time again before they finally get done? And for similar reasons—the next chance you get to do it, you find yourself with no more time than you had before.

Borrowing goes hand in hand with scarcity.

TUNNELING AND BORROWING

Why do we borrow when we face situations of scarcity? We borrow because we tunnel. And when we borrow, we dig ourselves deeper in the future. Scarcity today creates more scarcity tomorrow.

Take Sandra’s example. That initial bill she could not pay created scarcity. She then tunneled on making ends meet that month. Within that tunnel, the payday loan proved eminently attractive. Its benefits fell inside that tunnel: it helped her make it through the month. The costs of the loan—the repayment and the fees—all fell outside this tunnel. The loan seemed to offer a solution to the problem she was fixated on.

Our own qualitative fieldwork supports the view that tunneling makes the payday loan particularly attractive. Ask a borrower at the time of borrowing, “How do you plan to pay it back?” and you usually get cursory answers such as “Well, I get paid in a week.” Probe a bit—“But don’t you have other expenses?”—and you encounter exasperation, as if you just don’t get it. “Don’t you understand? I’ve got to make my rent payment this month!” The subtext being “I’m focusing on what needs to get done now!” Next month’s budgeting is an abstraction, something to turn to later. Like all the worthy goals that do not matter when you’re speeding to the hospital, the long-term economics of the payday loan do not matter at that moment. This is why payday loans are so attractive—people turn to them when they are tunneling on putting out a fire. And their best feature is that the loans put out this fire, quickly and effectively. Their worst feature—that the fire will return in the future, possibly enlarged—is obscured.

Of course, none of this is unique to payday loans or to money. Think about putting off answering an e-mail. When we take on this time debt, we focus on the benefits: “Right now I need to get other things done.” We do not spend much time asking ourselves, “How will I make time for this later?” It is not that we are blind to the costs; they just do not get much attention.

There is an important implicit assumption here about what we tunnel on. Sandra is short of cash today and still expects to be short of cash next month. The perpetually busy are busy this week and next. Those who experience scarcity experience it not only now but typically also later. Yet people tunnel on their immediate scarcity; knowing you will be hungry next month does not capture your attention the same way that being hungry today does. The bill that is due now generates threatening notices; the bill in two months’ time is nowhere to be seen. Even if you were to think carefully about tomorrow’s scarcity, you’d really only “know” it in the abstract; you wouldn’t feel it, and thus it wouldn’t capture your mind in the same way. One reason for this is the bandwidth tax. The present presses automatically on you. The future does not. To attend to the future requires bandwidth, which scarcity taxes. When scarcity taxes our bandwidth, we become even more focused on the here and now. We need cognitive resources to gauge future needs, and we need executive control to resist present temptations. As it taxes our bandwidth, scarcity focuses us on the present, and leads us to borrow.

We have already seen data that support this assumption. Recall the deadline study from chapter 1 in which one group of students had three weeks to finish an assignment while a second group faced a deadline every week. We attributed the second group’s boost in performance to the focus dividend. But, of course, the first group also faced a deadline, one that was three weeks away rather than one week. This tells us that the three-week deadline was not as pressing. In fact, initially, each one-week deadline may not have felt very pressing either. But we can guess what happened. The deadline only mattered once it got close. Until then, it was an abstraction; it failed to evoke the scarcity mindset. But that mindset arose three times for those who had one-week deadlines and only once for those who had three weeks. All this, incidentally, should be familiar. It is why we experience a rush of productivity shortly before a deadline that was always there.

Tunneling this way creates a bias toward borrowing. Because only the most immediate scarcity enters the tunnel, loans are particularly attractive.

Of course, taking a loan need not be a bad choice. When you really do have more time next week, putting off things is eminently sensible. Borrowing to pay rent if you are facing eviction can be sensible if you have a paycheck coming soon. When resources today—time or money—can truly provide greater benefit than they would in the future, a loan is a good idea. When we tunnel, though, we borrow above and beyond what is dictated by this cost-benefit calculus. When faced with scarcity, we borrow when it makes sense in the long run and when it does not.

LET’S PLAY THE FEUD

This explanation for borrowing is different from the usual ones. To explain why the poor borrow excessively, we do not need to appeal to a lack of financial education, the avarice of predatory lenders, or an oversized tendency for self-indulgence. To explain why the busy put off things and fall behind, we do not need to appeal to weak self-control, deficient understanding, or a lack of time-management skills. Instead, borrowing is a simple consequence of tunneling. To test this idea, we resort to one of our favorite tools: creating artificial scarcity in the lab.

This time we turn to Family Feud, an American TV game show that our colleague Anuj Shah was curiously familiar with (not what you’d expect from a time-pressed Princeton PhD student, which he was at the time). Contestants on Family Feud are asked to name items that belong to categories like “Things Barbie could auction off if she needed money fast.” Prior to the show, a hundred random Americans are presented with these categories, and they give their favorite answers. Contestants must then guess the most common answers, earning more points for those that are more popular. The answer “Barbie’s dream car” earns 35 points because 35 out of the 100 people gave that as an answer. (“Ken,” Barbie’s friend, earns 21 points.) Many quiz shows ask trivia questions that require esoteric knowledge, leaving the audience wondering whether the contestants read almanacs for fun. The questions in Family Feud, by contrast, are accessible and engrossing because there is no correct answer, only popular ones. It democratizes truth—you could call it the first postmodern game show.

Shah realized that Family Feud contestants experience scarcity: they must respond under time pressure, with very limited time to think. Regular trivia questions require that you recall an answer—either you know it or you don’t. On Family Feud, the questions require a different, more creative approach. When asked, “Name something Barbie would sell,” you sort through various candidate responses. You might think of things associated with Barbie and see if any of them might be sold. You could also think of things people typically sell and see if Barbie owns any of those. Each path leads to different answers, from “Ken” to “car.” These answers are mere guesses: the potential popularity of each must then be contemplated. Time pressure means fewer paths can be followed, and less time can be devoted to gauging each answer’s potential. Unlike busy people who measure scarcity in days or hours, Family Feud contestants measure it in seconds. Instead of deciding which project to work on first, they must quickly decide how to come up with the most popular answers.

We recruited Princeton undergraduates to play Family Feud in a controlled setting. Participants played several rounds in a fixed amount of time—the amount of time they were allocated determined their “wealth.” The “rich” had more time; the “poor” had less. In every round, they saw a new question. At the end of all the rounds, the total number of points they accumulated was converted to dollars.

Having created the rich and the poor, we added the element of real interest to us: we gave them the option to borrow, with interest. Each additional second they chose to use on a round cost them two seconds deducted from their total time. We also allowed them to “save”: if they finished a round early, the remaining time was “deposited” back into their total.

The poor focused. Per second, they were more effective than the rich; they made more guesses and earned more points. This was especially true in the later rounds, as they were running out of total time: the poor made 50 percent more guesses per second and earned more per guess. Had the rich stayed as intensely focused as the poor, they could have earned many more points. Since we gave the rich more than three times as many seconds, they could have played three times as many rounds and earned three times as many points. Instead, they only earned 1.5 times as much as the poor. Further analyses confirmed that none of the reasons that might come to mind—that the rich, who played longer, were getting bored, or that the best guesses come in early in each round—could explain these results.

The poor were more effective because they tunneled. As a result, they borrowed much more than the rich. Despite the high interest rate, loans looked extremely attractive in the tunnel, much more attractive than a view from the outside would warrant. So the poor resorted to borrowing often, to help themselves right now. But in the end they were hurt by it. When we took away the ability to borrow—you now played each round as best you could and then moved to the next one—the poor earned 60 percent more points; the rich were unaffected.

In another version of the experiment, we re-created a payday loan trap akin to Sandra’s experience. The Family Feud poor rolled over the loans just like payday borrowers. Their debt would start getting repaid on the next round, making it just a tiny bit shorter. As subsequent rounds got shorter and shorter, subjects felt the need to borrow more seconds. Early borrowing created a vicious cycle for the poor. Pressed for time, too rushed to make productive guesses, they borrowed more. Most of their time was just going to paying off early loans (plus interest). And as before, when they were permitted to borrow, the poor did much worse than when they were not allowed to borrow, an effect that was missing for the rich.

This study shows the intimate link between success and failure under scarcity. The contestants in Family Feud borrowed most when they were being most productive, when they were most engaged, when they really felt they needed more time. In a sense they were right to borrow: those extra seconds had a good chance of paying off. In another sense, they were wrong to borrow because that payoff did not compensate for the interest rate incurred. What they noticed in the tunnel—an extra second could really help right now—was accurate. Their mistake was to neglect what was outside the tunnel: how much would this extra second cost later in the game? It is worth noting that both the rich and the poor showed this pattern of borrowing when they were particularly productive and pressed. It’s just that the poor, with their fewer seconds, were in that state a lot more often.

So why did the poor borrow more? Are these results due to tunneling or to something else? Perhaps time pressure leads people to borrow in a panic. After all, it’s not every day that you find yourself having to answer questions in fifteen seconds. We have replicated these findings in numerous other contexts. In the Angry Blueberries study from chapter 1, we also allowed for borrowing. And we found that the blueberry-poor subjects—facing no time pressure—borrowed more blueberries and were hurt by the ability to borrow. Focus again played a role: those who took more time on each shot were more likely to borrow: the more engaged, the more they borrowed. We have tried this in many such games, and the results are consistent: scarcity, in whatever form, always leads to borrowing.

Or perhaps our results are due to a general myopia. For example, researchers have documented a bias toward the here and now, which they call hyperbolic discounting, or present bias. We overvalue immediate benefits at the expense of future ones: this is why it is hard to save, to go to the gym, or to do your taxes early. Of course, present bias would also generate borrowing. Perhaps the poor borrow simply because they are more present biased. In fact, some have tried to explain actual borrowing in the world using this argument. What is striking in our data is that subjects were randomly assigned to be poor: they were no different from the “rich” except for the flip of a coin. Clearly, both groups in this study, rich and poor, should show an equal amount of present bias. In fact, any attempt to analyze myopic thinking at the level of personal differences between rich and poor—whether differences in present bias or otherwise—would need to somehow explain how scarcity led to borrowing in our present contexts, where rich and poor were created at random and could not have been more alike.

These studies support our more general hypothesis about the world: the reason the poor borrow is poverty itself. No need to resort to myopia or to financial ineptitude for an explanation. Predatory lenders may certainly facilitate this type of borrowing, but they are not the source. The powerful impulse to borrow, the demand for high interest and potentially spiraling borrowing, the kind that creates a slippery slope and looks so ill advised, is a direct consequence of tunneling.

Scarcity leads us to borrow and pushes us deeper into scarcity.

NEGLECTING THE FUTURE

Imagine you are working under a tight deadline. Suddenly, after weeks of planning, your report is due tomorrow, and you are not quite there. You scramble all night, do all you can, but there are a couple of references you just can’t trace. Not in time for tomorrow, anyway. So you submit the report to your boss as is, hoping for the best. And you move on to other pressing matters. The following week, hours before an important trip, you receive a note from your boss: “There are missing references in the report—I need them immediately!” Like a boomerang, that quick fix has come back at you, at the worst moment. Like borrowing, behaviors such as these look attractive inside the tunnel but have potentially spiraling consequences outside it: they can dig you deeper into scarcity.

Two organizational researchers illustrate this with the story of a steel cord manufacturer.

Because machine uptime was important, the company encouraged maintenance engineers to respond to breakdowns as quickly as possible [emphasis added]. Even so, overall performance didn’t improve. Only after the company started keeping and analyzing records machine by machine instead of person by person did it realize [why]. Engineers … would make a quick fix and move on to the next machine. Each … breakdown [was] patched three times before it was finally solved.

In a way the engineers were doing exactly as asked: they were solving problems quickly. Management, you might think, had committed a classic mistake. As organizational researchers would describe it, they were “paying for A while hoping for B.” They were asking for speed while hoping for speed and quality. However, this was not simply a case of misaligned incentives; the workers in this case would likely have taken this quick fix even if they were their own bosses. When working to finish things quickly, the engineers tunneled. Inside their tunnel, a quick fix was just the thing needed. Cutting corners was the perfect solution; the cost would only show up later. Much like an expensive loan, a hastily patched solution looks attractive within the tunnel. It saves us something today even as it creates greater expenses in the future. And we will then have more to do, more things to fix, more bills to pay. Patching is a lot like borrowing, a failure to invest and to commit the resources now so that the job is done correctly.

People short on money also patch together short-term solutions. You need a washer but are short on cash? Buy the cheapest appliance. It is, of course, less durable, but that problem falls outside the tunnel. When your tire goes flat, you may literally opt for a cheap patch rather than get a new tire. You know that a patched tire is less advisable, less safe, and less durable than a new tire. But that, too, is outside the tunnel. For now, inside the tunnel, the patch makes life a lot easier. Like a quick fix that saves time now, these are all quick fixes that economize on money today. And as the patches accumulate—for the engineers, the report writers, and the poor—so too do the long-term costs.

The author Steven Covey finds it helpful to classify tasks according to whether they are important and whether they are urgent. He notes that busy people spend their time on tasks that are both urgent and important. This is what it means to be working on a deadline. We get a burst of output working on the tasks that matter and that are due very soon. We would call this a focus dividend.

At the same time, he argues, busy people tend to neglect the important but not urgent tasks. These are tasks that can always be put off until later. And so we do. Nowhere do we see this more clearly than in the state of our offices or our homes. When we get very busy, our homes and offices become very messy. There is always something more pressing than keeping order, which is never truly urgent. Of course, we don’t make a conscious decision to have a messy life. Instead, the messy surroundings just “happen” while we attend to what’s urgent. The messy home or office is the result of a sequence of small choices, mostly passive, effortless, and unnoticed. Rushing to a meeting, you drop a stack of mail on top of another stack of papers. Getting to the phone, you leave the book you’re reading open on the sofa. Lots of little things, at the end of which there’s a mess. While not urgent, it is important. It is less productive and less pleasant to work and live in a messy space.

Putting off an important but not urgent activity is like borrowing. You gain time today by not doing it. But you incur a cost in the future: you will need to find time (possibly more time) to do it at some later point. In the meantime you may pay a cost for not having done it or lose the benefits that taking care of it could have brought. Having a messy office makes your work just that much less productive. You spend a whole lot of time trying to find those papers under the mail. Every day you incur a little cost. The cost is never big enough to make the thing urgent, as a deadline might. Instead, the neglected office bleeds you by a thousand little cuts.

Scarcity, and tunneling in particular, leads you to put off important but not urgent things—cleaning your office, getting a colonoscopy, writing a will—that are easy to neglect. Their costs are immediate, loom large, and are easy to defer, and their benefits fall outside the tunnel. So they await a time when all urgent things are done. You fail to make these small investments even when the future benefits can be substantial.

The tendency to put off important but not urgent choices shows up in money as well as time. Here is one example. Rag collectors in India travel around town looking for old clothes and cloth pieces being tossed away that can be sold for reuse. It is, as you might imagine, a low-income job: a typical collector earns less than a dollar a day. But it is also a low-investment job: besides labor, the only equipment is a pushcart, which might sell for $30. And yet most rag collectors do not own their pushcart; they rent it, for $5 to $10 a month. Most collectors would like to save up for a pushcart but never quite manage to do that.

Investing in a pushcart is an important but not urgent activity. Like keeping your office clean, it has benefits in the future, but it can always wait; it is not essential right now. The irony, of course, is that if a rag collector had the pushcart, he would have one less expense (the rent), and some of the other pressing expenses wouldn’t be as hard to deal with. Of course, that is true for your office as well—if it were better organized, you’d be saving time and end up less rushed. (And with more time to clean the office.) The pushcart is but one of many examples that poverty researchers can point to: even when returns are high, the poor, who need those returns more than anyone, fail to invest in ways that cannot be explained by weak financial institutions or a lack of skills.

If all this sounds vaguely familiar, it may be because you have heard it discussed in politics. A similar focus on the urgent at the expense of the important has long been observed in the workings of governments that, over decades of tight budgeting, have slashed spending on infrastructure. The upkeep of bridges, for example, is a critical investment. Yet it is one that is all too easy to put off when budgets are tight and cuts are needed. Decaying bridges are important but not urgent, and so, according to a 2009 report issued by the American Society of Civil Engineers, approximately one in four rural bridges and one in three urban bridges in the United States are deficient.

FAILING TO PLAN

These various behaviors share one obvious feature: people are behaving myopically. This leads to the most basic implication of tunneling. When we focus so intensely on making ends meet now, we plan less effectively for the future. Of course, studies have shown that planning is a problem for all people. But scarcity makes this problem a whole lot worse.

Think of it this way. On a good day, you might start by looking at your calendar, taking a moment to gauge what’s ahead of you today, maybe even getting a sense of what the week holds. Being aware of what is coming allows you to mentally prepare for it, to anticipate a challenging conversation or remind yourself of details so you don’t walk into a meeting cold. In contrast, on a busy day you dive right in. You do not step back and scope out the day. You are not quite sure who’s at the meeting or what it’s about. And it’s not only for lack of time. You may have a little time to work, but your mind is so focused on everything that needs to get done that your vision is obscured. You do not look past the first few meetings to what follows later.

Stepping back, detaching from the moment, and thinking ahead requires a wider perspective and some cognitive resources. Thinking about the bills due next month, the other income sources you might anticipate, the new time commitments that might arise, all require some leftover cognitive capacity. With the mind focused on present scarcity, looking ahead risks becoming yet another casualty of the tunneling tax.

Could we re-create this in Family Feud as well? As before, subjects were asked to play several rounds. Once again, some were rich (they had many seconds per round to play) and some were poor (they had only a few seconds). But now we gave subjects a chance to look ahead a little, to prepare for future rounds. Half were given a preview of the next round’s question. They could think about that question in parallel to thinking about the current one. They could look at it and decide to save or borrow because they think they ought to spend more or less time on it.

The previews helped. To be more accurate, they helped the rich, who looked ahead, took advantage of the information, and scored more points. The poor, on the other hand, did no better with the previews. They were so focused on the current round that they did not expend the mental resources required to look ahead. Scarcity kept them tied to the present, unable to benefit from a glimpse of what the future might hold.

A common theme stretches across many forms of the tunneling tax. Scarcity brings about behaviors that make us shortsighted. We ignore the (future) health cost of eating out when we are busy. We do not think about the implications of paying back payday loans (in the future) when we are tight on cash. We do not consider the (future) benefits of keeping our offices clean when working on a deadline. Of course, there will be exceptions, things that grab our minds no matter where we are. You may forget a meeting today while busy contemplating your wedding a year from now. That’s part of the beauty of the human mind. But by and large, the problems of scarcity press on us today. Tomorrow we may also be poor (in time or money), but that is another problem, left for another day. The scarcity that captures us is now, and it yields a tunneling tax and makes us act myopic.

But what is remarkable in this account is that myopia is not a personal failure. Tunneling is not a personal trait. It would be foolhardy, after all, to call Sandra myopic. She rose from a Head Start program to become employee of the year at UNC-W and a board member of Head Start. Similarly, we would not describe the busy people we know as myopic. And the students in our lab studies probably didn’t get to Princeton through shortsightedness. Many of the busiest people who borrow time are the same people who have invested years in demanding careers and planned carefully how to get ahead. In fact, as far as personality traits go these people are anything but myopic; rather, it is the context of scarcity that makes us all act that way.

Tunnels limit everyone’s vision.