behavioural economics

Rethinking Scarcity in Economics

Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Penguin UK, 2013; pp. 304, Rs. 504.

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Economics is often described as the science of scarcity; indeed, if there is any single foundation for economic science, it may well be in understanding the way society utilizes resources. While almost every theory in economics hinges on understanding decision-making under various conditions (uncertainty, initial endowments, among others), it is only in the past three decades that psychological factors have been incorporated into economic models of decision-making. Scarcity is the latest in a spate of behavioural economics research that looks to build a comprehensive and cohesive economic theory of decision-making with strong foundations in psychology (see also: Nudge [Thaler and Sunstein, 2003]; Thinking, Fast and Slow [Kahneman, 2011]; The Honest Truth About Dishonesty [Ariely, 2013]). In defining scarcity as a ‘mindset’, Sendhil Mullainathan and Eldar Shafir are able to argue for altered decision-making processes and outcomes when we perceive that we have too little, which is not as ubiquitous as physical scarcity of resources that economics studies.

First, the authors propose a taxonomy of various concepts (drawing from psychological science) that define scarcity. At the heart of this theory are two interrelated ideas of mental bandwidth and tunnelling. Intuitively, bandwidth refers to the mental capacity of an individual to focus on the task at hand under constrained processing capacity, while tunnelling refers to the refinement of our mental faculties toward a task that requires our immediate attention, that is, the one that is ‘causing’ the scarcity. Over the course of the book, the authors propose a cost-benefit approach to understanding how scarcity works: it often endows us with the short-term benefit of being able to focus better on the task at hand, but also tends to cost us our attention toward other concerns, leading to suboptimal decisions.

Scarcity is often seen in the form of three dimensions: (a) money or financial considerations; (b) time or temporal constraints; and (c) social constraints. While (a) and (b) are common areas of research in economics (particularly behavioural economics), the influence of social constraints on decision-making has only recently been explored. The authors argue that scarcity in the social dimension could refer to social isolation; for example, not having many friends or an active social life. Thus, socially isolated individuals may tend to perform worse under situations with high scrutiny, such as a date or a job interview, relative to situations where their every action is not observed.  However, simply being commonly drawn from the underlying theory of scarcity need not imply that poverty influences decision-making in the same way that being socially isolated or busy would.

The final part of the book deals with applying scarcity to everyday situations, organizational behaviour, and designing policy for individuals affected by scarcity (not unlike the libertarian paternalism in Nudge). Taking varied examples from commercial airline pilots to parenting, the authors provide cogent arguments about how people’s decisions are affected by their mental capacity as well as the environment that creates such constrained mental capacity. Despite the strong background work carried out by the authors, the book relies heavily on theoretical and hypothetical arguments, rather than employing empirical evidence (as most well-formed economic theories eventually do).  Additionally, there is little discussion of the types of psychometric tests that may be used in order to comprehensively measure scarcity, perhaps in an effort to keep the material accessible to non-scientific readers. This is perhaps a notable future course of research in scarcity and decision-making, bolstering empirical evidence for its influence.

The theory of scarcity as proposed is a novel conceptual leap for the fields of economics as well as psychology. This book is better taken as a starting point to an evolving area of research and thinking that holds considerable weight for understanding what goes on in the process of human decision-making. To some extent, Scarcity also deals with the issue of how much the environment in which the decision-maker is placed in influences decisions, and further how this environment may be endogenously determined by the decision-maker. Indeed, there is much to be learnt about behavioural economics by pursuing this line of inquiry.

Anirudh Tagat

Altruistic Economics

Recent research in economics has unravelled a mountain of scientific evidence that has previously remained unexplored. Indeed, the methods in the field of economics are markedly changing, as well as the topics that economists are dealing with. A cursory glance at published articles dealing with experiments, psychology, sociology, and political science in top-ranked economics journals will suffice to grasp recent shifts in economic thinking: something that we often overlook when immersed in a full-time formal degree in economics. The purpose of this article is to understand how expanding our current economic perspective is only beneficial for achieving a better picture of everything that is economics.

First, it must be said that intertwining fields such as psychology and political science with economics is not exceptionally novel, in that it has been an active means of economic analysis under the aegis of behavioural economics and political economy. In fact, areas like mathematics (e.g., game theory) and statistics (e.g., econometrics) have contributed much more to our understanding of economic issues than others; so clearly economics as a social science has borrowed significantly from other sciences. For anyone who is thoroughly dissatisfied with learning the assumptions of any economic model (which, in their own right, are absolutely justified in theory) might immediately take a shine to modelling economic behaviour using psychology or evolutionary biology, since it partly consists of appealing to one’s sense of intuition in analysing economics. Recent studies in behavioural economics include studying the role of moral and religious codes in dishonest behaviour such as cheating on a test (Ariely, 2013), ‘nudging’ people to make choices that are optimal in their own right (Thaler & Sunstein, 2008), and how social norms and social preferences drive our selfish (and often altruistic) decisions (Binmore, 2010).

Second, we see that ‘sister’ fields such as experimental economics have assumed importance owing to their utility in testing behavioural economics theories, as well as falsifying existing, traditional economic theory (Kagel & Roth, 1995). Experiments have become particularly popular in playing out game theoretic-situations for human subjects (e.g., testing if the prisoner’s dilemma is indeed a dilemma for people). Some experiments in economics have gone far beyond the comforts of the laboratory (which gives a researcher the advantage of having complete control over how the decision is presented) to the field; this necessarily requires more resources to organize, but has higher external validity (Harrison & List, 2004). Natural (or field) experiments have become wildly popular in economics as they allow one to assess policy impacts (such as Banerjee & Duflo, 2011). Clearly, experiments (despite their complexities) indeed show the path to a new understanding of how we make decisions in real life.

In the Indian context of economics research (such as Hatekar & Kulkarni, 2013), it would be a grave error to say that there is a dearth of good research. Universities, think-tanks, and other research institutions have contributed vastly to the present research scenario in India. There are also extensive datasets that offer crucial insights into the state of the economy—both at the macro and micro level.

Finally, we can say that the state of flux for economics research (both in India, and world over) is a good indication of a belief in collaboration, scientific rigour, and a system designed to (mostly) ensure that the (usually) best research survives. The inter-and-multi-disciplinary approach to economics will only give us richer insights into the way we function, and ultimately how society (or an economy) runs itself. While many important issues are already the focus of mainstream economics research, there is treasure everywhere, waiting to be found.

Anirudh Tagat