From the President: Considering Scarcity

Written by Dory Rand on December 2, 2013 - 4:19pm

I recently read an eye-opening book entitled “Scarcity: Why Having So Little Matters So Much,” by Sendhil Mullainathan and Eldar Shafir. It’s about how scarcity of time, money, food, and sleep affects our brains, creating a tunnel vision.

This tunnel vision may sometimes help us focus in productive ways, but often reduces our cognitive capacity or “bandwidth” in harmful ways.

The authors, leading researchers in behavioral economics and psychology, illustrate the effects of scarcity on bandwidth through a variety of examples from research conducted in the United States and abroad with a wide range of participants. In one of these tests, the same Indian sugar cane farmers were shown to have reduced cognitive capacity just before harvest when they were “poor” as compared to just after harvest when they were “rich.” Here is a link to Shafir presenting recently at the  Federal Reserve Bank of Cleveland.

I find this research fascinating because it debunks the idea that consumers generally make rational choices that are in their best economic interests and shows how limited bandwidth can lead consumers (and others) to make disadvantageous or even disastrous choices. As the authors note, this research has direct implications for consumer protection and economic security issues such as payday loans and retirement savings.

In the case of payday and deposit advance loans, for example, consumers’ tunnel vision about their current desire for cash impairs their ability to forecast that their economic situation may be made worse by taking out a high-cost loan. Enforcing ability-to-repay requirements, such as those recently finalized by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, can protect consumers from that very real possibility.

In the case of retirement savings, employees’ lack of knowledge about investments, overly optimistic views about “catching up later” and limited bandwidth when faced with more immediate concerns, reduce the likelihood that they will take the time and trouble to opt into a retirement plan and select appropriate investment vehicles and levels of investment. Adopting automatic enrollment, default investment vehicles such as target-date funds, and default investment rate policies (with opportunity to opt out or change defaults), can help employees/employers obtain/provide a valuable benefit while reducing the time, trouble, and cost.

I urge federal and state policymakers, consumer advocates, and financial service providers to consider how this kind of research on behavioral economics and psychology can and should inform how we enact and enforce laws and rules to protect consumers. The research should also be used to create programs and materials that empower consumers to make more informed and better choices for their economic security.

I hope that you enjoy the holidays and find a way to help those in need in your community.