A book about the psychological challenges caused by scarcity that keep the poor, poor.
I read this book a few months ago but never wrote about it.
Scarcity: Why having too little means so much by Sendhil Mullainathan and Elder Shafir is a book based on real-world research data. The book explores how the mind of a poor person works and why they seem to perennially remain in debt.
The solution to poor financial management by poor is not to offer them money. The best thing to do is to offer them strategies that tackle some of the problems that they face. These need to be systematically addressed.
I knew a local money-lender in Bangalore who would offer short-term hand loans. He would offer loans between Rs. 1000 and Rs. 10000.
How it worked was, say you wanted to borrow Rs 1000. He would divide the repayment into 10 equal weekly instalments. He would collect Rs 100 each week. Consequently, it was 2.5 month loan.
He was ostensibly offering the loan at a 10% interest for the period, so he would deduct Rs 100 from the Rs 1000 before giving it. In effect he would be earring Rs. 100 in the last week. In absolute terms it does not seem like a lot. He would also deduct Rs 100 as the first week payment when giving the money and handover Rs 800 to the borrower.
If your head is spinning, I can understand. Think about the plight of a poor person who desperately needs Rs 1000 ($12).
Principle - Rs. 1000
Interest Deducted - Rs 100
First week repayment deducted - Rs 100
Sum given - Rs 800
With 9 more instalments of Rs 100 pending over the next 9 weeks.
Effectively you took Rs. 800 and will be paying back Rs. 900.
At the earlier stated 10% for 2.5 months, you were already paying 48% per annum. With the final little subterfuge you end up at almost 60% per annum. Most people who borrowed from him would go back for the next round immediately after they finished the previous round. Why?
What scarcity does to the mind
Tunnelling - When you are faced with scarcity, you tend to become like a horse with blinders on. You are only able to see the problem at hand. You do not have the capacity to see the problem that could come. Or how continuing down the path that you are currently on is not going to save you.
A poor person faced with the choice between making the rent payment or being evicted would borrow to make sure the rent gets paid. It created a problem for them in the future but the thinking is, we will deal with it when the problem arrives. Today, the rent is to be paid and that is all I care about.
This thinking leads to a cascade of poor decisions that are focused only on the here and now. It is not forward-looking.
There is no big-picture thinking. There is only a small picture of - now.
Executive decision - When you are constantly faced with such poor choices your ability to make choices declines and your executive decision-making skills decline a lot. Even when presented with good choices, one’s ability to pick the better option is sharply reduced. A person who is making 100 “bad Vs worse” decisions a day cannot be expected to perform well in decision-making.
First of all, they are exhausted from making these decisions. Secondly, they are not decisions that one is excited to be making. They probably hate the idea of making any decisions at all. Therefore decision-making is not likely to be your sharpest skill.
Slack - Even if a poor person reaches the pinnacle of discipline and starts figuring their lives out, they do not have any slack to play with. Somebody in the family decides to get married or some unforeseen expense due to health comes up; it throws their discipline into the trashcan.
They do not have the ability to absorb the unexpected. Even the slightest jolt from the normal will send them tunnelling to fix it. Which then starts a cascade of bad decisions.
These three phenomena tend to ensure that the poor remain poor no matter what they do.