How scarcity rules our choices

I'VE OFTEN SAID that money problems are the result of issues people haven't addressed or don't even know they have.

One of those issues is scarcity - having less than you feel you need.

This is the focus of Scarcity: Why Having Too Little Means So Much by Sendhil Mullainathan and Eldar Shafir (Times Books, $28). Mullainathan is an economics professor at Harvard, and Shafir is a professor of psychology and public affairs at Princeton.

Reading it could help you deal with the psychological barriers that prevent you from having the financial life you deserve.

When my husband and I teach a new financial class at our church, we start not with budgeting, as some participants expect, but with discussions about behavior that impedes people from achieving their financial goals. We talk about feelings of entitlement and the lack of decision-making skills. That's how Mullainathan and Shafir approach scarcity. They explore the why behind the scarcity mind-set by using academic studies, anecdotes and vignettes.

Their academic approach is accessible. Scarcity isn't beach reading, but it's intriguing if you want to understand the significance and consequences of scarcity.

As the authors point out, scarcity can be a good thing. When you have less money or time, it may result in a "focus dividend" or heightened productivity. Scarcity also can result in "tunneling," which is when you focus on one thing so much that you neglect something else.

Ever miss paying a bill because you're too focused on deadlines at work?

"Focus is a positive: Scarcity focuses on what seems, at that moment, to matter most," Mullainathan and Shafir write. "Tunneling is not: Scarcity leads us to tunnel and neglect other, possibly more important, things."

How do these concepts play out in our financial lives?

Mullainathan and Shafir cite health insurance as an example - and given the ongoing fury over the Affordable Care Act, it makes sense to me. Why don't people who need health insurance buy it?

Many will say they can't afford it. But those of us who have experienced health complications costing thousands of dollars insist that you can't afford not to have health insurance.

Yet the scarcity of financial resources forces people to focus on their immediate needs, not on the possibility of a need in the future.

"Insurance does not deal with any of the needs - food, rents, school fees - that are pressing against the mind right now," the authors write. "Instead, it exacerbates them - one more strain on an already strained budget."

Mullainathan and Shafir contend that applying the science of scarcity to poverty might help change people's attitudes about and empathize more with the poor. "When we think of the poor, we naturally think of a shortage of money," Mullainathan and Shafir say. "When we think of the busy, or the lonely, we think of a shortage of time, or of friends. But our results suggest that scarcity of all varieties also leads to a shortage of bandwidth."

Bandwidth in this context is mental capacity. When money is scarce, your thoughts can become overwhelmed with your financial struggles, making it hard to make better choices. "We are emphatically not saying that poor people have less bandwidth," they write. "Quite the opposite. We are saying that all people, if they were poor, would have less effective bandwidth."

Their discussion about poverty elevates it from stereotypes that the poor are just lazy or irresponsible. So when we address poverty, understanding how the poor may be thinking can result in more effective anti-poverty programs. "Why not look at the structure of the programs rather than the failings of the clients?" they ask. "Why not design programs structured to be more fault tolerant?" And asking the questions isn't a substitute for personal responsibility, the professors add.

I was enthralled by the research in Scarcity. As I tell participants in my workshops, you can't fix financial issues unless you know why you do what you do.

"The more we understand the dynamics of how scarcity works upon the human mind, the more likely we can find ways to avoid or at least alleviate the scarcity trap," Mullainathan and Shafir write.