Scarcity: Why Having Too Little Means So Much

Chapter 9 explores the concept of managing scarcity effectively, using case studies to illustrate how recognizing and incorporating slack into systems can dramatically improve efficiency and outcomes. The chapter begins with the case study of St. John’s Regional Health Center, an acute care hospital that faced a common form of scarcity: more surgeries than operating rooms. The solution—leaving one room unused for emergencies—reduced scheduling conflicts and improved the hospital’s capacity to handle surgeries, highlighting the counterintuitive benefit of slack in managing scarcity.

Mullainathan and Shafir extend this principle to the broader context of poverty programs, training initiatives, and welfare systems, criticizing how these programs are often not designed to be fault-tolerant. They argue that many social programs are designed under the assumption that participants will not make mistakes—an unrealistic expectation that does not account for the inevitable errors people living in scarcity will make. A better approach, they suggest, would involve designing programs that allow for errors and provide ways for participants to recover without severe consequences.

The authors also discuss the distinction between “fat” and “slack” in organizational contexts. While both can be seen as excess, fat is identified as wasteful expenditure that does not contribute to organizational goals, whereas slack is a necessary buffer that allows systems to adapt and respond to unforeseen challenges. Mullainathan and Shafir point to the leveraged buyout wave of the 1980s. During this time, many corporations were perceived as bloated, headed by executives who spent money wastefully. Buyouts were intended to impose pressure on these organizations by moving them from abundance to scarcity. However, many of these companies were pushed to the brink of bankruptcy. Mullainathan and Shafir suggest that, in an attempt to cut fat, these buyouts did away with necessary slack.

The chapter concludes with the example of Benihana restaurants, a restaurant chain that creatively managed seating scarcity by using communal tables and fast-paced, theatrical cooking. This approach not only optimized the use of space but also increased turnover and profitability, showcasing how understanding and managing the correct scarce resource—seating, in this case—can lead to significant business success.

Through these examples, Chapter 9 emphasizes the importance of designing systems and programs with an understanding of scarcity, the value of slack, and the need for fault tolerance. Mullainathan and Shafir argue that by doing so, organizations, governments, and businesses can better navigate the challenges posed by scarcity.

Chapter 10 delves into practical solutions for mitigating the negative impacts of scarcity on decision-making and behavior. Mullainathan and Shafir argue that while changing the inherent psychology of scarcity is challenging, altering the environment to counteract scarcity’s psychological effects can yield positive outcomes. They liken this approach to using rumble strips on highways—simple yet effective modifications that protect against human error.

Mullainathan and Shafir discuss how directing attention to important matters can help manage tunneling, the focus on immediate needs at the expense of longer-term considerations. As an example, the authors describe a project they implemented in Bolivia, Peru, and the Philippines, in which they sent reminders to poor individuals who wanted to save money. The monthly reminders, sent via text message or letter, increased savings by 6%. This program demonstrated that even small nudges could effectively increase savings by making future needs more salient, thus bringing beneficial actions into the “tunnel.”

The authors then discuss the phenomenon of neglect. While normally a detrimental behavior, neglect can be harnessed for good, especially in the context of saving money. Mullainathan and Shafir share that they have both enrolled in a program that automatically directs a portion of their paychecks to their savings accounts. This approach capitalizes on the tendency to overlook long-term goals, ensuring savings grow despite daily neglect. Mullainathan and Shafir also point to other studies that suggest that altering default options can significantly increase participation rates by making inaction lead to desirable outcomes. For instance, one study showed that at companies which defaulted to enrolling their employees in retirement savings plans, rather than requiring the employees to opt in, more than 80% enrolled in the plan.

Mullainathan and Shafir recommend transforming behaviors that require ongoing vigilance into one-off decisions. For instance, rather than constantly resisting unhealthy snacks, making a single decision to not purchase them at the grocery store eliminates the need for repeated self-control.

The authors also emphasize the importance of managing scarce resources wisely, such as by breaking down long deadlines into shorter, manageable chunks to prevent procrastination. They also recommend building slack into systems to buffer against shocks. This is critical to avoid overly focusing on immediate crises.

Finally, Mullainathan and Shafir make an ironic observation: Scarcity often emerges from periods of abundance. For instance, the last-minute stress of working toward a deadline is often preceded by ample time that was ineffectively used. The authors highlight the importance of using abundant periods wisely to prevent future scarcity. This includes appreciating the value of deadlines and creating buffers for unforeseen events.

Overall, Chapter 10 offers a blueprint for scarcity-proofing one’s environment, advocating for structural changes that account for human psychology under scarcity. By understanding and anticipating the effects of scarcity, individuals and institutions can implement strategies that help mitigate its negative consequences, leading to improved outcomes in various aspects of life.