College Honors Program

Scarcity and Economic Decision Making

Date of Creation

5-15-2025

Document Type

Thesis

First Advisor

Mark Hallahan

Abstract

Those who experience a sense of material scarcity or poverty are oftentimes blamed for making bad financial decisions. This paper finds that the Scarcity Theory, introduced by Sendhil Mullainathan and Eldar Shafir, allows individuals to understand why people in a state of material scarcity make financially harmful decisions. This theory explains that financial scarcity causes individuals to fall into a scarcity mindset, where their cognitive and emotional functions are harmed, and alter their decisions. These “suboptimal” decisions may seem like bad decisions, but oftentimes those in poverty have no other choice but to solve a problem immediately and suffer the consequences of their decisions in the future. These consequences can cause those in poverty to fall victim to poverty traps, which create a cycle of poverty. Although there are negative consequences that come with many of the poor’s decisions, such as taking out payday loans, they are often the only options to survive in a state of scarcity. Government and organizational reform through policies such as cash transfers and more sustainable job designs are necessary to address the cycle of poverty that individuals fall into. Specifically, Universal Basic Income can be implemented to relieve individuals of their scarcity mindsets.

Comments

Reader: Kristofer Ray

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