Rethinking Scarcity in Economics

Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Penguin UK, 2013; pp. 304, Rs. 504.

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Economics is often described as the science of scarcity; indeed, if there is any single foundation for economic science, it may well be in understanding the way society utilizes resources. While almost every theory in economics hinges on understanding decision-making under various conditions (uncertainty, initial endowments, among others), it is only in the past three decades that psychological factors have been incorporated into economic models of decision-making. Scarcity is the latest in a spate of behavioural economics research that looks to build a comprehensive and cohesive economic theory of decision-making with strong foundations in psychology (see also: Nudge [Thaler and Sunstein, 2003]; Thinking, Fast and Slow [Kahneman, 2011]; The Honest Truth About Dishonesty [Ariely, 2013]). In defining scarcity as a ‘mindset’, Sendhil Mullainathan and Eldar Shafir are able to argue for altered decision-making processes and outcomes when we perceive that we have too little, which is not as ubiquitous as physical scarcity of resources that economics studies.

First, the authors propose a taxonomy of various concepts (drawing from psychological science) that define scarcity. At the heart of this theory are two interrelated ideas of mental bandwidth and tunnelling. Intuitively, bandwidth refers to the mental capacity of an individual to focus on the task at hand under constrained processing capacity, while tunnelling refers to the refinement of our mental faculties toward a task that requires our immediate attention, that is, the one that is ‘causing’ the scarcity. Over the course of the book, the authors propose a cost-benefit approach to understanding how scarcity works: it often endows us with the short-term benefit of being able to focus better on the task at hand, but also tends to cost us our attention toward other concerns, leading to suboptimal decisions.

Scarcity is often seen in the form of three dimensions: (a) money or financial considerations; (b) time or temporal constraints; and (c) social constraints. While (a) and (b) are common areas of research in economics (particularly behavioural economics), the influence of social constraints on decision-making has only recently been explored. The authors argue that scarcity in the social dimension could refer to social isolation; for example, not having many friends or an active social life. Thus, socially isolated individuals may tend to perform worse under situations with high scrutiny, such as a date or a job interview, relative to situations where their every action is not observed.  However, simply being commonly drawn from the underlying theory of scarcity need not imply that poverty influences decision-making in the same way that being socially isolated or busy would.

The final part of the book deals with applying scarcity to everyday situations, organizational behaviour, and designing policy for individuals affected by scarcity (not unlike the libertarian paternalism in Nudge). Taking varied examples from commercial airline pilots to parenting, the authors provide cogent arguments about how people’s decisions are affected by their mental capacity as well as the environment that creates such constrained mental capacity. Despite the strong background work carried out by the authors, the book relies heavily on theoretical and hypothetical arguments, rather than employing empirical evidence (as most well-formed economic theories eventually do).  Additionally, there is little discussion of the types of psychometric tests that may be used in order to comprehensively measure scarcity, perhaps in an effort to keep the material accessible to non-scientific readers. This is perhaps a notable future course of research in scarcity and decision-making, bolstering empirical evidence for its influence.

The theory of scarcity as proposed is a novel conceptual leap for the fields of economics as well as psychology. This book is better taken as a starting point to an evolving area of research and thinking that holds considerable weight for understanding what goes on in the process of human decision-making. To some extent, Scarcity also deals with the issue of how much the environment in which the decision-maker is placed in influences decisions, and further how this environment may be endogenously determined by the decision-maker. Indeed, there is much to be learnt about behavioural economics by pursuing this line of inquiry.

Anirudh Tagat

Demystifying Research for the Indian Psychologist

Besides being engaged with clients or students, some psychologists might undertake research, not just as an alternative to lazy weekends, but to earn a decent living. In fact, most psychologists are meant to practice, teach, and research, in some combination or the other.  These three distinct (yet interconnected) roles require different sets of skills, and graduate and post-graduate training is usually targeted to develop such skill sets. Psychologists who practise can also conduct research with clinical samples, similar to researchers who conduct studies with their students. As an undergraduate student of psychology you may well be tired of being asked to read people’s minds, but you also should have taken part in a professor’s research project.

However, most Indian students of psychology have hardly had this opportunity, and that is a cause for great concern. As a result, most undergraduate (and in some cases, postgraduate) students hardly have any understanding of research in psychology and research methodology.

So how do undergraduate students grasp what research is? One way is through the arduous Lab sessions that are a mandatory part of the curriculum for psychology majors. And another way is… Um… Yes! When they’re required to complete a Research Methods course as part of post-graduate study. And then, training in research is complete (?). At least as complete as it could be to receive a passing grade, anyway.

Given such limited exposure to the rigors of scientific research in psychology even at the postgraduate level, chances are the student will often be dissuaded from doing/participating/assisting in research for the rest of their careers. Unless of course, the resilient few go on to complete an MPhil or a PhD (and I completely empathize with you!). Yet, an additional degree often does not guarantee adequate training in research, because the quality of training vastly differs from one University to the next. No, this isn’t the difference between one institute teaching Path Analysis and the other not; this is the difference between being exposed to a flourishing research environment, with innovative principal investigators, and enthusiastic participants, and an ethics committee that distinguishes right from wrong, and co-investigators who cooperate more than compete, and… basically, a culture for research.

This is a utopian view, where systems and processes are stable, and the profession of a social science researcher commands respect. But reality  tends to be a bitter pill. The notions of research and the profession of a researcher are often misconstrued, misperceived, and misunderstood, not just in a discipline like psychology, but in the sciences as whole (which, by the way, include social sciences). Scientific illiteracy can contribute to such a state of affairs, where individuals may not only be ill-informed about how to think analytically and interpret scientific conclusions presented in popular media, but may also be ill-informed about what the components of science and research really are. Although critics of this opinion may throw Indian literacy figures in the air, I oppose the criticism by stating that most individuals who have the fortune of receiving higher education are literate, but are often scientifically illiterate. And this lack of information, combined with poor monetary incentives to continue researching, significantly contributes to students being dissuaded from entering research.

So now, I’ll break down some myths of research in India that I’ve come across.

Yes, research is fun, if you make it so.

No, natural science research and social science research are not at par; the former often receives more funding (often for completely valid reasons, too).

Yes, research requires resilience, commitment, and internal motivation (in more than equal proportions).

No, the monetary payoffs aren’t great; but the feeling of contributing to knowledge more than makes up for it.

Yes, if you’re good at it, you’ll go places, get published, and the whole deal.

Yes, you’ll receive credit for your work, most of the time.

No, you won’t receive funding for all your ideas.

Yes, research is creative! Scientific creativity is prized above all else.

Yes, you can choose any topic under the sun that can be plausibly studied about, in a scientific manner.

No, you won’t be able to plagiarize; integrity is one of the corner stones of academic research.

Yes, seeing your name in print in an article that you’ve toiled over for months on end really makes it worthwhile.

No, it isn’t easy.

It’s a tough road ahead for social science researchers here, and I admit, it isn’t all roses and peaches. But I’d urge students of psychology, and other social science disciplines to give the profession a chance. After all, dismissing something without knowing what it is, is a marker of scientific illiteracy. In the spirit of the indomitable Mr. Spock (and Leonard Nimoy): “Live long and prosper!” and research!

 Hansika Kapoor

Altruistic Economics

Recent research in economics has unravelled a mountain of scientific evidence that has previously remained unexplored. Indeed, the methods in the field of economics are markedly changing, as well as the topics that economists are dealing with. A cursory glance at published articles dealing with experiments, psychology, sociology, and political science in top-ranked economics journals will suffice to grasp recent shifts in economic thinking: something that we often overlook when immersed in a full-time formal degree in economics. The purpose of this article is to understand how expanding our current economic perspective is only beneficial for achieving a better picture of everything that is economics.

First, it must be said that intertwining fields such as psychology and political science with economics is not exceptionally novel, in that it has been an active means of economic analysis under the aegis of behavioural economics and political economy. In fact, areas like mathematics (e.g., game theory) and statistics (e.g., econometrics) have contributed much more to our understanding of economic issues than others; so clearly economics as a social science has borrowed significantly from other sciences. For anyone who is thoroughly dissatisfied with learning the assumptions of any economic model (which, in their own right, are absolutely justified in theory) might immediately take a shine to modelling economic behaviour using psychology or evolutionary biology, since it partly consists of appealing to one’s sense of intuition in analysing economics. Recent studies in behavioural economics include studying the role of moral and religious codes in dishonest behaviour such as cheating on a test (Ariely, 2013), ‘nudging’ people to make choices that are optimal in their own right (Thaler & Sunstein, 2008), and how social norms and social preferences drive our selfish (and often altruistic) decisions (Binmore, 2010).

Second, we see that ‘sister’ fields such as experimental economics have assumed importance owing to their utility in testing behavioural economics theories, as well as falsifying existing, traditional economic theory (Kagel & Roth, 1995). Experiments have become particularly popular in playing out game theoretic-situations for human subjects (e.g., testing if the prisoner’s dilemma is indeed a dilemma for people). Some experiments in economics have gone far beyond the comforts of the laboratory (which gives a researcher the advantage of having complete control over how the decision is presented) to the field; this necessarily requires more resources to organize, but has higher external validity (Harrison & List, 2004). Natural (or field) experiments have become wildly popular in economics as they allow one to assess policy impacts (such as Banerjee & Duflo, 2011). Clearly, experiments (despite their complexities) indeed show the path to a new understanding of how we make decisions in real life.

In the Indian context of economics research (such as Hatekar & Kulkarni, 2013), it would be a grave error to say that there is a dearth of good research. Universities, think-tanks, and other research institutions have contributed vastly to the present research scenario in India. There are also extensive datasets that offer crucial insights into the state of the economy—both at the macro and micro level.

Finally, we can say that the state of flux for economics research (both in India, and world over) is a good indication of a belief in collaboration, scientific rigour, and a system designed to (mostly) ensure that the (usually) best research survives. The inter-and-multi-disciplinary approach to economics will only give us richer insights into the way we function, and ultimately how society (or an economy) runs itself. While many important issues are already the focus of mainstream economics research, there is treasure everywhere, waiting to be found.

Anirudh Tagat