How does financial scarcity affect how we spend?
S1: It's time for Midday Edition on Kpbs. Today , we are talking about the impact financial scarcity has on our psyche and how we spend money. I'm Jade Hindman. Here's to conversations that keep you informed , inspired and make you think. A new study challenges popular beliefs about how people spend money when there are few resources.
S2: I think the understanding of the psychology underlying scarcity can help create a sense of empathy and compassion towards people who are already struggling financially.
S1: Plus , a new multimedia art exhibit takes you back in time through San Diego's hip hop history. And we'll talk about the Latino Film Festival and its role in representation. That's ahead on Midday Edition. Finances are top of mind. For many , cost of living is high , interest rates are rising and the median price of a San Diego single family home just hit $1 million. When people feel the financial pinch , they might make decisions that help them out now instead of ones that could benefit them in the future. For example , taking a high interest loan to pay rent even though it could be hard to pay back in the future. Previous research suggests scarcity pushes people to make shortsighted decisions. But Eesha Sharma , an assistant professor of marketing at Sdsu and co-author of a new psychology paper , challenges that mindset. Professor , thanks for joining me.
S2: Thanks for having me.
S1: So your paper Scarcity and Intertemporal Choice was just published in the Journal of Personality and Social Psychology. Scarcity is when there's a lack of resources.
S2: So when we're talking about scarcity , we're not necessarily talking about people who are living in poverty , but people who feel their resources are insufficient for their needs and intertemporal preferences are or choices are any choices that involve trade offs between time periods in the present or in the near term and in the future.
S1: And can you talk about what the paper's major key findings were ? Sure.
S2: The prevalent view in the literature on scarcity and Intertemporal choice is that when people experience feelings of scarcity , they make decisions that tend to favor the shorter term over the longer term. And the decision making behind that has been characterized in literature as well as the media as impatient or myopic decision making. So inattention or inability to think through the future. There's a competing perspective that's received less attention , which is that people are actually making decisions that are contextually appropriate given the circumstances that they're facing. But existing literature has mostly focused on individuals who have needs in the present , so it wasn't possible to distinguish between those two perspectives. Our work introduces the time horizon of people's needs , and we look at needs that exist along a broad time horizon , and we are able to disentangle between these two perspectives. Are people being impatient and not careful in their thinking , or are they actually making more deliberate choices ? And we see that when needs have longer time horizons , people aren't more impatient. They are equally patient or sometimes more patient , suggesting that the decision making under scarcity isn't necessarily myopic , but could be more thoughtful than we previously understood. Right.
S2: You know , are people making bad decisions because they're taking on a high interest rate loan in order to keep the roof over their heads ? That could be what is needed in the moment to make ends meet for survival. Wow.
S1: And there were five studies conducted in this paper , one of them about wedding planning.
S2: And we ensured that the participants taking our study were financially responsible for the majority of their wedding. What we did is we experimentally assigned them to one of two conditions in the scarcity condition. We asked them to indicate what they were most concerned about paying for for their weddings , and they received a list of items and they could pick one and talk about it in the control condition. They saw the same items , but they were asked to indicate what they were most excited about , and we then told them that they would be entered into a raffle , into a lottery where they could they could have the opportunity to win a smaller amount of money in that week or a larger amount of money after July. And we did that knowing that most weddings occur during the summer. And so we asked people to indicate the date of their wedding and we coded whether or not the larger later payout would be before or after their wedding date. Essentially , when will they need this money ? When might it be most useful for them ? And what we found is that when participants wedding dates occurred before the payout of the larger later option , they were significantly more likely to prefer that smaller monetary payout. But when their wedding dates occurred after the larger later payout , they were significantly more likely to wait for that option.
S1: So then tell me also.
S2: They touch nearly everybody's lives. And that's because these feelings are subjective. So one can experience these feelings any time that they feel their resources are not sufficient for their needs or wants. So we have actually seen that scarcity touches the lives of everyone across nearly every income bracket. It's not just isolated to people who have very low incomes.
S1: So what do you think is needed to help people make better long term decisions when it comes to money in the face of scarcity , really , or at least the feeling of.
S2: So I think that this idea can be addressed from three different angles. I think for consumers themselves , the recognition of the influence of scarcity and the understanding that these feelings can lead them to make decisions that prioritize the shorter term , but with the knowledge that these decisions can shift based on people's perceptions of the relative benefits of these outcomes , I think it suggests for consumers that they might be able to engage in more mindful decision making. So if you are practicing mindfulness , when you're making intertemporal choices and considering the implications of their decisions and how they align with their shorter term or longer term goals , it might help them assist , it might help assist them with their financial planning goals.
S1: You're listening to Kpbs Midday Edition. I'm Jade Hindman , and I'm speaking with Isha Sharma about a new study on scarcity.
S2: And I think this creates an inaccurate depiction of those who are struggling financially as individuals who are less thoughtful or simply incapable of thinking through the future. I think we've all heard certain narratives around the poor being poor decision makers or perhaps lazy and less thoughtful , and I simply don't think that that is accurate across the board and think it's a very broad generalization that has the potential to push people apart and not be very helpful or solution oriented. I think the understanding of the psychology underlying scarcity can help create a sense of empathy and compassion towards people who are already struggling financially.
S1: Can your findings be applied to other areas where we might feel scarcity ? For example , a commercial that makes us feel like we need this new product or even climate change impacting resources , which is very real.
S2: I think this is why understanding effects of scarcity is more important now than ever , because feelings of scarcity can be induced by actual shocks in your income , or it can be induced by fleeting cues in our environment. So there's a commercial for something that we want and we feel like we don't have enough money , or there's a certain financial goal that we would like to have , but we fall short or we are exposed to our peers who have things that we don't have. And it seems just ever increasing the number of cues in our environment that make us feel like we don't have enough. You mentioned climate change. As societies evolved and certain wants become more normalized as needs , I think it surrounds us everywhere and the effects of scarcity are not new. You know , we've known for many , many decades that scarcity enhances the perceived desirability of virtually anything that can be acquired. And some of the research that I've done with my co-authors has shown that when people feel financially constrained , they are especially drawn to things that might seem more limited in their environment and across , I would say , dozens of of studies. We've seen that feelings of scarcity are really unpleasant and they can lead people to engage in what we call compensatory consumption or consumption with the intention of sort of offsetting these unpleasant feelings. So just imagine people who are already feeling financially pinched now feeling , you know , it would be great if I got went out and bought something maybe on Amazon. You know , it's so easy. Just one click. And you can be closer to something that might give you an emotional boost.
S1: Retail therapy , huh ? Exactly.
S2: Retail therapy. And the funny thing is , this isn't about people being dumb or stupid. I study this for a living and I feel drawn to do these things. So it's a fairly common , you know , behavior that is alluring to a lot of different people. And my my doctoral student , Rodrigo Diaz , at Duke , he has found in his dissertation work that despite the allure of. Consumption when we feel financially constrained , those who make purchases when they feel financially constrained are actually less happy with the purchases that they buy. And one of the things that can mitigate these feelings is to more carefully plan your purchases. He finds that one of the reasons that people are less happy with their purchases is that they're thinking about all of the other ways they could have spent their money. And that takes away from purchase satisfaction. But when you plan your purchases more carefully , you're less likely to have those other thoughts about ways you could have spend intrude. And it offsets somewhat those that lower satisfaction from your purchases.
S1: And you know , one example of scarcity that I can think of , whether real or perceived here was during Covid when everyone started to hoard toilet paper. How do you think your findings relate to that situation and what did what did you make of it ? Right.
S2: So in a sense , it feels as though there's some kind of matching here , right ? I feel my financial resources are scarce now. I become more attuned to things that might be they might seem more limited in the environment. So now I'm especially interested in acquiring those items. And at the time there were certain products that were flying off the shelves , so toilet paper happened to be one of them. And it's hard to say sometimes with with certain behaviors that seem like a herd mentality , where did it come from ? But it's sort of emerged and then it perpetuated. And then you see this this kind of urge to stockpile and acquire perhaps , so that you feel okay. If my financial resources are limited , at least I'm not limited in this other area or this thing is really going to run out. I've got to make sure that I'm covered. So absolutely think , you know , as with most things , many factors are at play. But I certainly think that the feelings of financial scarcity can contribute to that type of behavior.
S1: What do you ultimately hope that people who feel like they're experiencing scarcity or are experiencing scarcity , whether it be financial or something else , take away from your paper.
S2: That's a great question. I tend to think a lot about the lived experiences of individuals who are experiencing these challenges. And I would like to tell individuals who are struggling financially to somewhat give them a break because we know that these challenges can be really tough and there are a lot of systemic issues in the world that can be contributing to their situation. And I think for mental health , which is a huge and rising challenge for individuals , the notion that you are bad or poor decision maker because of your financial state , I don't think is constructive. So I think first and foremost , understanding the types of factors that are affecting their psychology and noting that this really isn't about being poor , it's it's a psychological phenomenon that touches the lives of every single person who doesn't feel that their resources are unlimited. Right.
S1: Right. And I mean , so it's one thing to have people who are experiencing scarcity take something away from this paper , but also pretty much everyone. Right ? Because I would imagine the hope here is that there will be policy change or something so that so many people don't experience scarcity.
S2: What I can say is that I know this work has already been circulated among policymakers. It's part of the Federal Reserve Bank of Philadelphia's Consumer Finance Institute , and the opinions I'm expressing here are mine and not of the Federal Reserve Bank or Federal Reserve System. But I know that it's it's already been circulated in in circles where individuals responsible for making policy are involved. And I do think it has the potential to inform which strategies and interventions might be more successful to aid individuals who are struggling financially or feel as though they're struggling financially.
S1: I've been speaking with Sdsu marketing professor Isha Sharma , the co-author of a new paper called Scarcity and Intertemporal Choice. And Professor , thank you so much for speaking with us today.
S2: I appreciate you having me. Thank you.
S1: How do you spend money when resources are scarce ? Give us a call at (619) 452-0228. You can leave a message or you can email us at midday at pbs.org. Coming up , a stroll through San Diego's hip hop history.
S4: So for us , an exhibit like this one speaks to the connection between generations. I'm a kid of the 82 , and on a personal level , for me , it was the introduction to an entire new cultural movement that was happening at the time.
Many San Diegans are experiencing financial strain. A new study finds that when people are strapped for money, they make responsible decisions to meet their most important needs. This challenges previous research that we make short-sighted decisions in similar circumstances.
Eesha Sharma, assistant professor of marketing at San Diego State University and co-author of “Scarcity and Intertemporal Choice”