Article Review

“Scarcity”: a book review

What is scarcity?

“Scarcity” was published in 2013, written by Sendhil Mullainathan, professor of Economics at Harvard, and Eldar Shafir, professor of Psychology and Public Affairs at Princeton. The greatest strength of this book is also its greatest weakness: it’s educational. On the one hand this is good, because it brings Behavioral Economics to the general  public and we certainly need it; on the other hand, the lack of a model makes the analysis shakier than we would like.

At the very beginning the authors define scarcity as “having less than you feel you need”; traditionally, development economists focused only on physical poverty. However, with this definition, they want to emphasize that scarcity can be both physical and mental. The main takeaway of the book is that scarcity is a mindset that lures people into a poverty trap, the leaving of which is very difficult.

To better illustrate this point, throughout the book they refer to  several experiments that have taken place both in developed and developing countries. The best feature is that they test physical and mental scarcity in both settings, and more importantly how they interact. The interaction is fundamental, because their thesis is that physical scarcity causes mental scarcity, i.e. the scarcity mindset. It’s easy to imagine physical scarcity, it ranges from not having enough food, money, time or (spoiler alert!) enough blueberries in a videogame. However, it is more difficult to think of mental scarcity, even though we constantly experience it. To explain it, they use the concept of bandwidth, or mental capacity. We can think of it as the “RAM of our brain”, the precision and speed at which we process information and execute decisions.

What are the effects of scarcity?

When we experience  scarcity we tunnel, i.e. we get extremely focused on solving the scarcity at hand. This focus can have 2 effects: one positive, and one negative. In the short run it is generally positive, because it makes us focus on the task at hand, operating at maximum capacity. However, it can have a negative effect too, since in this case when we are focusing we are actually tunneling, i.e. leaving everything else out of the picture, with possibly dire consequences. Moreover, in the long run scarcity erodes the availability of mental capacity, given that we can focus on nothing else.

To support this view, they refer to  several experiments and I’m going to explain three of them to help you understand. There is one experiment where people with less bullets available in each round of a shooting  game scored proportionately higher than people with more bullets: having less prompts efficiency. In another one, dieters found more difficult to concentrate on the next task if the previous one mentioned pastries: scarcity captures the mind and lets us focus on nothing else. The final experiment concerns Indian farmers, who score lower on an IQ test (measured with Raven’s matrix test) just before harvest than just after it. Why? Because they typically squander their harvest money in the months immediately following it, and the closer they get to harvest period, the poorer they are. That causes what is called a “bandwidth tax”; part of the brain continuously focuses on the scarcity at hand, leaving less room for other thoughts. It is really important to notice that all kinds of scarcity could cause that tax, ranging from money, time, love, etc.

Before turning to how to escape the scarcity trap, they focus on another negative side effect: borrowing. When tunneling, we leave everything else outside the tunnel, such as future consequences. To illustrate it , they make their case against the utility of payday loans. These loans are extremely short ones, with high interest rates. Moreover, they are extremely easy to get: in the US there are more payday lenders than McDonald´s and Starbucks outlets combined! Hence, once inside the tunnel, payday loans seem like the best way to get money, but in the long run they’re extremely detrimental.

How can we help people escaping the scarcity trap?

Seeing as scarcity is a lack of something, there are essentially 2 solutions: a windfall of the something needed or a more efficient use of the quantity at our disposal.

However, scarcity is insidious. For instance, they once gave Indian traders enough money to extinguish their debts, drastically increasing their disposable income, since they did not need to pay interests anymore. However, one by one they started borrowing again, eventually reverting to their previous situation. So a one time payment wasn’t enough to escape the poverty trap because they were not efficient, i.e. they did not reserve any slack. Indeed, the main reason to fall into the scarcity trap is that we are at the limit of the resource in question, so that when we face an unexpected “expense” we start borrowing from the future and taxing our bandwidth. Hence, the authors strongly advocate for the creation of slack, both to exit and to avoid (re)entering the scarcity trap.

Moving on to the strictly efficient part, they refer of the St.John’s Regional Center in Missouri: they were  constantly operating at maximum capacity, so when an unexpected surgery came up all the elective ones needed to be rescheduled. The solution was brilliant: keep an Operating Room (OR) only for the unexpected surgeries. Having one less OR available actually increased the number of surgeries performed: the creation of slack solved the problem. The last example highlights another important feature of scarcity: it does not concern only individuals, but also organizations.

In conclusion, the authors offer an exciting, novel interpretation of  poverty, tackling it from different angles, following a new framework: scarcity. Even though they lack a formal model (so far), the book offers an interesting view on one of the oldest problems, using several hints from Behavioural Economics. In short: a must read.

Article Review

Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment

Review of a paper by Fryer, Levitt, List and Sadoff (2012)

Improving the productivity of teachers has long been a priority in Public Policy. In recent years, there has been growing enthusiasm among policy makers for initiatives that tie teacher incentives to the achievement of their students. However, evidence as to the efficacy of such policies is mixed. Studies in developing countries have shown that linking pay to teacher performance helps reduce teacher absenteeism and dramatically improves students’ test scores. In contrast, the only two field experiments conducted in the US have shown small, if not negative, treatment effects.

The authors of this paper conducted a field experiment to test whether the psychological bias we call “loss aversion” can be exploited to design better incentives.

To be sure we’re all on the same page, let’s take a minute to define what loss aversion means. A perfectly rational person should feel the same amount of pain on losing say $5 as the joy felt on gaining $5. However, for a loss averse individual, the pain of losing is greater than the pleasure of gaining, even for the exact same amount. Studies have shown that losses may be more than twice as powerful as gains!

There is overwhelming laboratory evidence for loss aversion, but the paper in question is one of the first to demonstrate it in a field experiment. The study was conducted in Chicago Heights, Illinois during the school year 2010-2011. Chicago Heights is made up of primarily low-income minority students who struggle with low achievement rates.

Two methods of framing teacher incentives are compared:

  1. The teacher gets a sum of money at the end of the academic year if his/her students perform well (gain frame; the one we’re most familiar with in this context)
  2. The teacher is given the sum of money at the beginning of the year and it is withdrawn if the students do badly (loss frame)

At the beginning of the school year teachers were randomised into Treatment and Control groups. Within the treatment group, some were assigned the gain frame and others the loss frame. Further, within the “Loss” and “Gain” groups, the authors tested for heterogeneous effects for individual rewards compared to team rewards. Thus, participating teachers were randomly assigned to one of four treatment groups or a control group. Rewards were based on students’ end of the year performance on the ThinkLink Predictive Assessment, an otherwise low stakes standardised diagnostic assessment that is designed to be aligned with the high-stakes Illinois Standards Achievement Test (ISAT) taken by 3rd-8th graders in March and the Iowa Test of Basic Skills (ITBS).

Image result for children taking tests

They estimate intent-to-treat (ITT) effect by taking the difference between treatment and control group means. They find large impacts on both the ThinkLink as well as ISAT and ITBS scores, but only in the LOSS frame. There is no significant difference for student scores of teachers in the “Gain” treatment, in line with findings from previous studies done in the US. Also, no significant difference was found between individual and team incentives under either the Gain or the Loss treatment.

But can we really be sure that it is loss aversion that is driving these results? There could be 3 other possible explanations. These are listed below, along with the reasons why they are implausible in this case:

  1. Attrition- Perhaps teachers found a way to discourage weaker students from taking the exams. The authors run a probit regression on all of their covariates, where the dependent variable is an indicator for missing any of the exams considered. They find no significant difference between the gain and loss groups. Furthermore, the ISAT scores were not directly incentivised and they found similar rates of attrition even there. So attrition is unlikely to explain the results.
  2. Liquidity constraints- Teachers under the loss treatment have more money at the beginning of the year, which may enable them to spend more on resources for the classroom. However, surveys on the amount of spending reveal that this was not the case.
  3. Cheating- Teachers may cheat and give their students high scores. However, they cannot manipulate the ISAT and ITBS scores, which mirror the results found on the ThinkLink tests.

Thus, by spending the same amount of money, but just changing the way the incentive was framed, they obtained dramatically better results. This suggests that there may be significant potential for exploiting loss aversion for designing Public Policy (as well as for maximising profits, of course)!


Article Review

BE environmentally moral to save the planet

Review of a paper by Kjell Arne Brekke and Olof Johansson-Stenman (2008)

Taking into account economic behavior in the environmental economic political process could change the impact of economic measures

Cap and Trade, Pigouvian Taxes; Kyoto Protocol yesterday, Paris Agreement today. Why does environmental policy never work? As economists struggle for developing new economic models to address environmental threats, our planet fights to survive. What is the main obstacle to environmental economic policy? In this sense, one word is essential: implementation.

Economists talk about environmental damages (Greenhouses emissions, SO2, etc.) as social costs:  harms that affect the society as a whole, but that are not relevant in private economic choices (hence the title “negative externalities”). The reason is that clean production is costly and not efficient, both for firms and for the government. Measures to protect the environment, such as taxes and restrictions on production, raise the cost of production for firms, and their implementation is difficult for political reasons.

Therefore, when it comes to decision making, firms and countries tend to consider only their own costs and benefits, ignoring negative externalities: why should one country care about trans-border emissions, when it is a global matter and when the others do not?  

Someone would then argue that international agreements are necessary to enforce environmental regulations, in order to address this moral hazard problem. However, when it comes to transnational regulation, global commitments are even harder to be enforced. In this context, is there any possibility left of “saving the planet”?

Risultati immagini per international agreements on climate changeSource: Ecoadapt

It has been demonstrated that, even if not considered in the private costs-benefits analysis, environmental damages matter at a psychological level.

Economic agents do not consider all the environmental measures that restrict economic private profits equally. The key difference lies in the way those measures influence the “environmental moral(Frey, 1999): the intrinsic motivation for pro‐environmental activity. In this view, if we look at all the diverse economic measures each government can take, we find that not only do they differ in terms of economic and administrative efficiency, but also in terms of the impact that they have on people’s environmental moral. As a result, some measures are more likely to be implemented than others (Pollitt and Shaorshadze, 2011).

Frey (1999), for example, argues that both “tradable permits” (that allow firms for the production of a maximum emission as determined by the government) and “Pigouvian taxes” (on the generator of negative externalities) have two opposing effects on consumers. Not only the higher price that derives from their implementation discourages the aggregate demand, but the individual intrinsic environmental moral also goes down (crowding‐out effect).

Moreover, it has been demonstrated that low and high rate environmental taxes on emissions are more effective than the moderate ones in encouraging individuals to accept the environmental policy. In fact, with low taxes, consumers may be persuaded that the reason why they are being taxed is only moral, and they would be more positive to pay. On the other hand, high Pigouvian taxes make harmful behavior prohibitive: therefore, the economic effect dominates the crowding-out effect. Furthermore, according to Goodin (1994), tradable permits will reduce consumers’ motivation even more than taxes, because they may convey the impression that it is acceptable to sin as long as one pays the price for it.

However, since most of the climate policies address firms rather than final consumers, behavioral economics has a very limited influence on the choice of the level of production. On the other hand, public perception of the effect of these instruments is still relevant for policy because, when the public perceives that taxes and tradable permits are morally superior, governments may find it politically easier to implement them.

Similar results are valid internationally, in the context of global agreements. Given that humans are less self-serving than the “economic man”, cooperation has been demonstrated to be possible. However, it must be conditional and require the existence of sanctioning mechanisms (Kjell Arne Brekke and Olof Johansson-Stenman, 2008).

In BE there is a wide experimental literature focused on individual decisions, trying to understand under what conditions people cooperate, even when it is not in their own material interest. Conditional cooperation is usually the answer, suggesting that many people (in our case, countries) choose to cooperate only if others do too (Gächter, 2007). In addition, the evidence suggests that people are more willing to contribute to social causes when they think others are doing the same (Levitt and List, 2006).

In conclusion, what makes negotiations effective? We could summarize the best practices in three Ps:


Principles are essential to persuade people that they are paying for a moral reason. In this way, the individual intrinsic environmental moral also goes up and dominates the private cost bias.

2. Punishments.

They are fundamental for the long-term effectiveness. Kyoto protocol, for example, without including any penalty, lacked effectiveness, and commitments had never been really implemented.

3. Participation.

Since we are dealing with global externalities, everyone should commit. Only a global solution could be the best response to a global problem.

Article Review

Paracetamol packs’ size, frictions and deaths

Review of Hawton K., Bergen H., Simkin S., Dodd S., Pocock P., Bernal W., Gunnel D., Kapur N. (2013)

Have you ever noticed that sometimes very small obstacles prevent you from completing a task or pursuing an objective? For instance, you might have thought about changing your phone provider since your offer was not convenient anymore, but you never did it. Why? Probably just because you’d have to walk to a store and sign a couple of papers. Rationally you should do it: not even an hour of your time could possibly save you hundreds of euros, but still you do not. And your phone company knows about it and doesn’t bother to decrease the price of your plan, even though it is not competitive anymore.

Behavioural economists call those apparently insignificant impediments “frictions”. They help explain why in some countries only a few people decide to donate organs, while in others more than 90% of adults do so. Organ donation is quite an important matter and it sounds reasonable to invest a few minutes to express a preference on it. However, in reality, people do not. Indeed, the number of donors in countries in which donation is an opt-out (people are registered as donors by default) is 60 percentage points higher than in countries in which people have to opt-in (a 30 seconds procedure). Huge right? (for further details, refer to Johnson and Goldstein, 2004).

Similar results were found when investigating savings plans for retirement (check Madrian and Shea, 2001) and there are hundreds of such examples: frictions affect our decisions. But what about more important decisions, such as committing suicide? Here is an example of how changing a marginal element in drug packaging actually kept people alive.

In many western countries, the ingestion of a large dose of paracetamol is a common method of suicide. Moreover, in case of survival, it causes hepatotoxicity, a fatal liver dysfunction that requires transplantation.

Hawton et al (2013) studied the effects of a legislation introduced in the UK in 1998 that reduced the maximum number of tablets per package to 32 when sold in pharmacies and 16 in stores (original version here). It also forbade the purchase of more than one packet in the same store. The law created a “friction”: although the obstacle created was very small, as people could easily purchase as much paracetamol as desired, just going to different stores.

To understand the consequences of the legislation, the authors implemented an interrupted time series design using the deaths tolls of paracetamol ingestion (excluding those labelled as accidents) from 1993 to 2009, the number of registrations to the waiting list for liver transplantation and actual liver transplants due to paracetamol poisoning from 1995 to 2009. The chosen cut-off point is the 3rd quarter of 1998, when the law was implemented. From that date, the authors compare the estimated numbers of deaths and liver unit registrations and transplantations, which might have occurred in the post-intervention period without the legislation, with the actual values.

Estimates were made with different methods, including a conservative one that assumed no increase after 1998 in the number of deaths, of registration to the waiting list or of actual liver transplantation, according to the regression considered. Moreover, since in those years there had been a reduction in poisoning with drugs in general (but not as significant and as steep), analysis has been adjusted accordingly. Results are still significant: over the 11 years after the law was introduced there has been a 43% reduction in deaths, equivalent to 765 fewer deaths labelled as suicide or left as open verdicts, and 990 fewer deaths if accidental poisoning verdicts were included.


For what concerns liver transplants there has been a 61% reduction in registrations at liver units (482 fewer registrations), but the actual percentage of transplants has not significantly decreased. Results are not significant if the conservative method is used. However, authors explain that in those years, legislation made it easier to receive a transplant by lowering the required critical values, and that a new antidote had been made available, thus increasing the chances of getting a transplant on one side and reducing the need for one on the other. Hence, a non-significant decrease might actually hide a significant one.

To conclude, reducing the number of tablets of paracetamol per package, an inexpensive and easy to implement policy, produced remarkable results reducing the number of suicides and of registration at liver units (consequently also lowering NHS costs and the demand for transplants, usually undersupplied). Thus, frictions do influence even very serious decisions and this is true especially in situations in which people are less rational, or act under an impulse. Now the question is – can we use this knowledge in other contexts to make people’s lives better?

Article Review

A Social Norms Approach to Preventing Binge Drinking at Colleges and Universities

Review of the paper by Michael P. Haines (1996)

It is well-known that increased alcohol consumption of young people is a persistent problem and college and university students are no exception.

The Northern Illinois University (NIU) came up with a solution that has since spread to other US universities and even high schools. It all started by conducting a survey about students´ drinking behaviour, which revealed the presence of a large knowledge gap. Most of the students thought that binge drinking was more widespread than it really was.

The Health Enhancement Services Office at NIU decided to take action – develop a campaign to correct the perceptions of the students. What is the logic behind this? It is the belief that people are sensitive to social norms and tend to behave in line with them. For example, we all know that when we ask for something, we should say “please” and “thank you”. We do it because it is a norm accepted in our society and everyone does so. There are several papers proving that perceptions about the drinking behaviour of other students are a strong predictor of the actual drinking behaviour, so norms are at work also in this case (for the reference, see Graham et al., 1991 or Prentice and Miller, 1993).

The organisers of the NIU campaign were very careful with the design, since they wanted to spread the message as much as possible. They chose the campus newspaper, widely read by the students, as their medium to publish the following very simple message: “Most NIU students (55 percent) drink five or fewer drinks when they party”. This message was repeated on flyers, posters and on any occasion the students were likely to hear it.

The NIU team also came up with incentives for students to pay attention to the message. Two students were hired to work as “Money Brothers” (inspired by the movie The Blues Brothers). They would ask students how many drinks most NIU students consume and give $1 to anyone who answered correctly.  They also created some posters and would give $5 to those students living in university dorms who were found to have it on the wall of their rooms during random checks.

It is clear that the NIU team really worked hard to make students notice the message. The result? After the first year, there was an 18 % reduction in perceived binge drinking and a 16 % reduction in real binge drinking. Obviously after such success, the campaign has been repeated in the following years and binge drinking decreased further.Graph

Source: Haines, M. P. (1996): A Social Norms Approach to Preventing Binge Drinking at Colleges and Universities

The take home message of this initiative is that social norms are powerful and capable of changing our behaviour. However, the message needs to be simple, truthful and most importantly, noticed by the target audience.

Since then, other universities and high schools applied the same technique to fight binge drinking of their students. Here are some of the campaign materials:

Sources: Social Norms Consultation & Nudge blog

How about you? Do you know how many drinks people from your university/company normally have?

Article Review

Through the psychology of poverty

What explains the differences in economic decisions amongst poor and rich individuals?

In 2014 Johannes Haushofer and Ernst Fehr, professors at Princeton and Zurich University, respectively, have written the article “On the Psychology of Poverty” for the Science magazine (original version here). They show evidence that poverty causes psychological consequences such as negative affectivity and stress with unexpected changes in economic behavior by changing individuals’ revealed preferences and leading to short-sighted and risk-averse decision making. But what are the channels through which poverty could arise and perpetuate itself?

Bear in mind two things when interpreting their findings. First, although poverty is defined as the lack of sufficient income, it is also characterized by the exposure to dysfunctional institutions, violence, crime, poor access to health care, etc. Second, being born in such an environment can trigger processes that reinforce poverty. For instance, lower willingness to take risks, adopt new technologies, invest in education and health, together with present-biased income preferences, make it harder to escape from poverty.

The effect of poverty on economic behavior. Some laboratory experiments have randomly assigned individuals to income shocks after they have earned some money in an effort assignment. Then, researchers compared the discounting of future payoffs between “treated” individuals with negative income shocks and the “control” group, who didn’t experience any changes. Such exogenous manipulation of income eliminates any potential reverse causality between discount rates and income. They found that individuals with negative shocks on income showed more present-bias behavior than others. No analogous effect was obtained for positive shock on income.

The effect of poverty on psychological characteristics. Recent findings show a positive correlation between income and happiness/life satisfaction both within and across countries (see fig.1).

Fig.1. Relationship between income and life satisfaction within countries

According to the World Health Report, the poorest population quintiles in rich countries have records of depression and anxiety disorder up to twice as large as that of the richest quintiles. Besides, there are numerous findings that poverty is positively correlated with the stress hormone cortisol, as well as depression, anxiety and unhappiness. One should already expect such relationship, but is it a causal one?


Causal effect of poverty on affectivity and stress. A study by Haushofer and Shapiro (2013) evaluated the effects of an unconditional cash transfer program in Kenya on psychological well-being, by measuring characteristics such as happiness, life satisfaction, depression and stress. Individuals were randomly selected to receive transfers of $0, $400 or $1,500, and they found positive effects for all variables whenever receiving any positive transfer. However, levels of the stress hormone cortisol decreased only for the ones receiving a large transfer.


Fig.2. Z-score happiness response and levels of stress hormone cortisol

A series of natural experiments (e.g. lottery payouts, introduction of guaranteed incomes, access to pensions) suggest causal links between increases of income and well-being (e.g. reduction in hospitalization, lower consumption of anxiolytics, increased self-reported mental health). Randomized control trials also show that offering households access to health insurance, better housing conditions and access to water have a significant effect on psychological well-being.

The takeaway from this review is that the poor may intrinsically have identical time and risk preferences to those of wealthier people, but their discount rates and risk-taking behavior can change if living in a chronic condition of poverty. Should a welfare state intervene to avoid the creation of a poverty trap? According to the authors, there are three possible courses of action to break this vicious circle, which requires directly targeting:

  • poverty through poverty alleviation programs (e.g. cash transfers), proven to increase general welfare;
  • its psychological consequences (e.g. interpersonal psychotherapy);
  • its deriving economic behaviors (e.g. commitment savings account, reminders to save), which usually lead to considerable increases in savings.

These interventions allow us to better understand the relationship between poverty, its consequences and their potentially negative effects on decision-making, giving us a fresh perspective on how development economics can help to tackle poverty.