Poverty and economic decision making: a review of scarcity theory

Abstract

Poverty is associated with a wide range of counterproductive economic behaviors. Scarcity theory proposes that poverty itself induces a scarcity mindset, which subsequently forces the poor into suboptimal decisions and behaviors. The purpose of our work is to provide an integrated, up-to-date, critical review of this theory. To this end, we reviewed the empirical evidence for three fundamental propositions: (1) Poverty leads to attentional focus and neglect causing overborrowing, (2) poverty induces trade-off thinking resulting in more consistent consumption decisions, and (3) poverty reduces mental bandwidth and subsequently increases time discounting and risk aversion. Our findings indicate that the current literature predominantly confirms the first and second proposition, although methodological issues prevent a firm conclusion. Evidence for the third proposition was not conclusive. Additionally, we evaluated the overall status of scarcity theory. Although the theory provides an original, coherent, and parsimonious explanation for the relationship between financial scarcity and economic decision making, the theory does not fully accord with the data and lacks some precision. We conclude that both theoretical and empirical work are needed to build a stronger theory.

Fuel poverty and financial distress

“…utility expenses, groceries, rent) may come at the expense of neglecting future outgoings ( Shah et al, 2012 ; Shah et al, 2018 ). This line of thought is consistent with (but does not necessarily imply) low-income consumers behaving as if they employ larger intemporal discount rates than high-income consumers ( Train, 1985 ; Lawrance, 1991 ; Shah et al, 2012 ; de Bruijn and Antonides, 2021 ).…”

“…overborrowing), since “attention is allocated to the most pressing financial problems and needs. Future needs loom far away.” ( de Bruijn and Antonides, 2021 : 10). Whilst scarcity increases focus on limited resources, attentional focus on pressing present outgoings (e.g.…”

A Simple Mitigation Model of Poverty Reduction in Indonesia

“…According to Keynesian theory, poverty occurs unintentionally and is caused mainly by unemployment. Meanwhile, scarcity theory proposes that it causes a scarcity mindset, forcing the poor to take less than optimal decisions and behaviors (Bruijn & Antonides 2021). According to Bruijn and Antonides (2021), poverty leads to empowerment and triggers trade-off thinking, although methodological problems prevent firm conclusions.…”

“…Meanwhile, scarcity theory proposes that it causes a scarcity mindset, forcing the poor to take less than optimal decisions and behaviors (Bruijn & Antonides 2021). According to Bruijn and Antonides (2021), poverty leads to empowerment and triggers trade-off thinking, although methodological problems prevent firm conclusions. It was concluded that theoretical and empirical work was still needed to build a more robust theory.…”

“…According to Keynesian theory, fiscal policy affects aggregate demand directly through government spending and indirectly through taxation. Furthermore, this research is also based on the recommendations of previous research which concludes that theoretical and empirical work is needed to build a new and stronger theory (Bruijn & Antonides, 2021). Therefore, these approaches are considered urgent because they have an important contribution and novelty of simple mitigation models to better understand poverty problems related to unemployment, investment, GRDP, government spending, per capita income, and especially human capital capacity as measured by Human Development Index (HDI).…”