I recently read Scarcity: Why having too little means so much by Sendhil Mullainathan and Eldar Shafir. Since then I have been recommending it to friends in the debt advice world.
I think Scarcity is a very interesting read for anyone interested in personal debt advice and policy in Britain. Many of its arguments are directly applicable to the idea of introducing a breathing space for debt that is being proposed by organisations such as StepChange and the Children’s Society.
Scarcity doesn’t just mean lack of money
The thesis of this book is that having less than you need – scarcity – warps your decision making in similar ways whatever you are short of, whether that is money, or time, or if you are on a strict diet or lack enough human contact.
The examples I talk about here are mostly debt-orientated. But the book itself is not solely about debt and that is one of its big strengths.
The scarcity mindset
Not having enough of something means you concentrate on it a lot more. Many people with very little disposable income budget carefully and know exactly what is in their their bank account. That is the “advantage” of scarcity, by focusing these people are less susceptible to some sorts of poor financial decisions. Someone who is well off may decide not to go to a more distant shop to save £15 on a TV costing £400, but they would make the same trip to get a £30 shirt reduced to £15. People with little spare money would make that “error” less often.
But scarcity and focusing – which can be good for decision making – also bring major pressures. The concentration involved in focusing results in a form of tunnel vision, forcing you to ignore less immediate issues. If you are suffering from time pressure at work tunneling can result in you taking poor short-cuts that later result in extra work; just reacting to things that are thrown at you; and not allocating any time to strategic planning that could improve your situation.
Debt advisers are familiar with the results of this tunneling: clients taking a payday loan which makes their position harder the next month, thinking the weekly price in a Brighthouse store is affordable; buying their son a birthday present even though it means getting into arrears with council tax etc. And not taking debt advice for months or years after debts first became an issue.
Everyone has a finite cognitive capacity – their mental bandwidth. Scarcity can be seen as a bandwidth tax, reducing the amount of attention available for other issues. The side effects can be direct, as with the poor decision making around taking on more debt.
But there can also be indirect results. People perform poorly at work as they can’t concentrate, may be regularly losing sleep and can even end up off work through stress – all this tending to reduce their income just at the time when more is needed. Smokers with financial problems are less likely to be successful in quitting than the better off, even though they have a more pressing need to reduce their expenditure.
The scarcity trap
Scarcity then becomes a trap, with the poor decisions resulting from tunneling and the bandwidth tax leading to worse scarcity in the future. Anyone with a significant debt problem is unlikely to be able to borrow their way out of debt but borrowing often appears to be the only easy way to get through the next few weeks.
As someone’s situation deteriorates, the forms of credit available shrink and become higher cost, so the problem next month becomes worse:
- Miss A who can’t manage large credit card repayments could theoretically afford a low cost consolidation loan but is refused one;
- Mr B takes out a payday loan to pay for a car service because he can’t afford it this month, but he won’t be able to repay it – with interest – the following month without borrowing again.
Testing in a lab
One of the problems about discussing how changes in debt management could affect people is that it is often unclear what exactly causes someone in debt to make what to a debt adviser appear to be poor decisions. Do these poor decisions result from poor budgeting skills or other financial capability issues? What is the interaction between debt and mental health? It can be hard to disentangle these different factors.
It is also expensive and/or unethical to try to conduct experiments on people in debt, by changing the nature of the choices they face. But it is possible to model other forms of scarcity more easily, as the book discuses.
When a psych lab experiment with graduate students as the guinea pigs is used to assess decision making under pressure it produces results which appear exactly like people falling into a payday loan trap. By changing the parameters and retesting, the same guinea pigs show better performance under less pressure, and worse performance under more pressure. So you know that scarcity itself is the cause of the problem, not poor literacy/numeracy or pre-existing mental health conditions.
A breathing space to reduce the pressure
In March 2015, the government accepted the recommendation of the Farnish Review that it should:
review the legal framework for debt administration – in order to provide consumers who agree to specified debt repayment schemes
with a “breathing space” by freezing interest and charges, and to ensure a fair and appropriate basis for debt repayments to different classes of creditor.
This sort of legal protection whilst a debt solution is being explored already exists in Scotland with the Debt Arrangement Scheme. The Children’s Society summarises how a year long breathing space could work here. There would be three advantages from this:
- a major incentive for people to take debt advice sooner, knowing that the interest on their debts would be frozen and there would be no pressure from debt collectors, court action or bailiffs. The sooner debt advice is taken, the smaller the debts tend to be and the better the return is likely to be to the creditors;
- people with debt would be able to look in detail at the different debt solutions for them and their families, over the next few years, not just grab the first solution that appears to offer a life-line. Long term factors such as family changes and interest only mortgages can be considered; and
- it provides time for income maximisation to be effective, for temporary employment problems due to sickness or redundancy to be worked through, and for any housing problems to be resolved.
To front-line debt advisers these advantages often appear obvious. But Scarcity helps by providing an intellectual framework explaining why decision-making under pressure can often be poor decision making.
The promised government review hasn’t happened. As StepChange point out:
Since that original deadline passed, more than one million people have sought help from StepChange and our partners in the sector. The government reconfirmed its commitment to the review in this year’s Budget, but we are still waiting.
A Private Member’s Bill, The Debt Respite Scheme, is being put forward by Kelly Tolhurst, MP, and supported by The Children’s Society and StepChange. This sort of Bill rarely becomes law, but hopefully it will put pressure on the government to complete its review.
Any brief summary is always going to be simplistic, so if you have been thinking “Well yes on one level, but it doesn’t take into account …” then you need to read the book! It’s not long and is pretty readable. And why not sign the Children’s Society petition for a breathing space?