Poverty and economic decision making: a review of scarcity theory

• Published in: Theory and decision Vol. 92; no. 1; pp. 5 - 37
• Main Authors: de Bruijn, Ernst-Jan, Antonides, Gerrit
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.02.2022; Springer Nature B.V
• Subjects: Behavioral/Experimental Economics; Decision making; Decision theory; Discounting; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Finance; Game Theory; Insurance; Management; Methodological problems; Operations Research/Decision Theory; Poverty; Risk; Scarcity; Social and Behav. Sciences; Statistics for Business; Literature review; Cognition; Poverty; Scarcity theory; Economic decision making; Attention
• DOI: 10.1007/s11238-021-09802-7
• ISSN: 0040-5833

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.