Poverty and economic decision making: a review of scarcity theory

Ernst Jan de Bruijn*, Gerrit Antonides

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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.

Original languageEnglish
JournalTheory and Decision
DOIs
Publication statusE-pub ahead of print - 9 Mar 2021

Keywords

  • Attention
  • Cognition
  • Economic decision making
  • Literature review
  • Poverty
  • Scarcity theory

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