Eldar Shafir Q&A: Money worries lead to poor financial decisions
"Scarcity" co-author says you're broke because you worry too much
By Kelly Dilworth | Published: December 30, 2013
When struggling to pay your bills each month, staying afloat can often feel like a losing battle. Just when you scratch up enough cash to pay one bill, you miss another, incurring late fees and charges that make paying the next month's bills even harder.
According to Eldar Shafir, co-author of the book, "Scarcity: Why Having Too Little Means So Much," the problem isn't that you aren't trying hard enough. The problem is worrying. You worry about money and juggle your limited cash so much it taxes your brain.
Eldar Shafir, co-author,
'Scarcity: Why Having Too Little Means So Much'
Not having enough of something -- be it food, work or money -- can cause stress. Sometimes that stress can result in you hyperfocusing on the problem and getting sucked into expensive, short-term solutions, says "Scarcity" co-author Eldar Shafir.
"It's a very universal phenomenon," says Shafir, a professor of psychology and public affairs at Princeton University. Not having enough money forces you to constantly be on guard and do frequent calculations to make sure you've got enough cash on hand to make it through the day -- which depletes your mental and emotional resources.
It also causes you to hyperfocus on the problems at hand to the point you easily get sucked into expensive, short-term solutions -- such as high-interest payday loans -- that multiply your problems.
CreditCards.com caught up with Shafir and talked with him about some of the findings from his book, which he co-authored with Harvard University economist Sendhil Mullainathan.
Q: One of the central insights of your book is that not having enough of something, such as time or money, often causes people to make worse decisions than they otherwise would. Why is that?
A: When you focus on this thing that you're focusing on, you end up basically what we call tunneling. You focus on it so much that you end up, to a large extent, ignoring the periphery.
Q: And one of the ways we do this is by worrying, is that right?
A: Right. And not just with worrying, but also with doing some of the mental juggling that comes with figuring out how I'm going to do things. If I pay this today and I take a loan tomorrow, then I have to go through all this stuff. That just captures a lot of your attention and your cognitive capacity.
Q: Worrying about money is especially pernicious. Why is that?
A: Being poor, in some sense, is very heavy. It has very big consequences. If you're juggling finances and are facing not having enough food on the table or being evicted, that has a weight that just doesn't let the thought get away from your mind. It just intrudes, and it sits there all the time.
Q: It takes a lot of vigilance to stay financially above water when you don't have a lot of room to make mistakes. Why does not having enough money make it even harder for people to avoid making mistakes?
When we leave around payday loans and ballooning mortgages and untrustworthy advisers of all sorts, and you're busy juggling, you're going to fall for them all the more often.
A: Well, again, it's closely intertwined with the notion of how much cognitive capacity, how much bandwidth, you're dedicating to merely surviving. You know, I've got $117 in checking and I've just given an $80 check and now I have $37 left and tomorrow I'll get another. All that takes a lot of energy, a lot of mental space. As you do all that, often quite well and quite carefully and quite judiciously, you're just ignoring a lot of other things.
What's so interesting is that, as you're ignoring things in the periphery, you sometimes also ignore things that are directly related to the problem you have. So, for example, you might forget to pay some bill on time and incur a big penalty. [Or] you might take out a loan, which looks like the perfect way to solve a problem right now, while not paying enough attention to the implications of the high interest you'll have to pay.
Q: You write in the book that the kind of tunneling you describe is also part of what makes short-term borrowing -- such as taking out high-interest payday loans -- especially attractive to people who are financially stretched.
A: Indeed. So you know the metaphor is you have a fire in your bedroom and there is a bucket of water nearby. You don't stop to ask how much the bucket will cost you. You just grab it and you pour water over the fire. It's a very effective way to solve the problem right now. And the cost that is potentially incurred two weeks down the road is just outside the tunnel. It's outside the important thing you're dealing with at the moment and that leads to these more complicated tomorrows.
Q: What are some of the luxuries besides money that people who are financially well off have that people who are struggling don't have?
What the rich really have in addition to money is a luxury not to worry.
A: What the rich really have in addition to money is a luxury not to worry. We do studies where we ask people how much a meter in a cab costs when they get into a taxi. The rich use taxis a lot more than the poor, but they have no clue because they have the luxury not to give a damn. They don't really check how much things cost. When they come out of supermarkets, the rich don't know how much they paid for the items they paid for, whereas the poor do. So the poor are constantly checking and verifying and are basically very, very attentive to everything they are managing on a day-to-day basis and on an hour-by-hour basis. If something unexpected happens, your car breaks down, you need a doctor, you go. It's a bummer, but you do it and you move on. For the poor person, that can be a life-altering event.
Getting poll results. Please wait...
Q: On the flip side, you found that people with lower incomes are much savvier with their money and sometimes make better financial decisions than those who are well off.
A: That's right. The poor use every dollar much more judiciously and much more carefully. They know the prices. They attend to prices. They make small errors less often than the rich because they're paying very careful attention. So we know that's where they really excel. They're very good jugglers.
But, again, the problem is that juggling requires a lot of your attention and distracts you from everything else. And that connects us more to issues of policy and consumer protection. To the extent that I'm juggling day to day with great difficulty and I ignore the periphery, I really could benefit from not having too many traps -- you know, booby traps and mines on the side as I'm walking. When we leave around payday loans and ballooning mortgages and untrustworthy advisers of all sorts, and you're busy juggling, you're going to fall for them all the more often.
- Bobbi Rebell's money moguls' 'Financial Grownup' moments – ShreShrewd money managers reveal their financial 'aha' moments in Rebell's new book ...
- ‘Loaded’ author Sarah Newcomb: Call them loan cards, not credit cards – In a new book, the behavioral economist talks about the role credit cards play in the financial tales we tell ourselves ...
- Q&A with David Carlson: How side hustles can pare debt – Millennials struggling with student debt can take on extra work to get out of the red, blogger turned author David Carlson says. It worked for him ...