The Scarcity Trap: Why Feeling Poor Makes You Spend

It’s payday. For Sarah, this brings not a wave of relief, but a spike of acute, buzzing anxiety. The numbers in her head are a frantic calculation: rent, the car payment, the looming credit card bill. She knows, with absolute, nagging clarity, what the “right” thing to do is. The responsible path involves a trip to the grocery store for the staples that can stretch: rice, beans, pasta.¹

Instead, she finds herself walking toward a nice Chinese restaurant, a place she normally considers an impossible luxury. She feels, as she would later describe it, “almost against my will”.¹ She orders. She orders $100 worth of takeout—far more than one person could possibly eat. For one hour, sitting on her couch, the food is “amazing”.¹ It is not just sustenance. It is the comfort of a “nice meal,” a feeling of warmth, flavor, and abundance. It is a temporary, blessed silence from the constant, grinding mental soundtrack of lack.

And then, just as quickly, the “crushing realization” hits.¹ The $100 is gone. She has overspent, catastrophically. She will, she calculates, have to “go hungry for a day” later in the month to make up for it.¹

From the outside, the decision is a perfect portrait of financial self-sabotage. It is the kind of behavior that leads observers to ask, “Why don’t poor people just make better decisions?” It seems irrational, impulsive, and self-defeating.

But this behavior is not a “bad decision” or a “character flaw”.³ It is a predictable, systematic, and deeply human response to a specific psychological state: the “scarcity mindset”.⁴

This is the story of that mindset. It is a journey into a mind under siege, one captured and cognitively hijacked by the mere feeling of having too little. New research in behavioral science, led by figures like economist Sendhil Mullainathan and psychologist Eldar Shafir, reveals that scarcity is far more than just a physical limitation.⁷ It is a potent mental state that captures the mind, fundamentally changes how we think, and, in a cruel paradox, leads to the very “self-defeating actions” that perpetuate the trap.⁷

Sarah’s $100 meal was not an act of simple greed. It was, as other anecdotal accounts confirm, an act of “panic”.⁹ It was driven by a deep, learned fear that “as soon as you have money, some entity is going to take it, so you have to spend it on yourself immediately”.² In this light, the spending is not just for pleasure; it is a tragic, desperate act of agency. It is an attempt to claim a moment of control and self-care before an inevitable, external force—a bill, an emergency—reclaims that money, leaving, once again, nothing.²

The Bandwidth Tax: A Mind Under Siege

To understand why scarcity leads to these seemingly counter-intuitive actions, we must first understand what scarcity does to the human brain.

Imagine trying to complete your taxes while a fire alarm blares in the next room. Imagine trying to solve a complex logic puzzle after losing an entire night’s sleep. You would make mistakes. Your focus would shatter. Your patience would evaporate.

This, researchers argue, is the permanent cognitive state for someone in scarcity.

Mullainathan and Shafir call the brain’s finite capacity for these high-level functions—planning, problem-solving, attention, and self-control—our “mental bandwidth”.⁷ The scarcity mindset consumes this bandwidth at a ferocious rate. It acts as a “bandwidth tax” ¹⁰, imposing a “cognitive load” that is just as real and debilitating as physical exhaustion.¹¹ When your mind is perpetually occupied with juggling bills, calculating tradeoffs, and managing the stress of not having enough, you have less mental capacity left over for everything else.

This isn’t just a theory. It has been measured.

Narrative Evidence 1: The New Jersey Mall Study

In a landmark 2013 study, researchers Anandi Mani, Sendhil Mullainathan, and Eldar Shafir went to a New Jersey mall to test this idea.13

They approached shoppers, asking them to participate in a study. They divided the subjects into two groups, “rich” and “poor,” based on their self-reported income (the median income in the study was around $70,000, while the “poor” group was defined by incomes around $20,000).14

First, they asked each participant to ponder a hypothetical financial problem. Half were given an “easy” scenario: their car needed a repair that would cost $150. The other half were given a “hard” scenario: the repair would cost $1,500.¹⁴

After contemplating this problem, each participant performed a series of common cognitive and fluid-intelligence tests.

The results were staggering.

When the financial problem was “easy” ($150), the “rich” and “poor” groups performed identically on the cognitive tests. Their scores were indistinguishable.14

But when the problem was “hard” ($1,500), the “rich” shoppers’ performance was unchanged; a $1,500 expense was annoying, but not cognitively consuming. The “poor” participants, however, saw their cognitive performance plummet.13

The simple act of thinking about a major, unexpected expense was enough to trigger the scarcity mindset and consume their mental bandwidth. The size of the drop was equivalent to a 13-point dip in IQ.¹⁴ This is the cognitive difference between a person with “Superior” intelligence and one with “Average” intelligence. It is, by other measures, the same cognitive loss one experiences from missing an entire night of sleep.¹³

Narrative Evidence 2: The Indian Sugarcane Farmers

To prove this was a universal human phenomenon and not a quirk of American life, the research team traveled to Tamil Nadu, India.¹⁴ They studied sugarcane farmers, a population that provides a perfect natural experiment. These farmers are paid once per year, at harvest. This means they are relatively “rich” in the months just after the harvest, but grow progressively “poor” as the year goes on and they juggle debts waiting for their next payment.¹⁴

The researchers tested the same farmers twice: once before the harvest, when they were at their poorest, and again after the harvest, when they were flush with cash.

The results mirrored the mall study. The exact same person performed significantly better on the cognitive tests after the harvest, when their financial concerns were temporarily lifted. Before the harvest, their “fluid intelligence” and cognitive control were taxed by scarcity.⁷ After, their full cognitive capacity was restored.

These two studies offer a revolutionary, and deeply empathetic, new way to view poverty and decision-making. The “bad decisions” often associated with poverty are not the cause of poverty; they are a consequence of the cognitive burden that poverty imposes.¹³ The poor “are less capable not because of inherent traits, but because the very context of poverty imposes load and impedes cognitive capacity”.¹³ We are not looking at a “culture of poverty,” as has been argued ¹⁶; we are looking at a cognitive impairment imposed by a context of scarcity.

Life in the Tunnel

This “bandwidth tax” creates a psychological state the researchers call “tunneling”.⁷

Imagine you are driving a car through a long, dark tunnel. Your focus becomes intense, and rightly so. You fixate on the road in front of you and the single point of light at the end. You become, in that moment, a highly effective tunnel driver. But in the process of this hyper-focus, you miss everything else.⁷ You don’t see the exit signs. You miss the emergency pull-offs. You are unaware of the car in your blind spot.

Scarcity is this tunnel. The “light at the end” is the pressing, immediate need: the rent that’s due tomorrow, the hunger pangs, the power bill stamped “FINAL NOTICE”.⁴

This intense focus is not all bad. In the short term, it “prioritizes our choices” and can make us “more effective” at solving the immediate crisis.¹⁸ A student facing a 24-hour deadline (a scarcity of time) becomes incredibly focused and less prone to distraction.¹⁸ But this short-term benefit comes at a devastating long-term cost.

While “tunneling,” you have “less mind to devote to other things”.⁷ The collateral damage is the neglect of the very things that would help you escape the trap in the first place.

The research is full of tragic examples of this collateral damage:

Health: People “tunneling” on financial worries are “worse at adhering to their medication”.⁷ The immediate cost and hassle of getting a refill (inside the tunnel) outweighs the abstract, long-term health benefit (outside the tunnel). They also make less healthy dietary choices, as the immediate costs and effort of preparing a healthy meal are more “imminent” than the future, uncertain effects of a poor diet.¹²
Productivity: Shafir and Mullainathan point to studies of poor farmers in India who, “tunneling” on immediate debts, “weed their fields less well”.⁷ This neglect, born of a taxed bandwidth, reduces their future harvest, ensuring they will be in the same state of scarcity next year.
Opportunities: In one project, a government offered low-income customers “essentially free money” in the form of subsidized, energy-efficient home upgrades (like insulation and LED bulbs).¹⁷ These upgrades would have lowered their future utility bills, creating slack. But the program saw low sign-ups. The “tunneling” on immediate bills and daily survival meant this “free” long-term opportunity was on the periphery, completely overlooked.¹⁷
Parenting: The research notes that those struggling with scarcity are “often less attentive parents”.⁷ This is not from a lack of love, but from a “cognitive load” ¹¹ that leaves absolutely no mental or emotional bandwidth left at the end of a grueling day.

Case Study: The Payday Loan Trap

The payday loan industry is perhaps the most perfect and predatory-built environment for the scarcity trap.¹⁹ In 2006, there were more payday lender branches in the United States than all McDonald’s and Starbucks locations combined.²⁰

From the outside, a payday loan is financial madness. It’s a high-interest loan ²¹ taken to cover a small, immediate cash gap, to be paid back with the next paycheck. But for people without reliable incomes, the debt often must be rolled over, locking them into a “cycle of indebtedness”.²²

From inside the tunnel, however, the payday loan is the only visible exit.

When you are hyper-focused on the immediate, pressing need—keeping the lights on, buying food, preventing an overdraft—the long-term cost of the loan (the APR, the fees) is on the periphery. It’s an “exit sign” you cannot see. The loan offers an immediate solution to the problem at the center of your tunnel. This one decision—a rational choice inside the tunnel—creates a “scarcity trap” ¹⁰ that ensures you will be back in that same tunnel, in an even worse position, the following month.¹⁷

This reveals a critical flaw in how we try to “help.” Traditional financial literacy programs often fail because they are built on a faulty premise. They assume the problem is a knowledge trap. But the scarcity trap is an attentional trap.⁷

Giving someone who is already cognitively overloaded a 30-page booklet on “How to Budget” is like handing a driver in a dark, winding tunnel a complex, folded map. The map is not wrong, but the driver lacks the capacity to process it.²³ In one telling study, even sophisticated Princeton undergraduates, when made “time-poor” in a computer game, made the exact same errors as the poor, repeatedly taking terrible, high-interest loans that they intellectually knew were bad.⁷ The problem is not a lack of information; it is a lack of bandwidth to act on it.

The Paradox of Spending: In Search of Control, Status, and Relief

This explains neglect. It explains why a farmer doesn’t weed, or why someone in debt might take a bad loan. But it doesn’t explain our opening story.

It doesn’t explain Sarah’s $100 meal.

This is the central paradox. If scarcity “captures the mind” and makes you tunnel on a lack of money, why would the result be active, impulsive spending ²⁴ on unnecessary items?.⁶

The answer is that the scarcity mindset is not just a cold, cognitive state. It is a hot, emotional, and deeply painful one. The spending is not a symptom of the mindset; it is a “sub-optimal” solution to the psychological pain it creates. Research points to three powerful, hidden drivers.

Driver 1: Spending as Emotional Self-Medication

The “scarcity mindset” is “characterized by a persistent fear of never having enough money”.⁶ It is, in clinical terms, “chronic anxiety” ²⁶, a constant feeling of “inadequacy” ⁶, and a life lived in “survival mode”.²⁶ This state is fueled by negative emotions, stress, and a lack of confidence.²⁷

In this heightened emotional state, impulsive spending is not “retail therapy”—it’s self-medication.²⁹

The act of buying provides a “brief high” ³⁰ or a “rush of endorphins” ³¹ that temporarily soothes the gnawing anxiety. It is a way to “cope”.⁶ For Sarah, the $100 meal was a way to buy “comfort”.¹ This behavior is often rooted in deeper emotional wounds.⁶ Therapists find that for many, the chronic anxiety about money isn’t just about money; it is a “projection” of unresolved childhood feelings of “neglect or abandonment”.⁶ The spending is an attempt to fill a void that is emotional, not financial.

Driver 2: Spending as Status Compensation

Scarcity is not just an internal feeling of lack; it is an external, social signal of low status. And in a consumerist society, that “perceived low social status” is psychologically painful.³²

A fascinating study from University College London (UCL) analyzed actual bank account spending data and matched it with personality tests.32

The researchers found a shocking link: low-income individuals who also scored high in extroversion (sociable, outgoing people who care more about social status) spent a significantly higher percentage of their money on “status goods” and luxury brands than their low-income introverted peers.32

At higher incomes, this difference vanished.

The conclusion: when extraverted people, who are more attuned to social hierarchies, feel their status threatened by a low income, they compensate. They use spending on visible, high-status goods as a “cheat code” to reclaim a sense of status.³³ This is not “greed”.⁹ It is a psychological defense mechanism. It explains the “Pretty Woman effect”—the desire to “prove” to the rude, dismissive sales associate (and, by extension, the world) that you belong.³³

Ironically, the truly rich often don’t need to engage in this behavior; their status is secure.³³ This “status tax” is paid by the aspirational poor, driven by a deep, human need for dignity.

Driver 3: Spending as a “Panic” for Control

This is the most subtle, and most tragic, driver. It brings us back to Sarah’s “panic” to spend.

One journalist, writing about growing up poor, described receiving an $800 inheritance.⁹ Instead of putting it toward student loans, she spent it on travel, dinners, and drinks with friends. Her analysis is sharp and illuminating:

“It’s not a ‘greed’ thing. It’s a panic thing. ‘We have to spend this before it disappears.’”.⁹

She explains that when you’re poor, you know that any “windfall” money will “slowly bleed away” to everyday life, to bills and necessities, leaving you with “nothing to show for it.” The only way to feel a sense of agency, the only way to win, is to spend it now on something you choose.⁹ This is the “spend it fast” route.²

This is not just a feeling; it’s a learned response to trauma. Research from 2014 found that adults who “grew up poor” have a much lower “sense of control” over their lives.³⁴ When researchers primed these adults with cues of “economic uncertainty” (like photos of foreclosure signs), they became “more impulsive” and “less capable of delaying gratification” than adults from wealthier backgrounds.³⁴

The spending is a desperate attempt to seize control. In an environment where saving feels like a guaranteed loss—where the money will just be eaten by the next emergency—spending it on a chosen pleasure is the only way to exert power.

This, then, is the key to the paradox. The “irrational” spending is a rational attempt to solve a psychological need.

The problem is psychological Pain (anxiety, stress).⁶ The solution is spending for a “brief high”.³⁰
The problem is social Perception (low status).³² The solution is spending for visible “status”.³³
The problem is a lack of Power (low control).³⁴ The solution is a “panic spend” to claim agency.⁹

We have been misdiagnosing the problem. Telling someone to “just stop spending” is like telling a person with a broken leg to “just walk it off.” It fails to address the underlying injury.

“Poor, Not Stupid”: Redefining Rationality

The entire conversation to this point has operated on an unspoken assumption, one that pervades our politics and culture: that the “poor” make “bad” financial decisions, while the “rich” (or at least, the middle class) make “good” ones.³⁵

But what if this assumption is fundamentally wrong? What if the “bad” decisions are, in fact, more rational than we think?

Evidence 1: The $50 Tablet Puzzle

Anuj Shah, a researcher at the University of Chicago, presents a simple puzzle that he gives to his MBA students ³⁶:

Scenario A: You are at a store buying a $300 tablet. The salesman mentions that the exact same tablet is available for $250—a $50 discount—at a partner store a 20-minute drive away. Do you make the trip?
(Almost everyone says yes.)
Scenario B: You are at a store buying a $1,000 tablet. The salesman mentions that the exact same tablet is available for $950—a $50 discount—at a partner store a 20-minute drive away. Do you make the trip?
(Here, most people, including MBA students, hesitate or say no.)

That hesitation in Scenario B is, by any economic definition, “irrational”.³⁶ Your 20 minutes of time is either worth $50 or it isn’t. The $1,000 price tag is irrelevant to the calculation, but it feels different. The $50 discount seems smaller relative to the total price. This is a common cognitive error that the wealthy and educated make.

Here is the kicker: When researchers gave this puzzle to low-income participants, they aced it.³⁶

They were equally willing to travel for the $50 discount in both scenarios. Their “tunneling” on the absolute value of money made them immune to the “irrational” relative-value trap that the rich fell for. They knew, with perfect clarity, that $50 is $50. In this context, the poor were more rational, not less.³⁷

Evidence 2: Re-evaluating the “Impulsive” Choice

For decades, behavioral science has taught that a hallmark of poor self-control is choosing a smaller, sooner reward ($50 today) over a larger, later one ($100 in one month). This is seen as “impatience” or “present-biased” thinking.³

But new research, published in 2023, argues this is not a character flaw, but “intentional, deliberate decision-making” based on circumstances.³⁹

Researchers tested people experiencing scarcity, but they added one crucial, missing variable: the timeline of the need.

When the threatened need was immediate (e.g., “I need money for rent this week“), participants overwhelmingly chose the smaller, sooner payout.
When the threatened need was long-term (e.g., “I need to replace my car sometime next year“), the people in scarcity were no less willing to wait for the bigger payout. In some cases, they were even more patient than the control group.³⁹

This is a profound finding. It means the “impulsive” choice is, in fact, a strategic, rational calculation. If you need rent money now, $100 in a month is useless. The $50 today is the only rational choice. They are not “impatient”; they are making “the best decision they can, given the circumstances they’re in”.³⁹

We must reframe our entire understanding of this problem. The “bad decisions” we criticize are often hyper-rational adaptations to an environment of extreme uncertainty and constraint.⁴⁰ Sarah’s $100 meal is a rational choice to meet an immediate emotional need.¹ A payday loan is a rational choice to meet an immediate liquidity need when it’s the “only option to survive”.¹⁹ The “panic spend” is a rational choice to secure agency in a world that offers none.⁹

We have been misdiagnosing the patient. The problem is not the person, but the environment that makes these short-term, destructive choices the only rational ones available.

Conclusion: How to Build Slack

If the problem is the “scarcity trap” ¹⁰, the solution, as Mullainathan and Shafir argue, is “slack”.⁷

“Slack” is a buffer. It is the margin for error. It is the extra money in the bank that means a $400 car repair is an “annoyance,” not a “catastrophe.” It is the extra, unplanned hour in your schedule. It’s a “fuck up fund”.⁴³ Slack is the one thing scarcity, by definition, cannot tolerate. And it is the one thing that gives you back your mental bandwidth.

The journey out of the trap, then, is the journey to build slack—not just for ourselves, but for our society.

Solution 1: “Scarcity-Proofing” the System (Policy)

The most powerful solutions are systemic. We, as a society, must stop “taxing bandwidth” with our policies and start designing systems that account for scarcity.⁷

Simplify: Instead of “copious amounts of information” and complex, 50-page forms for aid, make applications simple.²³ “Less information can be more”.²³
Be Flexible: If a low-income parent misses a mandatory meeting, don’t assume “disinterest” and cut their benefits. Assume they were “tunneling” on a crisis. Offer “additional sessions”.²³
Send Reminders: Use “cognitive aids”.⁴⁴ Simple text message reminders for medication, appointments, or upcoming deadlines can offload the mental burden for someone whose bandwidth is already at zero.
Time it Right: Offer incentives at the right moment. One study in Tanzania found that asking people to sign up for health insurance right after payday—when they were “rich” and had the bandwidth to think—dramatically increased enrollment.⁴⁴

We must stop designing systems for an “ideal” human who is fully rested and high-bandwidth, and start designing for the real human: one who is stressed, tired, and living in the tunnel.

Solution 2: Widening Your Own Tunnel (Individual)

For the individual, the answer is not to “try harder,” which only burns more bandwidth. The answer is to use small, strategic steps to reclaim bandwidth.

The Reality Check: First, “take a good, hard look at your finances”.¹⁵ This is not to scare yourself, but to end the anxiety of not knowing. A budget is not a cage; it is “simply a plan for directing your money toward your goals”.⁴⁵
The Mindset Shift: This is the most difficult, but most crucial, step. Actively “challenge your beliefs” about money.¹⁵ This can be done by:

Practicing Gratitude: A daily practice of writing down what you do have—a roof, a meal, a friend—can chemically shift your brain’s focus from “what you lack” to “what you have”.⁴⁶
Using Affirmations: Remind yourself: “I have made it this far,” “I can afford to do things I enjoy while being responsible”.¹⁵
Being Generous: This is the most radical, counter-intuitive step. When you feel scarce, give something—whether it’s $5 to a charity or an hour of your time to a friend.⁴⁵ Generosity is the ultimate “abundance mindset” hack; it tricks your brain into believing you have more than enough.
The Buffer: Start building slack, no matter how small.⁴³ Automate $5 from every paycheck into a separate savings account. This is not just saving; it is an investment. You are buying back your future self’s cognitive energy.

We return to Sarah. She is learning to “sit with her feelings”.¹⁵ She has set up that $5 automatic transfer.

The journey out of the scarcity trap is not a single, dramatic escape. It is a long, slow process of widening the tunnel, inch by inch, until you can finally, finally see the periphery. It is the process of building, dollar by dollar, enough “slack” to be able to lift your head, take a deep breath, and not just survive the day, but plan for tomorrow.

We must stop judging the “Sarahs” of the world for their $100 meals. The paradox of spending more when you feel poor is not a paradox at all. It is the tragic, hidden, and perfectly human logic of a mind under siege, doing its best to survive.

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