Understanding the Concept of Scarcity in Behavioural Economics

Behavioural economics is a relatively new field that combines insights from psychology and economics to understand how individuals make decisions. It challenges the traditional economic assumption that individuals are rational and always make decisions that maximize their self-interest. Instead, behavioural economics recognizes that human behaviour is influenced by a variety of factors, including emotions, biases, and social norms.

The Role of Scarcity in Behavioural Economics

One of the key concepts in behavioural economics is scarcity. Scarcity refers to the limited availability of resources, such as time, money, or goods.

In traditional economics, scarcity is seen as a fundamental principle that drives individuals to make rational decisions. However, behavioural economics takes a different view on scarcity and its impact on decision-making. In traditional economics, scarcity is seen as a constraint that forces individuals to make trade-offs between different options. For example, if an individual has a limited budget, they must choose between buying a new phone or going on a vacation. This trade-off is based on the assumption that individuals have perfect information and can accurately assess the costs and benefits of each option. However, behavioural economics recognizes that individuals do not always have perfect information and are prone to making irrational decisions.

This means that when faced with scarcity, individuals may not always make the best decisions for themselves.

The Impact of Scarcity on Decision-Making

Behavioural economists have identified several ways in which scarcity can influence decision-making. One of the most significant impacts of scarcity is tunnel vision. When individuals are faced with scarcity, they tend to focus only on the immediate problem at hand and ignore other important factors. This can lead to short-term thinking and prevent individuals from considering the long-term consequences of their decisions. For example, imagine you are on a strict budget and have to choose between buying a new laptop or saving for retirement.

Scarcity may cause you to focus only on your immediate need for a new laptop and ignore the importance of saving for your future. This tunnel vision can lead to impulsive decision-making and prevent individuals from making rational choices. Another way in which scarcity can impact decision-making is through mental bandwidth. Mental bandwidth refers to the cognitive resources that individuals have available to make decisions. When individuals are faced with scarcity, their mental bandwidth is reduced, making it more challenging to make complex decisions. For example, studies have shown that individuals who are struggling with financial scarcity have reduced mental bandwidth, which can lead to poor decision-making.

This is because their cognitive resources are consumed by worrying about their financial situation, leaving them with less capacity to make rational decisions.

The Behavioural Economics Solution

So, how can behavioural economics help individuals make better decisions when faced with scarcity? One solution is through nudging. Nudging refers to subtle changes in the environment that can influence individuals' behaviour without restricting their freedom of choice. For example, in the context of scarcity, nudging can involve providing individuals with information about the long-term consequences of their decisions or reminding them of their long-term goals. This can help individuals overcome tunnel vision and consider the bigger picture when making decisions. Another solution is through choice architecture. Choice architecture refers to the way in which options are presented to individuals.

In the context of scarcity, choice architecture can involve presenting individuals with a limited number of options that are more likely to lead to better outcomes. For example, in the case of retirement savings, choice architecture can involve automatically enrolling individuals in a retirement savings plan, making it the default option. This can help individuals overcome their mental bandwidth constraints and make better decisions for their future.


In conclusion, behavioural economics offers a unique perspective on the concept of scarcity. It recognizes that scarcity can have a significant impact on decision-making and can lead to irrational choices. However, through nudging and choice architecture, behavioural economics provides solutions to help individuals make better decisions when faced with scarcity.

By understanding the role of scarcity in decision-making, we can make more informed choices that align with our long-term goals and well-being.