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Choices, Choices, Choices. How Scarcity Affects Us

This blog post is about scarcity, and how, when something becomes scarce, it seems that we want it even more. Scarcity confirms the old adage “the grass is always greener on the other side”.

The once famous pop rock band Savage Garden (yes, I did listen to the lyrics) had a song with the lyrics “I believe that junk food tastes so good because it’s bad for you”. The phrase contains a very subtle, but important, truth. It is that the things we do not have (that we should not eat, for example) that makes us want it more. (I have heard some people say that it is the triggering of a pleasure neurotransmitter in the brain called serotonin that makes us addicted to that nasty carbs).

But what is it about scarcity that makes us irrational? Do we really act differently under scarcity?

it is because of this scarcity that goods have value
Economics are built on this fundamental principle, known as the scarcity principle. Basically it states that goods and services are scarce and that human needs are infinite. But here is the paradox: it is because of this scarcity that goods have value – the more scarce something is, the more we want it. To quote Chris Anderson (author of The Long Tail and Free): “it is as if we are wired for scarcity”. We simply want something because it is scarce. Luigi Mittone has researched this bias extensively*, what he aptly calls the scarcity bias. As soon as you have a choice between two or more products, choosing the one product implies that you have not chosen the other. This causes the non-chosen product to have more value than the chosen one (think of the value of the supply of ten apples vs. the supply of only 1 apple).

People also perceive the value of something to be higher when they give it away than when they acquire it, a phenomenon known as loss aversion. First identified by Amos Tversky and Daniel Kahnemann, it has changed the way we look at losses. Because losses loom larger than gains, perceived scarcity is created, and explains the scarcity bias.

We also find it difficult to determine which options to choose when we are overwhelmed with choice. I think the reason is simply because we do not have a model or framework that we can use to determine the priority need of one product from another. By finding ways to create decision frameworks, we can make better informed choices with, most importantly, less regret.


Marketing Implications

There are a variety of ways in which products-or services-scarcity can be created. In promotions and advertising, displaying a sign that says “only ten left!” or “once-in-a-lifetime” promotion. The same goes for online promotions. For example: “free shipping only for today” or “order now! Free [product] with every book over $12.00 today only!
Trial periods and rebates can be used to make customers value a product more once they have it and hence will find it hard to return (even defective) goods. Loss aversion is related to the endowment effect: we value something more that we own than what we do not own.

Further reading: see  Mittone, L. & Savadori, L. Applied Psychology: An International Review, July 2009, Vol. 58 Issue 3, p 453-468, 16p.

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