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Know Your Nuggets: Scarcity

bob_sullivan
Bob Sullivan
Writer

Editor’s note: Scarcity is one behavioral principle I’m sometimes reluctant to discuss, because it has great potential for abuse. I want PeopleScience to be a source of ethical nudging, and, on the surface, scarcity seems to offer a quick trick for any purpose. But, digging deeper – as Bob does here in another of our Know You Nuggets pieces – we learn that using scarcity can backfire, especially when it’s done dishonestly. So, don’t do that! And, for those of us on the other side of the equation, who wonder if scarcity is being used against us, Bob also offers some tips to overcome that. In other words, this is a great piece, but you have to read it now because this deal won’t last!

 

You're thinking about a trip to Europe and you've found a great deal on airfare. You're excited, but still mulling things over. Then, the travel website you are using displays this ominous message:

"Only 2 left at this price."

Excitement turns to panic. You have to act fast! You can feel the clock ticking. Who knows how much the price might rise if those last two seats are sold out from under your e-shopping cart? Your spouse might kill the idea!

Suddenly, a trip you were simply mulling over becomes a trip you almost can't live without. You've become a victim of scarcity bias.

Scarcity is a bedrock principle of economics. In some ways, it's the evil twin of cost. Rare things are often expensive, and the rarer they become, the more their price rises. Gold, diamonds, Springsteen on Broadway tickets. Long before everyone had FOMO, economists had scarcity.

Long before everyone had FOMO, economists had scarcity.

Scarcity isn't just rarity, however. Plenty of rare items aren't worth very much. I play music in Irish pubs sometimes. When I play at a small bar, the price doesn’t go up (OK, my “shows” are free [Editor’s note: Bob offered me a 2-for-1 door deal]). When Bruce (Springsteen!) plays in a small venue, however, ticket prices soar.

So scarcity is a mix of both rarity and value. Value is in the eye of the beholder, however, and the way people value things can be manipulated. In a wonderful experiment, classical violin player Joshua Bell performed a free "concert" in Washington, D.C., subways in 2017. More than 1,000 people walked by and only a tiny handful stopped to listen. Earlier that year, Bell sold out the nearby Kennedy Center.

Scarcity is a mix of both rarity and value.

In the classic scarcity experiment, researcher Stephen Worchel recruited 200 students to rate the quality of cookies. One set picked from a jar of 10 cookies, the other from a jar with only two (the cookies were identical). Not only did students strongly prefer the more "rare" cookies, they indicated they were willing to pay 11% more for them.

Scarcity bias has an obvious link to our evolutionary past, when planning for scarcity was a matter of life and death. Hoarding food made sense when food was limited and dinner had to be hunted and killed. While most humans no longer live under those precise scarcity conditions, similar circumstances can arise. In 2005, I covered Hurricane Rita in Houston, just a few weeks after Hurricane Katrina ravaged New Orleans. Our well-built hotel promised to stay open and had plenty of food, and it generally kept a buffet available. But as the storm arrived, and nerves started to fray, it was obvious that many patrons started to hoard food and hide it in their rooms.

Scarcity also encourages focus, which can be good or bad. When time grows scarce, many students (and writers) find extra motivation to meet deadlines. But people who study poverty talk about the impact of "tunneling" on decision making. When money is tight, many people have trouble focusing on anything but the next bill that needs to be paid, and that can lead to bad decision-making.

Scarcity also encourages focus, which can be good or bad.

That's what marketers are counting on. Website designers point to scarcity techniques as one of their great innovations – the "only two tickets left at this price" technique really works. It also combines two other cognitive biases we've covered in this space: loss aversion (the pain of missing out on those plane tickets is greater than the fun of buying them [Editor’s note: Nugget on loss aversion coming soon!]) and social proof (I would love to have this bag that everyone else must have).

Scarcity is good for business in other ways, too. Raising prices is a way to induce scarcity effects, as many people believe higher prices are associated with higher quality.

Toying with scarcity can backfire, of course. Back to the cookie experiment. In some conditions, subjects were initially shown treat jars with only two cookies, then later, a 10-cookie jar. Those subjects valued the cookies the least. In other words, if you create scarcity, you'd better stick with it, because consumers won't react well to sudden abundance. Also, people often see through artificial scarcity. Researchers led by Seung Yun Lee of Konkuk University in Seoul, South Korea, found just that in a 2014 study.

 

Toying with scarcity can backfire.

“When consumers interpreted scarcity claims as a sales tactic, the positive effect of scarcity claims on product evaluation would be diluted,” the authors wrote.

If you lie about your "only two left" warning, you might lose all credibility.

Also, there's this to think about: Who wants to buy the last box of Cheerios on the shelf? Isn't it often damaged or at least beat up?

So scarcity has its limitations. But it is a human impulse. Inside organizations, there are plenty of ways scarcity bias could lead to poor decision making or tunneling. The entire tech industry is built on FOMO: fear of missing out on a cool startup acquisition; fear of missing out on a new trend, or a mini-gold rush. Acting fast is paramount. Go to any training session on pitching venture capitalists, and the instructors will talk about the need to create FOMO among potential investors (buy in now, or everyone else will).

If this kind of faux urgency sounds a bit familiar, that’s because it’s included in every Nigerian scam email you’ve ever read – for that matter, probably every scam email you’ve ever read. (Click now before your inheritance is claimed by someone else!) Criminals count on the tunneling effect of urgency; it’s a core tenet of successful scams.

 

Criminals count on the tunneling effect of urgency; it’s a core tenet of successful scams.

How do you avoid becoming a victim of scarcity bias-induced tunneling? For starters, constantly ask: Does acquiring this thing fit my goals? Did I really want it yesterday/last week/last quarter, or is this a new impulse? One good way to check: Call a time out. The best counter-measure to faux urgency is to hit the pause button. That’s common advice for avoiding scams; it also works to break free from the tunneling mindset.

But in a broader way, never forget to challenge the basic premise of scarcity when it is presented. When a car salesman says that price is only good for today, is that really true? Is there really only one car available at that price? Maybe, if it’s a 1960s classic. But usually, the price is valid tomorrow, and next week, and maybe even next month. If you get up, walk out of the dealership, and sleep on the transaction, you’re much more likely to make a good choice.

 

bob_sullivan
Bob Sullivan
Writer

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