Making financial decisions for your practice is hard. It’s even harder when you’re short on time and money—but not necessarily for the reasons you might expect.

‍

In their influential 2012 paper “Some Consequences of Having Too Little,” Sendhil Mullainathan, Eldar Shafir, and Anuj K. Shah shared the results of five experiments studying the effects of scarcity on attention and decision making.

‍

Big picture: The less you have, the more cognitive fatigue you experience planning how to use your limited resources—whether that’s budgeting for next month’s expenses or setting a tight schedule. You’re also less likely to make decisions that benefit you in the long run, like putting aside savings or avoiding new debt.

‍

‍

Here’s a close look at each experiment, what it tells us about how scarcity affects our minds, and takeaways you can use to make managing your private practice easier.

The sources

The main source of information about these experiments is Mullainathan et al.’s paper “Some Consequences of Having Too Little,” published 2012 in Science.

‍

But this is just part of a larger field of inquiry into the psychological effects of scarcity. Another paper by Mullainathan, Shafir, and other researchers, “Poverty Impedes Cognitive Function,” focuses specifically on financial scarcity, drawing both on experiments and field studies. 

‍

And “Financial Scarcity and Cognitive Performance: A Meta-Analysis” by Almeida et al. analyzes multiple studies. Importantly, it controls for education level when looking at the impact of scarcity on decision making.

1. Scarcity eats up attention

‍

‍

In Mullainathan et al.’s first experiment, subjects played a word-guessing game similar to Wheel of Fortune. They were split into two groups—”poor” players and “rich” players. 

‍

Poor players got 84 guesses, six per round; rich players got 280 guesses, 20 per round.

‍

The focus of this experiment wasn’t on the game itself, but the aftereffects of playing it. Once they were done, each player was given a Dots Task to complete. This task is typically used to measure executive functions such as attention and cognitive control.

‍

You might expect that the rich would perform poorly on this task relative to the poor players. The rich played more than the poor players—they had more guesses in total and per round—and so would have expended more mental effort.

‍

But that’s not what the results say. The poor players performed significantly worse than the rich on the Dots Task. That’s despite the fact that they each spent less time overall playing the word-guessing game.

‍

This suggests that they worked harder—using more mental energy—than their rich counterparts. Decision-making took more effort when they had fewer resources to work with.

Takeaway

If you feel burnt out at the end of a particularly busy day, it may not only be because you did more; it could be because you had less time to do it.

‍

When your schedule is packed, you have fewer blocks of time to invest in new tasks—like booking a last-minute appointment, paying a bill, fixing an issue with your EHR, or correcting an accounting error. The choice itself—deciding which items take priority over others—is mentally fatiguing.

‍

You can save your energy not by doing less but by scheduling your time more effectively. For instance, if Friday is typically a crunch day—you’re catching up on all the tasks left over from the rest of the week, trying to get them all done before the weekend—you may find you always roll into Saturday with a cloud over your head.

‍

The solution: Careful, realistic planning to ensure all your work is distributed evenly over the course of the week. That could include grouping similar tasks together—for instance, spending one day exclusively seeing patients, another catching up on admin—to reduce the mental cost of task-switching.

‍

Finding the motivation to do that can be difficult. But once you recognize the tangible effect a too-tight schedule has on your mental performance—and the potential payoff, in the form of more energy, if you make a change—it becomes easier.

2. Scarcity diminishes long-term planning abilities

‍

‍

The second experiment used a game similar to Angry Birds to measure how scarcity affects long-term planning.

‍

Similar to the word-guessing game, rich players had more shots overall and per round than poor players. But this experiment introduced a new mechanic: Some players had the option to “borrow” shots at 100% interest. That is, they could take an extra shot in the current round, but they would lose two shots in the future.

‍

Perhaps unsurprisingly, poor participants were more likely to borrow. What’s interesting, though, is that those who did borrow performed worse on the task overall than those who did not.

‍

And the performance of rich participants who borrowed was unaffected.

‍

This suggests that, when faced with scarcity—and the mental fatigue it produces—we are more likely to make decisions that lead to short-term benefits while hurting us later on. The less you have, the harder it is to make good choices.

Takeaway

If you’ve ever eyed a new purchase and felt your credit card burning a hole in your pocket, you know how tempting it can be to spend money for short-term rewards even if it incurs long-term costs.

‍

What the borrowing experiment shows us is that we’re more likely to cave to this craving when money is tight, ignoring future problems for present satisfaction.

‍

That can even extend to business decisions and relatively unexciting purchases. For instance, suppose you get an email inviting you to a conference on the other side of the country. It’s a deductible business expense, and attending could help you professionally, but you’ll have to use your line of credit to cover the cost.

‍

If your savings account is looking good and income is steady, you may actually be less likely to attend the conference—and incur the debt—than if money were tight. The temptation of short-term rewards is greater when you’re experiencing scarcity.

‍

To prevent yourself from making a bad decision, the first step is to consider your financial situation before each new purchase—not in order to decide whether you can afford it, but to recognize the effect a tight budget could have on your decision making. 

‍

The next step is to make a formal plan. When is it appropriate to take on more debt, and when is it not? For instance, covering essential business expenses during periods of low income may qualify. Add-ons—conference trips, new office furniture, an upgraded work phone—may not, no matter what types of sales or special discounts are being offered.

‍

Literally writing out this plan and keeping it on file can help you think more clearly about when debt is justified, and make it easier to analyze financial decisions before you make them.

‍

‍

‍

3. Scarcity affects time debt the same way it affects financial debt

‍

‍

In another experiment, participants played a trivia game similar to Family Feud. Rather than guesses, the currency was time: Rich participants had more of it, poor participants less.

‍

‍

This experiment also included a borrowing mechanic, but one more complex than with the Angry Birds game. Some players were not allowed to borrow at all; others could borrow without incurring interest; and still others could borrow with interest.

‍

As with the other experiment, poor participants were more likely to borrow. In effect, they took time from their future and moved it to the present. Whenever they borrowed, the total amount of time available to them decreased.

‍

Players who were not able to borrow time performed better than those who were able to borrow time without interest. The worst-performing were the players who could borrow time with interest.

‍

The rich participants’ performance was unaffected.

‍

You may have been able to predict this outcome, considering how players behaved and performed in the Angry Birds experiment. What is important here, though, is that the same patterns of behaviour appeared when players borrowed time as when they borrowed “money” (turns).

Takeaway

In real life, you can’t borrow time from the future. Or can you?

‍

Consider this example: It’s January, your first day back in the office, and you know tax season has just begun. The books from the previous year aren’t closed yet—in fact, you still have transactions to enter on the records.

‍

Now you have a choice: You could either do your bookkeeping so you’re on track for tax season, or you could work on some new social media videos you plan to post as part of your marketing. You decide that making videos is the more attractive option.

‍

In effect, you’ve just borrowed time from the future. Your bookkeeping has to get done—without it, you can’t file your taxes—so you know you’ll have to do it later. But whereas you could have done three hours of bookkeeping now, you’ve taken that time and put it towards social media marketing.

‍

That would be fine if you had a wide open schedule. But if your schedule is tight, according to the work of Mullainath et al., you’re more likely to borrow time from the future, even to your detriment. And the negative impact of doing so is greater.

‍

This is where setting priorities can help you. Designating a different level of priority for each task that comes your way helps you decide when borrowing against future time is justified. You could even color code tasks in your calendar: Red for work that needs to get done within a specified timeline, green for work that can happen any time. That saves you some of the mental fatigue of deciding how to spend your time.

4. Scarcity numbs you to the impact of debt

‍

By now, we know that individuals experiencing scarcity are more likely than those who are not to incur debt, even when it fails to benefit them in the long term.

‍

But what happens when the damage done isn’t long term but more immediate and palpable?

‍

Mullainath et al. ran another experiment with the Family Feud game. For each round, participants received a “paycheck”—a certain amount of time they could use to answer questions. Poor players got small paychecks, rich players got big ones.

‍

Again, they were allowed to borrow against the future—but now, each time they borrowed, their debt would reduce their future paychecks. The more they borrowed, the smaller their paychecks became.

‍

You might expect that, with the negative impact of borrowing becoming more immediate, participants would borrow less. In fact, they borrowed, and then borrowed more, and then more. For poor players, the short-term impact of borrowing had a negligible effect. They just kept digging themselves deeper.

‍

So, when we experience scarcity, it’s not just our distance from the future that makes it easier to incur debt. Even when borrowing has an immediate impact, we have trouble resisting. We become numb to debt.

Takeaway

One key point to understand: Debt may become normalized.

‍

If you’re used to being in debt—never quite managing to pay down a credit card or line of credit, or never fully catching up on payments to the IRS—you may find you take new debt for granted. After all, you’re already X dollars in the hole—what difference does another hundred (or another thousand) make?

‍

If you’ve had trouble in the past with uncontrolled borrowing, one step you can take to prevent future problems is limiting your own access to credit. That could mean paying down and closing a credit card account or line of credit. Or it could simply mean opting out next time your carrier or bank offers to increase your limit.

‍

But the most impactful move you can make is to create and use a complete budget for your practice. 

‍

A list of expenses you expect to cover and revenue you expect to earn over a particular period isn’t a complete budget; at best, it’s half of one. A complete budget is one you update. Meaning, after each budgeting period, you record your actual earning and spending in different categories alongside the amounts you projected. Doing that keeps you accountable and helps you create more accurate future budgets.

‍

Also, tracking balance sheets month to month will show you your total debt; you can measure how it grows over time, and get a bird’s-eye-view of how it impacts your financial situation.

5. Scarcity makes it harder to anticipate the future

‍

The fifth experiment measured individuals’ ability to plan for their future during times of scarcity. 

‍

Plans for the future, in this case, did not just have to do with future debt. Participants needed to anticipate their own behavior and performance.

‍

In a Family Feud game, poor players got fewer attempts to answer questions and rich players got more. All players could borrow future question attempts to use in the present.

‍

One key difference from other experiments: Some players were given previews of questions to come. That allowed them to anticipate the future difficulty or ease of answering questions.

‍

Among rich players, those who were given previews performed substantially better than those who did not.

‍

Poor players, on the other hand, performed similarly regardless of whether or not they had access to previews. Also, they were just as likely to borrow from future turns when they had previews as when they did not.

‍

This suggests that, when experiencing scarcity, we’re less able to think concretely about the impact of future events; our focus is mainly on the present and the mental effort it takes to decide how to spend the few resources we have available.

Takeaway

When money is tight, even knowing about a future expense may not motivate you to plan for it.

‍

For instance, you know that in six weeks you have a quarterly tax payment due, but you don’t have enough money set aside to cover it. If you adjusted your budget now, you could just barely afford to pay—but it would take some planning. You’re so busy trying to keep up with day-to-day expenses—and so exhausted from the effort—that you can’t bring yourself to make concrete plans.

‍

And so the deadline creeps up, you pass it, and you end up in greater debt than you would have been if you’d just sat down and faced the problem earlier on.

‍

If that situation sounds familiar, there are steps you can take to avoid it happening again.

‍

The most important thing is to start taking concrete, incremental action as soon as possible. When resources are scarce, just knowing about a future event isn’t always enough motivation to prepare for it. So, break it down into small steps, and complete the first one.

‍

For instance, with the example above, you could take $100 from your main bank account and put it into your tax savings. Would that make a significant dent in what you owe? Probably not. But if you can afford to do it now, it’ll get the ball rolling. Taking the next step—withholding a larger percentage from your next paycheck—will be easier. Next, after that—with your withholdings tangibly growing—you’ll have an easier time sitting down and putting together a revised budget for the next six weeks.

‍

None of this is easy. It’s important to give yourself some grace—many people face scarcity, and many struggle to make financial decisions as a result of it. The work of Mullainath et al. shows that scarcity creates psychological conditions that make focusing, planning, and dealing with financial matters more difficult. But just by recognizing that fact, you put yourself on the path to better decision-making—maybe, even, to winning the game.

‍

—

‍

Interested in more ways psychology impacts your financial life? Check out Why Therapists Avoid Checking Their Bank Account and The “Future You” Trick for Retirement Saving.

‍

‍