Why the financial sector should understand scarcity better
“Scarcity is not just a lack of resources — it’s a lack of bandwidth.” That’s the message Professor Eldar Shafir of Princeton University has been repeating to anyone who will listen.
Best known for his groundbreaking work on behavioral science and decision-making under pressure, Shafir has spent years studying what happens when people don’t have enough — not just money, but also time, food, or friends. “Scarcity,” he explains, “hijacks the mind. It narrows your focus to the urgent at the expense of the important. It taxes your cognitive capacity.” His research, which he published together with co-author Sendhil Mullainathan in the influential book "Scarcity: Why Having Too Little Means So Much", shows that the stress of not having enough distorts our decision making—in predictable and often harmful ways. And for banks, especially those serving people with limited means, this insight could be very useful.
“Financial exclusion isn’t just about lacking a bank account. It’s about lacking the flexibility, empathy, and infrastructure to function in a system that wasn’t built for you.”
We’d never blame a pilot
Imagine a student pulling an all-nighter before a deadline—juggling, rushing, unable to think beyond the next hour. Now imagine living like that every day, but with rent, childcare, and food on the line. That’s the effect of financial scarcity, says Shafir. “You're not irresponsible,” he explains. “You're bandwidth-constrained. It's not about who you are—it’s about the situation you’re in.” This distinction is critical: too often, banks treat missed payments or erratic behavior as a matter of personal failure. Shafir urges a reframe. “We’d never blame a pilot for crashing if the instruments were malfunctioning. So why do we blame clients when the system isn’t designed to support them?”
Too risky Financial institutions tend to judge clients by their past behavior: track records, collateral, or credit scores. But scarcity warps those very behaviors. Clients under pressure may forget a due date, take out high-interest loans, or default not out of indifference, but desperation.
FMO programs like NASIRA aim to expand access to finance for groups often left out of traditional systems—refugees, women entrepreneurs, smallholder farmers. While their challenges vary, many face financial uncertainty that shapes behavior in ways behavioral science helps us understand. Shafir: “Banks often find them too risky. But that’s using the wrong metric. Many of these customers, given the right support, perform just as well.”
Facilitate the juggling
Shafir is careful about saying what banks should do differently. "I am a behavioral scientist, not a banker," he stresses. But he does have a few suggestions that could improve the lives of the poor.
Defaults and reminders: “Make sure people have access to their paycheck two days before rather than after rent is due. Of course, that may not be up to the bank, but the combination with a small nudge from the bank that rent is due, can prevent a spiral.”
Smarter timing: “Make banks and loan offices open when people can actually visit — after hours. A person who transports fruit to a waiting ship can’t just tell his boss he will take a long lunch break because he needs to go to the bank, like someone working in an office might do.”
Low-interest micro-loans: “Someone living paycheck to paycheck might need just $100 to bridge a gap. Because of a parking ticket, or some other small set-back that he or she can’t afford at that moment. If that would be available against low costs, that would make a world of difference to so many people. Facilitate the juggling. Without that, they could face a $35 overdraft fee or turn to payday lenders charging 600% interest if you would calculate it on an annual basis.”
Poor people also have money These aren’t acts of charity that a bank or any financial institution should take. Shafir underscores that they can also benefit. “There is a lot of money to be made if you do it right. The poor also have money going in and out. But if the system is rigid, impersonal, or punitive, we set them up to fail.” In the U.S., he recounts, some banks were known to cash checks in such an order that it maximized bounced checks, profiting from people’s financial missteps. “That’s not just unethical,” he says. “It’s economically short-sighted.”
Interventions As global crises—from climate change to geopolitical instability—drive new waves of uncertainty and exclusion, banks must become more attuned to how scarcity affects behavior. Financial exclusion isn’t just about lacking a bank account. It’s about lacking the flexibility, empathy, and infrastructure to function in a system that wasn’t built for you. And while policy is often slow to catch up, banks can act now. “You don’t need to overhaul everything,” Shafir says. “Even small interventions, designed with an understanding of how people actually behave, can make a huge difference.”
About the Author Eldar Shafir is the Class of 1987 Professor of Behavioral Science and Public Policy, Professor of Psychology and Public Affairs, and the Inaugural Director of Princeton’s Kahneman-Treisman Center for Behavioral Science and Public Policy. A Princeton faculty member since 1989, he studies decision-making, cognitive science, and behavioral economics. His recent research has focused on decision-making in contexts of poverty and on the application of behavioral research to policy.