Remember those early days of the pandemic when people were stockpiling toilet paper? Or maybe you’ve seen people lining up to buy limited-edition sneakers? Perhaps you’ve even bought something on Amazon because of that little red tag that says “only two left in stock?” Then you’ve encountered real-world examples of the scarcity heuristic cognitive bias.
What is the Scarcity Heuristic?
The scarcity heuristic is a cognitive bias that explains why diamonds, Bitcoin, and time are valuable—they’re limited resources. It’s a cognitive bias that occurs when people overestimate the rarity of something. This can lead to ineffective decision-making, as people are willing to pay more for a scarce item than they would for a less scarce one.
The scarcity heuristic is often used in marketing, as businesses know that people are willing to pay more for a limited-time offer than they would for the same product if it were always available.
It can also lead to hoarding behavior, as people become afraid that they will not be able to find the item again if they do not buy it now. While the scarcity heuristic can be helpful in some situations, it is important to be aware of it so that it does not lead to irrational decisions.
How Does the Scarcity Heuristic Affect Your Financial Decisions?
The scarcity heuristic can lead to poor financial decisions because people tend to value things that are scarce more than things that are abundant. So you might perceive something as valuable even if it doesn’t offer much utility.
For example, you might be willing to pay more for a limited edition item even if it’s not objectively better than the regular edition. Or you might make an impulsive purchase if you hear, “Hurry while supplies last!” at the end of a commercial.
The scarcity heuristic can also cause hoarding behavior. If you think an item will run out, you might be inclined to stockpile it. While there’s nothing wrong with being prepared, excessive hoarding can lead to financial problems.
If you often make decisions based on the scarcity heuristic, it’s important to take a step back and consider whether you’re making the best decision for yourself.
5 Ways to Overcome the Scarcity Heuristic
The most important thing to remember about cognitive biases is that by recognizing them, you can avoid them. Here are a few ways to overcome the scarcity heuristic:
1. Buy only what you need.
Have you ever gone to the store intending to buy a handful of items only to leave with dozens more than you needed? Set your intention before you head out by making a list of exactly what you need and sticking to it. That way, you won’t be influenced to buy extra items that you don’t really need.
2. Beware of marketing that signals limited quantities of an item.
It can be tempting to make an impulsive purchase when you see a “low stock” message. But it’s important to remember that scarcity is often used as a marketing tactic. Rather than succumbing to the pressure, take a step back and consider whether you really need the item.
It can be helpful to ask yourself why you’re drawn to an item that’s in limited supply. Is it because you think it’s truly rare and valuable, or is it because you’re afraid you won’t be able to find it again?
Once you’ve identified the reason, you can make a more informed decision about whether to buy it. Just remember—don’t let the fear of missing out dictate your decisions.
3. Don’t buy something just because you think it will be valuable someday.
It also can be tempting to buy something because you think it will be valuable in the future. However, it’s important to remember that the future is unpredictable.
So rather than buying something because you think it will be rare and valuable someday, only buy it if you truly need or want it, as there’s no guarantee that it will be worth anything in the future.
4. Shop around for alternatives so you don’t get too attached to one specific item.
The scarcity heuristic can cause you to fixate on one specific item. However, if you take the time to explore your options, you may find that there are other products that offer the same value without the same sense of urgency.
So if you’re considering making a purchase, be sure to shop around and compare prices before you commit. This way, you won’t be as invested in the specific item and you’ll be more likely to get a good deal.
5. Adopt an abundance mindset.
One of the best ways to overcome the scarcity heuristic is to adopt an [abundance mindset]. This means believing that there is enough of what you want in the world. When you have an abundance mindset, you’re more likely to make decisions based on what’s best for you, rather than what’s scarce.
Creating the illusion of scarcity is a tried and true tactic of marketers. And because we’re hardwired to want things that are in limited supply, it can be challenging to resist the urge to act quickly. But you can create a bountiful future for yourself by understanding cognitive biases such as the scarcity heuristic.
Need more support? Julep pairs psychology with financial management techniques to help you change your money mindset.
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.