Why would we want to learn more about scarcity? More specifically, why am I reviewing this particular book, Scarcity: Why having Too Little Means So Much, and recommending that you read it? Because entrepreneurs deal with scarcity all the time. Scarcity of time and money. It is a constant battle. Learning to deal with it is a critical tool. This book provides interesting insights into the problem. Maybe not ones that you will completely agree with but they will make you think and evaluate how you have thought about the issue in the past and how you can stay out of the “Scarcity Trap”.
The Scarcity Trap is when our brains focus so tightly on what we perceive is lacking that it leaves little room for anything else. We come up with solutions that try to solve this immediate problem but often create other problems in the process. You solve one problem, but in the process create another problem that needs to be solved later. It seems rational at the time only because you have been in the Scarcity Trap and only focused on solving the problem immediately in front of you.
I know first hand what the scarcity mindset has done to me in times of financial lack. It felt like my otherwise rational brain becomes completely disfunctional. Rational though is replaced by emotion. Self control is depleted. Both of these are key factors in making quality financial decisions.
One of the effects of this on small business is in borrowing. Borrowing seems to relieve the immediate pain of cash flow. But it often just pushes the need down the road gathering interest expense and or fees along the way. If not stopped it can create a downward spiral that is difficult if not impossible to work through. It takes almost a Herculean effort to break out. It is the high cost of always being broke.
One way out of this trap is by creating slack. A rookie mistake in business planning is looking at things too optimistically. It is hard not to do. You wouldn’t go into business if you weren’t optimistic about the opportunity. But there will be problems. Things happen in ways that you never anticipated. If you have slack in your budget it is considerably less detrimental than if you are on the edge. But when you are trying to grow your business, the temptation is to push the envelope.
There is a lot of good discussion about slack in the book. All slack isn’t the same. It is more important to have slack in some resources vs. others. And having too much slack can just turn in to fat. So it is a complicated. But there is a lot of food for thought in the discussion about how to create an appropriate amount of slack.
Bandwidth is another topic that is discussed extensively in the book. We all have to deal with limited band width. There are ways of expanding it but it always has a limit. If your brain is already overloaded, you just don’t have the capacity to take on any more. If you are trying to figure out how to make payroll this week, your ability to sit through an extensive class on financial management maybe limited, even if you desperately need the information. You are already taxed to the limit.
Making smaller incremental changes are more likely to be something that will have an lasting effect. Sure the financial management class may be helpful, but if you can’t get through it and you give up, it didn’t really help. They gave an example of a non profit that was trying to help entrepreneurs in third world counties get out of poverty. They started with basic financial rules of thumb that they could easily implement. For example they needed to learn to keep their business money separate from their personal funds. One woman came up with the solution of putting her personal money on one side of her bra and her business money on the other. An easy solution to implement.Once they made these simple rules of thumb habit, they freed up capacity to learn more complex concepts that they could apply.
I think there is a lot more to learn about this topic. How decisions are made is something that is important for the entrepreneur to learn. We all like to think that we are making “rational” decisions. But the lizard brain takes over in times of lack. Having an awareness of the issue and steps to move yourself away from decisions that will likely not be in your best interest long-term is a skill that needs to be developed.
What do you think? How has scarcity effected your decisions? What tools have you used to stay out of these traps?
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