What is the Scarcity Principle?
What is the scarcity principle?
The scarcity principle states that you value something more if it is scarce.
Robert B. Cialdini in his textbook, Influence: The Psychology of Persuasion, defines it this way:
“Opportunities seem more valuable to us when their availability is limited.”
Have you ever gone to buy a product online only to have a ticking timer pop up, counting down the seconds you have left to finish the order?
Your heart rate increases. Adrenaline starts pumping through your veins. You rapidly type out your credit card details and wonder how a little timer could have such a dramatic impact on your body…
What you’re feeling is the scarcity principle in action.
A “one-time only” event seems more valuable than an event that happens every week.
A “limited-edition” sneaker is more desirable than last year’s mainstream edition.
All because of the scarcity principle.
Examples of the Scarcity Principle
Currencies
Even the value of a currency, like the U.S. dollar or the crypto-currency Bitcoin, is influenced by the number of them available.
One of Bitcoin’s core value propositions is that there will only ever be 21-million of them. And after each ‘halving,’ (as fewer Bitcoin become available) the price has risen dramatically.
Sales tactics
It won’t surprise you that sales reps and “compliance practitioners,” as Cialdini calls them, know about the scarcity principle.
I just encountered a form of it at an F45 gym in Pasadena, California. The gym had a one-time promotional 6-month rate that could only be locked in after your first class. If my wife and I didn’t take the deal immediately, the representative assured us it was gone for good. (We didn’t take it).
This “deadline” driven time limit technique is a common scarcity tactic. It makes you value the opportunity more now because you can’t get the same deal later.
There’s also the “limited number” tactic, where you are told that the product you want is limited in quantity. If you don’t buy now, there won’t be any left for you to buy later.
These tactics are meant to shock you into the same state of stress as the online ticking check-out clock. This state of scarcity-induced stress doesn’t allow you a moment to think rationally, and often ends with you buying something.
Why does the scarcity principle work?
The scarcity principle tells us that the scarcer something is, the more valuable it seems to be. But why is it so good at influencing our behavior?
Cialdini highlights two main reasons:
1) Our mind likes to create short-cuts to deal with a complex world.
The scarcity principle is one of these short-cuts. It’s easy to estimate an item’s worth based on its availability. If an item is rare, we assume it is of higher quality and is worth more than a common item that’s easy to obtain.
And this is true, most of the time. That’s why it’s built into your psychology. Under most circumstances, this short cut helps us. But not always.
2) The scarcity principle limits the number of opportunities we have available to us. As those opportunities decrease, we lose the freedom to choose.
You are psychologically hardwired to react against losing freedom of choice.
One of the reasons for this is that we suffer more from a loss than we celebrate from a proportionate gain. You are wired to watch the downside and keep as many options openly available as possible at any given time.
This is grounded in evolutionary biology. The more options our ancestors had, be it in food or shelter variety, the more likely they were to survive. If they failed to catch an animal for dinner, at least they could climb a tree in the area and eat its fruit. They kept their options open.
We all have a visceral, bodily reaction when we lose the freedom of choice. This reaction makes us want the freedom even more once it’s gone.
For example, if tickets to your favorite sport team’s home game are sold out, you’ll want the tickets even more now that you know you can’t easily get them.
As a teenager, if your parents restrict you from seeing someone you like, you’ll want to see that person even more after the restriction (just like Romeo and Juliet).
As a rule, you act against a restriction because it limits your freedom of choice, and you will come to want the restricted item or experience even more.
Has the quality of the item improved at all after it has been restricted? Of course not, and yet the scarcity principle compounds your desire for it. To solve this cognitive dissonance, your mind will make-up positive qualities for the thing you want in order to justify your increased desire.
For example, you could claim that the sports tickets are for the only night of the week that you could actually go. And it’s fan appreciation night too, so you’d get a free towel to waive around!
This is your mind creating positive attributes to solve your increased desire for the game, created by the scarcity of tickets.
Scarcity of information
Cialdini reminds us that the scarcity principle also works for information. A hot stock tip is more valuable and persuasive when the information is scarce (from an “insider”) and can’t be gotten elsewhere (Disclaimer: this could be illegal…)
This happens in the court of law all the time. Cialdini finds that when a judge deems certain evidence as non-admissible and tells jurors not to consider it in their verdict, this can actually have the opposite intended impact. Jurors may actually weigh the banned evidence greater than the admissible evidence when making their decision.
Again, this comes down to valuing something that is scarce or restricted more than something that’s common or unrestricted.
Scarcity as a result of demand
The most powerful form of the scarcity principle, though, comes about when something is first abundant, and then scarce as a result of demand for that thing.
Cialdini writes:
“This finding highlights the importance of competition in the pursuit of limited resources. Not only do we want the same item more when it is scarce, we want it most when we are in competition for it.”
This has important consequences in business. Warren Buffett and Charlie Munger avoid bidding in open auctions for this reason. The frenzy that occurs when a scarce resource is actively pursued by multiple participants almost never results in a good deal for the buyer.
I’ve encountered this circumstance firsthand. I once attended a charity auction where silent bids were placed in writing by prospective buyers. Upon finding a painting I loved and seeing a decent-sized list of names and offers, I promptly put down an offer around 50% greater than the last bid!
Why would I do that? Because I wanted to make sure I got the painting! This was not a cost-effective way to bid. I was so shocked by the scarcity principle that I didn’t stop to think it through. Had I shown a little patience, I could have gotten the same painting for much less than what I paid. It was all for charity though, so there’s no sour taste in my mouth, but the example stands.
How can you protect yourself from the scarcity principle?
Cialdini warns us that the scarcity principle impacts your rational thought precisely when you need it most: in the first few moments when you watch something you want become less available.
Here’s how you can protect yourself from making bad decision under stress of the scarcity principle:
1) Learn what the scarcity Principle Feels like in your body.
If you feel a strong emotional reaction to something that’s slipping away, notice that feeling. Cialdini says you can use this reaction as a warning that you’ve been taken by the scarcity principle.
The lightning-fast emotional charge can serve as a sign to slow down, take a beat, and analyze the circumstance to try and make a better decision.
2) Clarify why you want the thing you want.
Another way to prevent yourself from making foolish decisions under the effect of the scarcity principle is to clarify exactly why you want the thing you want.
Is it to use it or experience it for what the product or activity offers? Or do you want it because if you don’t buy it now, you won’t have a chance to buy it later? Perhaps you want the thrill of having the scarce thing without thinking through how you’ll actually use it in your life.
These are important questions. If you want to own it in order to use it (not just because you can’t have it later), then scarcity has no impact on the quality and utility of the product. You can always find a competing product in-line with what you’re looking for.
If you can remember these tools, scarcity will have a much harder time tricking you into buying something you don’t want just for the sake of having it.
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Cialdini PhD, Robert B.. Influence (Collins Business Essentials). HarperCollins e-books. Kindle Edition.
Bitcoin Halving info: https://medium.com/swlh/bitcoin-halving-everything-you-need-to-know-4573dc5b528e
Photo by chuttersnap on Unsplash