What Is a Scarcity Mindset? Investing and Living In a Zero Sum Paradigm

Little Old Les writes in on my post about Tax Efficient Investments:

What does the phrase "a whole lot of scarcity-based thinking" mean?

In its most basic form, scarcity thinking means if someone else wins, I lose. And vice versa.

Considering it in the context of last week's post, it would mean believing, inaccurately, that investing in a dividend paying stock "cheats" the government out of taxes because the rate on dividends is lower than the rate on other forms of income.

In other words, scarcity thinking is a framework where you approach a problem or a challenge using a fixed-pie or zero-sum mindset. And with regard to money and investing, it means presuming if I get an extra dollar, by definition somebody else loses a dollar.

Now, to normal people (in contrast to abnormal people like me *cough* who spend their free time thinking about economics and investing), this framework for thinking about money can seem quite reasonable. Logical even.

But here's the thing: the economy doesn't work that way.

The supply of money and wealth in an economy isn't fixed. Not even close. In reality, if you earn an extra dollar it generates more wealth for everyone else--the government included. This is why entrepreneurial bloggers like Mark Cuban say the most patriotic thing you can do for your country is to get rich. He's right.

Abundance Thinking
So, let's look at investing and taxation using the opposite of a scarcity mindset: an abundance mindset. Using abundance thinking, you'd work through last week's post and conclude that tax revenues and investment income may not be zero sum. In fact, our investment in a dividend paying stock not only provides the government with additional tax revenues, it also provides you with added income that you can use as you see fit. Which, intriguingly, can generate still more wealth and tax revenues.

Here's the important part: You can decide which framework to use. You can pick up the scarcity lens or the abundance lens to look at any problem, issue or challenge in life. But here's the problem: if you choose a scarcity mindset, you'll arrive at conclusions that on their face seem reasonable, but in reality, those conclusions will likely be both wildly incorrect and deeply disempowering.

Why? Because when you follow scarcity-based logic all the way to its conclusion, everybody loses. You won't make the dividend-paying stock investment because you've pre-emptively concluded that you'd be "cheating" the government. Which means you won't earn any incremental investment income. Worse, the government doesn't get any incremental tax revenues because you decided not to take action. You've caused yourself, the economy and our government to lose out.

And the end result is the most disempowering of all: you won't bring yourself any closer to financial independence. In other words, everybody loses--or wins--because of the framework you selected to look at the problem.

Readers, share your thoughts!

For Further Reading:
1) The Seven Habits of Highly Effective People by Stephen Covey. Covey is widely credited for coining the phrases "scarcity mentality" and "abundance mentality."

2) Cooking Up Advantages Out of Disadvantages at Casual Kitchen. A zero-sum mentality doesn't just mess up your thinking in the domains of money and investing. It leads you to disempowering conclusions about food and health too. See also: Uninstalling Limiting Beliefs With Healthy Food.

3) The Most Patriotic Thing You Can Do at Blog Maverick. This post is an exceptional example of abundance thinking in action.

4) The Abundance Mindset via Steve Pavlina. A useful summary of the concept of abundance. Also worth reading for Steve's discussion of what he calls the "outrage script."

5) Overcoming Jealousy via Steve Pavlina. Jealousy is a side-effect of a mindset rooted in scarcity.

6) Sufficiency at The Art of Non-Conformity. A good essay from Chris Guillebeau on how, for most of us, a scarcity mindset is the default mode.

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chacha1 said...

Great collection of links. I guess I've never really suffered from the scarcity mindset because my family has been so self-sufficient.

And I don't necessarily mean that we grew all our own food (although my mother certainly did maintain a kitchen garden whenever she could) ... but that we lived with what we had and made the most of it.

There was never a time - even when we were good and broke - when my parents let slip any hint that something outside of themselves was somehow keeping them down. They owned their choices and worked to improve their situation.

The scarcity mentality goes along with oppression mentality, in my observation, and they are both self-destructive.

Incidentally, the comments on Mark Cuban's piece (what I read of them) were profoundly depressing.

Daniel said...

I like your thinking Chacha, that's a useful parallel between a scarcity mentality and an oppression mentality (great phrase by the way!). Once again it's a lens you can decide to use... or decide not to use.

Also, you're exactly right about the comments on Mark Cuban's piece... from my experience (been reading him for years), it's generally the case on his blog that all the value is in his posts. Almost never is there any value in the comments.


chacha1 said...

I grew up in the poor rural South, and I saw a lot of the intersect between scarcity and oppression mentality.

A lot of people who spent their money on cigarettes, beer, customizing their trucks, buying lottery tickets, or betting on races because they "couldn't get ahead" and "what was the point" of spending it a little bit at a time to fix up the falling-down shack they lived in, or saving it (heaven forbid) for the inevitable vehicle breakdown or for (inconceivable!) college for their kids.


Daniel said...

I hear you. But the thing is, I also get that perspective of "what's the point?" too. I think it really depends on how far downfield you're really willing to look in your life. I think for a lot of people the future seems vague and much more distant than it really is [cf: the Stanford marshmallow experiment].

In the instances where I've helped people do financial planning, I've found that it really helps people map things out if you can help them to make the future seem real and tangible.

One simple example: I walked a young, highly educated couple through the true cost of their student loans--not in terms of the dollars of each payment they're making now, but in terms of the aggregate that they will have paid when the loan term is over. I could see the lightbulbs going on in their head as they worked it through. Before, they had just accepted and acclimated to making monthly payments. Only after they worked it all out did it make sense to them to start working down that loan aggressively. And these are really bright, educated people--it's not about intelligence or education, although these things can help. It's just that they just never thought about it this way.


Darby said...

As an econ major (aka thrill seeker, brain donor, etc.) This article is a great start to a road of reconciliation of what I studied and learned to believe vs how the world works. In Econ 101, we mistakenly learned that Economics is the study of production and distribution of scarce resources. Applying the abundance mindset would transform this discipline! I already see people from Adam Smith to Karl Marx turning over in their graves! Such as what happens when assumptions don't hold up to real world events!