Life in the Red

The New York Times:

The belt-tightening was the easy part. Cancel the cable. Skip the air conditioners. Ration the cellphone, unplug the wireless Internet, cook rice and beans — done, and done.

The larger problem for LaKeisha Tuggle, 33, who had lost her public relations job, was cash flow: After her unemployment insurance and savings ran dry, there was none. So she did some creative financing, juggling loans, credit lines, tax refunds and educational grants, to stay afloat — until a Sunday in September of 2011, when it looked as if the jig was up. She awoke to a foreclosure notice on her front door that announced her home would be auctioned in a week.

“One week?” said Ms. Tuggle, a single mother who was more than $20,000 behind on her house payments. “I had no idea what to do.”

The usual explanations for reckless borrowing focus on people’s character, or social norms that promote free spending and instant gratification. But recent research has shown that scarcity by itself is enough to cause this kind of financial self-sabotage.

“When we put people in situations of scarcity in experiments, they get into poverty traps,” said Eldar Shafir, a professor of psychology and public affairs at Princeton. “They borrow at high interest rates that hurt them, in ways they knew to avoid when there was less scarcity.”

Read the whole story: The New York Times