Daniel's notes on The Great Mental Models, Volume 4

A mental model is simply a representation of how something works. We use models to retain knowledge and simplify how we understand the world. We can't relearn everything every day, so we construct models to help us chunk patterns and navigate our world more efficiently.

In economics, scarcity means a limited supply of things people want or need, such as money, time, or raw materials. One way to look at the development of human societies over time is as a process of overcoming different kinds of scarcity. Technology enables us to increase our access to scarce resources or to decrease our requirements for them.

Where there is scarcity of something, its price goes up. For a resource to have economic value, it must be both scarce and desirable. If something is scarce, but no one wants or needs it, then it has no or low value. If something is desirable but not scarce, its value is also low or nonexistent.

Perceptions of scarcity impact our ability to make decisions. Not only does scarcity trigger our biological instinct for self-preservation, it often results in making trade-offs. We become fenced in by perceived limits, whether they reflect actual limits or not.

Experiencing temporary scarcity of something essential can impact our actions for a long time after. For example, someone who grows up in poverty and then, later in life, makes a lot of money may continue to fear running out of money or may retain frugal habits that are no longer needed. The Great Depression is an example of this; many people who grew up during the Depression maintained the same resource-preserving behaviors well after it ended.

When one resource becomes more abundant, something else tends to become the bottleneck restricting how much we can consume. Making a lot of money, say, can come at the expense of not having enough time to spend it. We may need to moderate our use of one resource to allow us to realize the benefit of another.

if we expect something desirable to be in short supply, we may behave in detrimental ways. The possibility of a short supply of a resource can trigger the urge to hoard as much of it as possible for ourselves, as we saw with the hoarding of basics like toilet paper during the early days of the COVID pandemic.

Scarcity can also perpetuate itself. When access to a resource has previously been severely limited, leading to high economic value, it creates strong incentives to maintain its scarcity, even if the resource actually becomes abundant. Take diamonds: for centuries, their supply was tightly controlled, making them expensive. Now we can grow flawless diamonds in labs, but the industry still works hard to preserve the perception of scarcity. They're not selling diamonds; they're selling the story.

Scarcity is the business model of the luxury sector. Luxury brands take advantage of one particular aspect of psychology: the fact that the more scarce something is, the more we want it. Hermes can make more Birkin bags but chooses not to. Fewer than 100,000 Birkins are made every year, and the process of buying one is famously difficult-it involves either waiting for months or having a purchase history with Hermès. This controlled scarcity is key to the high prices of the luxury sector.

In our personal lives, scarcity can be a great motivator. When we think about reducing scarcity, maybe we think about learning new skills to increase our income. Maybe we think about changing jobs to earn a higher salary or decrease our commute. In both cases, we are aiming to give ourselves more of a resource, either money or time, and therefore to reduce the scarcity of those elements in our lives.

When considering how to reduce scarcity, it's equally important to consider what effects that reduction in scarcity might have. As in the example of lottery winners, we need to do a little second-order thinking and say, "Now that I have more money or time, what am I going to do with it?" It's just as important to think, "If I do those things, then how does my life change?"

Will a higher salary or net-worth solve most of our problems? Not exactly. Due to lifestyle creep (increasing your living standard to match a higher salary), many people with high salaries spend most of what they make and feel the same financial pressures as the rest of us. Whatever economic rung of the ladder you're on, that cohort has its own financial cues, expectations, and mores. It's about acknowledging that changes in one part of a system will often generate changes in another part.

The printing press transformed the nature of preservation of written text, changing texts from something you tucked away for safekeeping to something you shared widely. Now, you preserved something by printing it on paper, many times, and sending it out into the world. "The notion that valuable data could be preserved best by being made public, rather than by being kept secret, ran counter to tradition... and was central both to early modern science and to Enlightenment thought." p.s. same approach is used by Bitcoin to preserve the ledger from being tampered, it shares it with tens of thousands of nodes.

This is the lesson for our lives. Time and money tend to be our two most fundamental resources, although there can be others. When you reduce the scarcity of a core resource in your life, the effects are likely to be significant. It is thus worth some effort to identify such reductions as they occur and plan for managing those changes as best you can. Abundance has its own consequences.

Some businesses operate with a scarcity mentality, removing shock absorbers and operating lean, with just enough resources to produce the day's goods. This model is prone to disruption with the slightest hiccup and signals to employees that they're in a culture of scarcity, triggering our biological instinct toward self-preservation. We subconsciously hoard things of value to gain an individual advantage.