In the second chapter of Mark Twain’s The Adventures of Tom Sawyer the protagonist is in a spot of bother. He has been involved in another scrap and as punishment is tasked by Aunt Polly to spend his precious Saturday whitewashing ‘thirty yards of board-fence nine feet high’. It seemed that a bleak day lay ahead for poor Tom, yet in a matter of hours boys from the town were queuing up to take a turn with the brush. Not only that, but they were paying Tom for the privilege.

How did he manage such a feat?

He applied some behavioural tricks to transform the situation, using the power of framing and scarcity.

Tom Sawyer has some lessons for investors.

As he was beginning his work on the fence, Tom was approached by Ben Rogers, a boy from the town.

Ben began to ridicule Tom’s predicament:

‘Say, I’m going in a-swimming, I am. Don’t you wish you could? But of course you’d druther work, wouldn’t you?’

Tom desperately wished he could stop painting and go swimming but he didn’t let on. Instead, he changed the frame:

‘What do you call work?’

‘Why, ain’t that work?’

‘Well, maybe it is, and maybe it ain’t. All I know is that it suits Tom Sawyer.’

Tom re-frames the situation. Painting isn’t a chore; it is what he wants to be doing. He would rather be whitewashing than swimming.

As Tom lovingly returns to his meticulous task, Ben’s perspective is changed entirely. He stops mocking Tom, instead he asks for a turn.

Tom reframes the situation by evoking a key driver of our behaviour – the notion of scarcity.

Painting the fence is not arduous graft, it is a rare privilege that is not available to everyone.   

‘Does a boy get a chance to whitewash a fence every day?’

‘I reckon there ain’t one boy in a thousand, maybe two thousand, that can do it in the way it’s got to be done’.

Tom was able to spend the day relaxing and ponder how he had managed to get three coats of whitewash on the fencing, whilst almost bankrupting all the boys in the town.

Why do the actions of Tom Sawyer matter? Because framing and scarcity are critical to how we make decisions and are vital concepts for investors to understand.

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We can consider framing to be the lens through which we interpret the world. The mental models that we apply to inform our view on a particular situation. The frames we apply can be intransigent and all-encompassing, such as a strident political view which influences how we understand almost everything. They can also be or more focused and potentially malleable – like Ben’s view on the joys of whitewashing a fence.

Some frames can be easily shifted, others cannot.

We spend a great deal of time trying to change the mind of people we disagree with by to them explaining how we see things – this is likely to be fruitless. We need to understand that they are viewing the evidence through an entirely different frame. Our starting point in the face of differing opinions should be to try and view the situation through the other person’s frame.

Many intractable investment debates are a faming problem. Take the inherent friction between a strong advocate of ESG-focused investing and a proponent of the idea that shareholder returns are paramount above all else. No amount of discussion and deliberation about the specific evidence is likely transform any side’s viewpoint, it is a framing problem. Understanding the model each side is applying is likely to be far more productive than exchanging different studies with contrary evidence.

Some of our most significant investment mistakes are also likely to be a problem of framing. It is not that we made a wrong call on a particular market or macro-economic event, it is that we were viewing the world through an entirely incorrect frame. An investor whose initial experience was in the 1970’s is likely to have an entirely different model for thinking about interest rates and equity markets, than someone who has only experienced the most recent decade.

The major challenge for investors is that markets are complex adaptive systems – how they function through time will evolve. Applying one overarching frame is unlikely to be a successful approach. We need to understand the frames that we use which are likely to prove robust through time (short-term market movements are unpredictable noise) and those which are subject to change (bond yields always fall if equities are weak).

It is important for investors to think more explicitly about framing – why we see the world or the situation as we do. There are three key benefits:

1) It allows us to better challenge our own views. Our beliefs about a subject are likely the result of the specific frame we are using. We need to worry less about the information we are observing and more about the lens through which we are looking upon it.

2) It enables us to understand the perspectives of others. It is easy to disregard the viewpoints of people we disagree with, without ever attempting to understand the frame they are using.

3) It can assist us in encouraging good investment behaviour. How can we influence people to become long-term investors? Think about the frames they are applying and try to shift them.

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Tom Sawyer did not just change the framing of his task by highlighting how much he enjoyed it, he applied the scarcity principle. We desire things more and ascribe them a higher value if we believe they are scarce.

The perception of low or restricted supply increases the demand and price.

The concept of scarcity and how it influences our behaviour is critical to how we consider the value of different assets or investments. It is an idea that has seemingly become increasingly relevant in recent years.

In simple terms we can think of an asset or object as possessing value for three reasons:

1) It has some use or utility.

2) It provides us with a cash flow (often related to its utility).

3) It is scarce.

If something has no or little utility and does not generate a cash flow, then its value is likely to come from scarcity. It seems unlikely that something that is abundant and has no use will be of value.

To create value without utility, we need scarcity.

Of the three drivers of value, scarcity is the exception. This is because its perceived worth is not driven by the asset itself but entirely by the perceptions others hold about it. Whilst the value of all assets are impacted by the beliefs of others, most are underpinned by utility or cash flows.

Why can scarcity create value, or at least the perception of value? Social proof is perhaps the critical element – our view is informed by the behaviour of others. It must be valuable because everybody else thinks it is.

The information we take from the actions of others is compounded by the fear that we are being excluded – limitations in supply make us view the situation through the frame of loss. What is it we are missing out on?

The more boys from the town turned up to help paint Aunt Polly’s fence, the more other boys wanted to join the queue.

As much as scarcity value is about other people, it is also about us. Scarcity is deeply intertwined with signalling – the decisions we make to manage how we are perceived. Items that are rare or difficult to attain are attractive because they say something about us, about the group we belong to. Nobody buys an expensive, branded t-shirt because it has significantly more utility than a simple option, they do it because they want to signal something. Here there is a circular relationship between scarcity and price. The higher the price of something the more scarce or difficult it is to obtain, which makes it worth more as a signalling tool.

The other vital element of scarcity is the narrative. Not all items or assets that are scarce are deemed to be valuable, particularly if they are useless. So, the story matters. The story also becomes more powerful the more the perceived value increases. Price change begets story begets price change. And so, the cycle continues.

Assets with a value driven solely by scarcity can be dangerous for investors because there is no supporting worth or utility. We are beholden to the behaviour of others. Yet, we should not be too dismissive of a factor that can exert a huge influence on the behaviour of financial markets and asset prices.

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Tom Sawyer elegantly uses the framing of scarcity to transform the perception of his situation and change the behaviour of others.

He had discovered a great law of human action, without knowing it – namely in order to make a boy covet a thing; it is only necessary to make the thing difficult to attain.

He changed the frame. What frame are you viewing the world through?

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Twain, M. (19876). The Adventures of Tom Sawyer,