Spending Blind: How Behavioural Biases Drive Consumer Debt
Who doesn't adore a good dose of retail therapy? Treating yourself to a shopping spree can be just the thing to lift your spirits. But, let's be real – getting too caught up in the thrill of swiping that credit card and juggling all those shopping bags can lead you down a slippery slope. Before you know it, you might find yourself trapped in the all-too-common cycle of overspending. This post is all about how debt can impact consumers, both behaviourally and financially, and how to avoid becoming its next victim. So, let’s take a look on how you can keep your wallet intact!
Humans have always preferred instant gratification, and tend to assign stronger weight to payoffs closer to the present time when considering trade-offs between two future moments. In behavioural economics, they call this a ‘present bias’ and generally use it to describe impatience in decision-making. For example, a present-biased person might prefer to receive ten dollars today over fifteen dollars tomorrow, but wouldn’t mind waiting an extra day if the choice were for the same amounts one year from today versus one year and one day from today. In addition to a present bias, many overvalue current consumption while underestimating future financial risks. It implies a motive for consumers to constrain their own future choices. Furthermore, while optimism is generally good, too much of it can cause one to misjudge future financial situations and end up excessively borrowing to the point where it exceeds their ability to return even the principal. All of the above are different behavioral factors that greatly hinder consumers making the right choices for their financial situations and contribute to debt accumulation.
Society also plays a part in the debt crisis. Nowadays, materialism among the younger generations is becoming increasingly prominent. When accompanied by impulsivity, credit cards can be easily misused. Consumers get to buy things without lowering that number in their bank accounts, that instant, but the aftermath of extravagant spending when the credit card bill comes in at the end of the month is often neglected and overlooked. Besides, the common phrase “you only live once”, also commonly used as YOLO, further exacerbates the issue by heightening people’s fear of missing out (FOMO). Many people are pressured into buying unnecessary luxury goods by their peers to fit in. When valuing their societal image more than their financial well-being, they can get warped into a cycle of unhealthy spending.
Furthermore, financial institutions and markets also have their role in pushing people towards these irresponsible spending habits. To begin with, the lack of regulation of services offered by institutions greatly increases the general public’s access to credit. With advertisements for credit cards everywhere in the city, those who lack financial knowledge become much more prone to higher debt levels. In economics, interest is the cost of present consumption to the borrower. When inflation and interest rates are reduced, the cost of borrowing is technically reduced. This gives people the pretense that they can take out more loans, subsequently piling up more debt under their name.
Too much consumer debt accumulation in an economy can be detrimental, hence it is important to educate the public on how to make sound financial decisions. Some behavioural economists have proposed setting up programs that combine simple decision aid, social commitment, and reminders like the Borrow Less Tomorrow scheme. While still a novel idea due to the lack of debt reduction services in the market, it could help reduce consumer credit card debt.
To summarise, debt affects consumers through behavioural biases and societal pressures. As information continuously becomes more accessible, it is important to steer consumers in the right direction to enhance financial literacy and foster good decision making when it comes to purchases. Financial health is just as important as one’s physical or mental health, so make sure you take care of it.
