Pragma Synesi – interesting bits

Compendium of interesting bits I come across, with an occasional IMHO

How ‘minimum payments’ screw you

You could write a book on the myriads of subtle ways credit card companies extract every penny they can get from you, but this is a new one for me: people who wanted to pay part of their balance paid less when a minimum payment was shown on their statement. From The Economist print edition:

Credit cards

A nudge in the wrong direction

Dec 11th 2008

Minimum-payment requirements may be counterproductive

EVEN the best-intentioned policies can fall prey to the quirks of human behaviour, as a new study of credit-card repayment finds. In order to stop borrowers from being socked by an accumulation of unpaid interest whenever they fail to pay their bill, there are laws requiring credit-card companies to specify a minimum payment in each statement. But these may do more harm than good, suggests Neil Stewart, a psychologist at Warwick University.

Mr Stewart was studying a phenomenon known as “anchoring”. Psychologists have found that being exposed to numbers, even irrelevant ones, can affect people’s decisions. For example, diners tend to spend more in a restaurant named “Café 97” than in one named “Café 17”. Since minimum payments on credit-card statements are usually small amounts, Mr Stewart wondered whether seeing an actual amount might make people pay less than they would otherwise have done. That is exactly what he found.

Mr Stewart presented 413 people with mock credit-card bills of £435.76 (about $650) that were identical—except that only half mentioned a minimum payment of £5.42. Participants were asked how much they would pay.

Among those inclined to pay the bill in full, the presence of the minimum payment hardly made any difference. However, those who wanted to pay just part of it handed over 43% less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.

Economists will be interested in the results. Behavioural economists advocate “nudging” people in the right direction by subtly altering the choices that they are presented with. The insistence on minimum payments is a variation on this theme. Supposedly, those confronted by minimum-payment requirements should pay at least that much. In fact Mr Stewart’s work suggests that people who would have paid a lot, paid less. In economics, as in life, nudging needs to be done carefully.


May 24, 2009 - Posted by | behaviour, decision making, economics, psychology | , ,

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