Winning the Battle but Losing the War: The Psychology of Debt Management

Moty Amar, Dan Ariely, Shahar Ayal, Cynthia E. Cryder, and Scott I. Rick
Journal of Marketing Research (JMR)
Current average rating    
Key Takeaways
Executive Summary
According to the Federal Reserve, the total outstanding credit card debt carried by Americans reached an all-time high of $975 billion in 2008, a figure that will surely remain high as more people reach for the plastic just to make ends meet. Additionally, consumers who use credit already hold over five credit cards on average (Experian 2009). As cautious lenders cut credit limits and force indebted consumers to find new sources of credit, the number of different debts consumers carry is likely to further increase.

When consumers carry multiple debts, how do they decide which debt to repay first? From a normative perspective, debt management is simple: To minimize the total amount of debt across loans, people should first pay the minimum payment for each debt, and then use all available cash to pay down the loan with the highest interest rate.

From a psychological perspective, however, there are several reasons to suspect that consumers might stray from normative principles when managing debt. Drawing on prior work on the psychology of goals and Prospect Theory, we hypothesized that indebted consumers are likely to focus on paying off individual debts, regardless of their interest rates. Becoming entirely debt-free is a difficult high-level goal that may prompt indebted consumers to adopt subgoals focused on paying off individual loans. Indebted consumers may focus on paying off small loans in particular. Because the motivation to achieve a goal increases as proximity to the goal increases, consumers may be more motivated to achieve goals that are proximal (e.g., paying off debts with small balances) than goals that are distal (e.g., becoming completely debt-free).

Moreover, Prospect Theory suggests that multiple losses (debts) are more distressing than a single loss of equivalent total value. Because small losses impose a disproportionately heavy psychological burden, eliminating a small debt may offer greater relief than making an equivalent reduction to a larger debt. Building on these multiple lines of work, we hypothesized that consumers saddled with multiple debts will primarily be motivated to reduce their total number of outstanding loans, rather than their total debt across loans, a phenomenon we refer to as debt account aversion.

We initially examined whether indebted consumers were debt account-averse in a series of field surveys. Consistent with debt account aversion, we found that multiple-debt holders devoted disproportionate effort toward paying off their smallest debt. Then, to experimentally examine how consumers manage multiple debts, we developed an incentive-compatible debt management game, in which participants were saddled with multiple debts and decided how to repay them over time. Four experiments revealed evidence of debt account aversion: Participants consistently paid off small debts first, even though the larger debts had higher interest rates. We also found that restricting participants’ ability to completely pay off small debts, and focusing their attention on the amount of interest each debt has accumulated, helped them reduce overall debt more quickly.

Moty Amar is Assistant Professor of Marketing at the Ono Academic College (OAC), Israel. He earned his PhD in Marketing from the Hebrew University of Jerusalem and was a postdoctoral research fellow at the Fuqua School of Business in Duke University. His research focuses on consumer financial decision making and placebo effects in marketing.

Dan Ariely is the James B. Duke Professor of Psychology & Behavioral Economics at Duke University. In addition to appointments at the Fuqua School of Business, the Center for Cognitive Neuroscience, the Department of Economics, and the School of Medicine at Duke University, Dan is also a founding member of the Center for Advanced Hindsight, and the author of the New York Times bestsellers Predictably Irrational, and The Upside of Irrationality.

Shahar Ayal is Assistant Professor of Psychology at the Interdisciplinary Center (IDC) Herzliya. He earned his PhD in social psychology from Tel Aviv University and was a postdoctoral research fellow at the Technion and then at the Fuqua School of Business in Duke University. His research focuses on heuristics and biases, risk perception, and unethical behavior and has been published in a variety of outlets, including the Journal of Personality and Social Psychology, Psychological Science, and the Journal of Behavioral Decision Making.

Cynthia Cryder is an Assistant Professor of Marketing in the Olin Business School at Washington University in St. Louis. She earned her PhD in Behavioral Decision Research and Psychology from Carnegie Mellon University in 2009. Her research focuses on charitable donation decisions and financial decision making and has been published in journals including Psychological Science, Social Science and Medicine, and the Journal of Consumer Research.

Scott Rick is the Arnold M. & Linda T. Jacob Assistant Professor of Marketing at the University of Michigan’s Ross School of Business. He earned his PhD in Behavioral Decision Research from Carnegie Mellon in 2007, where he was supported by a fellowship from the National Science Foundation. His research focuses on the emotional causes and consequences of spending money and has been published in a variety of outlets, including the Journal of Consumer Research, Games and Economic Behavior, the Annual Review of Psychology, and Neuron.

Journal of Marketing Research, Volume 48, Special Issue 2011
View Table of Contentsa


Author Bio:

Moty Amar, Dan Ariely, Shahar Ayal, Cynthia E. Cryder, and Scott I. Rick
Add A Comment :

Become a Member
Access our innovative members-only resources and tools to further your marketing practice.