The Hedonics of Debt

Abstract

Psychologists and economists often discuss the “pain” of paying for our purchases. Four experiments examine how people evaluate prospective debt payments, analyzing how different features of a loan (down payment, final payment, duration, monthly payments) affect willingness to accept the loan. Akin to previous findings on physical pain, participants exhibited duration neglect and overweighted final moments. However, participants also focused heavily on the monthly or average payment (unlike in retrospective studies of physical pain where only peak-end moments seem to count). In Experiment 2, participants’ willingness to accept the loan was not significantly diminished by making it more expensive through keeping the same monthly payment but extending the length of the loan by 40% (evincing duration neglect). Further, in Experiments 3 and 4, we show that participants increased their willingness to buy if loans were made longer and more expensive by adding smaller, less “painful” payments to the end.

Attitudes, behavior, and institutional inversion: The case of debt.

“…Individuals exist within an environment; that environment has affordances and constraints that facilitate or inhibit people from acting. Given forces such as people’s tendency to engage in hyperbolic discounting, the ease and seeming “painlessless” of paying with credit (Prelec & Loewenstein, 1998; Shin et al, 2020), and the various techniques that producers use to encourage spending (Akerlof & Schiller, 2015), people who are offered greater amounts of credit may find it relatively easy to run up debt. In contrast, when credit is less available, this is harder to do.…”

Unlocking the neural mechanisms of consumer loan evaluations: an fNIRS and ML-based consumer neuroscience study

“…Decisions regarding credit offers are potentially influenced by various internal factors, such as the principal amount, interest rate, and repayment period, all of which comprise both emotional and rational considerations, as well as by external factors. For instance, provided that monthly payments remain within the borrower’s affordability range, there is a propensity for price escalation as consumers exhibit a tendency to enter into extended payment obligations ( Shin et al, 2020 ). An individual’s decision to take on a loan appears to be influenced by a combination of factors, including their personal history, their current economic situation, and episodic emotions such as perceived risk and uncertainty about the future ( Lerner et al, 2015 ).…”