Abstract

http://ssrn.com/abstract=1760528
 
 

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


Moty Amar


Ono Academic College

Dan Ariely


Duke University - Fuqua School of Business

Shahar Ayal


Duke University

Cynthia Cryder


Washington University in Saint Louis - John M. Olin Business School

Scott Rick


University of Michigan, Stephen M. Ross School of Business

May 5, 2011

Journal of Marketing Research, Forthcoming

Abstract:     
When consumers carry multiple debts, how do they decide which debt to repay first? Normatively, consumers should repay the debt with the highest interest rate most quickly. However, because people tend to break complicated tasks into more manageable parts, and because losses are most distressing when segregated, we hypothesized that people would pay off the smallest loan first to reduce the total number of outstanding loans and achieve a sense of tangible progress toward debt repayment. 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. Consistent with our hypothesis, 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.

Number of Pages in PDF File: 40

Keywords: Financial Decision Making, Debt Repayment, Debt Consolidation, Subgoals, Credit Cards

JEL Classification: C90, C91, D10

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Date posted: February 13, 2011 ; Last revised: June 1, 2011

Suggested Citation

Amar, Moty and Ariely, Dan and Ayal, Shahar and Cryder, Cynthia and Rick, Scott, Winning the Battle But Losing the War: The Psychology of Debt Management (May 5, 2011). Journal of Marketing Research, Forthcoming . Available at SSRN: http://ssrn.com/abstract=1760528

Contact Information

Moty Amar
Ono Academic College ( email )
Tzahal Street 104
Kiryat Ono, 55000
Israel
Dan Ariely
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
(919) 381-4366 (Phone)
Shahar Ayal
Duke University ( email )
100 Fuqua Drive
Durham, NC 27708-0204
United States
Cynthia Cryder
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Scott Rick (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
HOME PAGE: http://webuser.bus.umich.edu/srick/
Feedback to SSRN


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