Edika G. Quispe-Torreblanca, Neil Stewart, John Gathergood, and George Loewenstein, “The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas.” Management Science 65(11): 5392-5410, November 2019.
• Is money fungible? Many studies show that the source of money influences how it is spent – for instance, “playing with house money”
• Consider the repayment of borrowed funds. Presumably the highest interest debt should be most rapidly repaid.
• But durable goods create a stream of future benefits, so perhaps people can reduce the psychological pain of paying by paying off debts of transient goods more rapidly than debts associated with durable goods.
• A vacation (a transient good) paid for in advance will be more pleasurable, by this accounting (“prospective accounting”) than the same vacation which is paid for after the fact.
• People will be more willing to pay interest for a durable good like a clothes dryer. Pre-paying for the dryer does not appreciably raise its hedonic payoff.
• These mental accounting effects might affect original decisions to make purchases, as well as how repayment occurs.
• A large field experiment is conducted, using UK credit card data.
• Nondurable goods are indeed much more likely to be paid off at the end of the month than similar bills for durable items – an effect that would be matched by something like a 15% increase in the APR on non-durable debt.
• Is money fungible? Many studies show that the source of money influences how it is spent – for instance, “playing with house money”
• Consider the repayment of borrowed funds. Presumably the highest interest debt should be most rapidly repaid.
• But durable goods create a stream of future benefits, so perhaps people can reduce the psychological pain of paying by paying off debts of transient goods more rapidly than debts associated with durable goods.
• A vacation (a transient good) paid for in advance will be more pleasurable, by this accounting (“prospective accounting”) than the same vacation which is paid for after the fact.
• People will be more willing to pay interest for a durable good like a clothes dryer. Pre-paying for the dryer does not appreciably raise its hedonic payoff.
• These mental accounting effects might affect original decisions to make purchases, as well as how repayment occurs.
• A large field experiment is conducted, using UK credit card data.
• Nondurable goods are indeed much more likely to be paid off at the end of the month than similar bills for durable items – an effect that would be matched by something like a 15% increase in the APR on non-durable debt.
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