Experimental Evidence on Saving and Debt: Insights into Consumer Behavior
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Experimental Evidence
on Saving and Debt
DR. BRIANNA MIDDLEWOOD | RESEARCH PSYCHOLOGIST
Disclaimer: The views expressed here are my own and do not necessarily represent the
views of the CFPB or the United States.
Labeling Debt as Ordinary versus
Exceptional to Motivate
Consumers to Increase Credit Card
Repayments
REMI TRUDEL
SIMON J. BLANCHARD
KERI L. KETTLE
Problem & Question
Problem:
There is a lot of credit card debt, and we’d like people to
pay it down.
Question(s):
Can we leverage what we know about mental accounts
and norms to nudge people to pay down more of their credit card
debt?
1.
Specifically, do people find it less acceptable to use credit cards for
ordinary, as opposed to exceptional, purchases?
2.
And does this negative view lead consumers to pay more on ordinary
balances when their ordinariness is pointed out?
Design & Sample
STUDY 1 – MTURK (N= 179)
•
All participants viewed
hypothetical scenario with two
credit cards
•
One card with more ordinary
expenses, one with more
exceptional expenses.
•
Outcome: Allocate $600
STUDY 2 – STUDENTS (N = 240)
•
Participants assigned to 1 of
4 hyp. scenarios with one
credit card:
•
2(Debt Type: more ord. or
more exc. ) X 2 (Debt Labeling
:
yes, no)
•
Outcome: Allocate $400
surplus
Design & Sample
STUDY 3 – MTURK (N = 125)
•
Participants assigned to 1 of 2
cards, one card with more
ordinary or exceptional majority
of expenses
•
Outcome: “Is it ok that Alex has
these types of expenditures
when trying to get out of debt?”
STUDY 4 – HELLO WALLET (N = 3777)
•
Examined effect of unusual
spending notifications
conditional on the extent to
which their debt was more
exceptional (larger amounts) vs.
ordinary
Findings
Study 1, 2, 3:
o
People put more money toward ordinary debt when it is labeled as
ordinary
Study 3:
o
“Alex” has more financial control when his debt is ordinary
o
Less acceptable to have ordinary debt
Study 4:
o
An unusual spending alert when most expenses are small increased
repayment, but when most expenses are large decreased repayment
Answer
Maybe
yes
!
Participants
did
increase payments to ordinary credit card
statement when it contained mostly ordinary expenses.
They also did so when a statement was flagged as something
that “Alex” would not be able to repay.
Participants
do
find it less acceptable to have ordinary debt.
Discussion
o
There are alternative explanations for paying more on ordinary debt?
•
The fact that most payments are ordinary signals that the card is used a lot. So, payments
could be higher because people want to free up space on a card that is used a lot.
•
Consistent with the finding that Alex has more financial control when his bill is more
ordinary. P’s may respond to this question thinking Alex uses a credit card for all spending
with the intention of paying it off every cycle.
o
Participants view Alex’s debt as a
bill
until it’s labeled as “debt?”
o
The payment questions in studies 1 and 2 sounds like people are just told about a credit
card statement, so it’s not clear whether it’s “debt.”
o
In study 3, P’s are asked in the question “is it okay that…trying to get out of
debt.”
So at
that moment, you’ve signaled to people that this is not just a bill, it’s “debt”
o
And the repayment question now is specifying that he can't repay (so he overspent on
ordinary things)
Discussion
o
Measuring the mediator
•
Always the possibility that measuring something will result in an observed effect of that
thing, so measuring alternatives and manipulating the mediator in follow-ups is important
o
Hypotheticals
•
Do people tend to know how their
own
spending is shaking out in terms of ordinary
versus exceptional?
•
Interested in how consumers define ordinary vs. exceptional, and whether that is
something that is subject to context or motivated reasoning.
•
Is “ordinary” debt better defined qualitatively or in terms of relative size, as in S4?
What is credit
card “Debt?”
o
Is it your credit card balance?
Statement? The amount left over after
you make your payment?
o
Does it depend on whether you
could
pay off the whole thing, but you
choose
not to? How is this different from closed-
ended credit?
Open-ended debt is psychologically
interesting. In the absence of firm rules for
how to pay it down, consumers use their
own
rules, which are subject to social and
emotional contexts.
Does Saving Cause Borrowing?
PAOLINA MEDINA
MICHAELA PAGEL
Problem & Question
Problem
: We want to nudge people to save more, but there’s a risk
that this ultimately results in some people taking on more debt.
Question
(s): Does nudging people to save ultimately mean they take
on more debt to meet expenses? Might this effect be stronger for
certain groups, like those who tend to co-hold savings and debt at the
same time?
Design & Sample
Customers of
Banorte, a
Mexican bank
Answer
o
No, nudges to increase savings amounts do not appear to
lead to increased borrowing.
o
A decrease in
discretionary spending
likely underlies the
observed increase in savings for the treatment group
o
As opposed to taking on more credit card debt.
Discussion
o
It’s tough with small treatment effects to evaluate
whether the treatment is “harmful.”
o
Really cool idea to try to tackle this issue using machine
learning to identify what seem to be the “most treated”
groups or the groups that are most likely to be harmed.
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o
This question motivates a lot of cool
research, but…
o
What about removing barriers to savings
products or creating new products to
help people save more easily?
o
Bureau is forming partnerships with Fintech
companies to learn about new products
o
What about interventions that reduce
the cost of banking services?
o
This report
says “vulnerable households
spend 13% of their income in 2020…on fees
and interest related to everyday financial
services”
If time…
Bureau Research:
Balancing Savings and Debt
When asked if savings should be used to pay down credit card debt,
people think that a good chunk should go to debt (~60%), but that
another chunk of savings should be retained.
This is true even if the credit card debt exceeds the savings by quite a
lot, even if the savings is twice the amount of the debt.
Dr. Brianna Middlewood, a research psychologist, presents experimental findings on motivating consumers to pay down credit card debt by labeling debt as ordinary or exceptional. The research investigates if nudges based on mental accounts and norms influence repayment behaviors, revealing that people allocate more funds towards ordinary debt when it is labeled as such, indicating a potential strategy to encourage debt reduction. The studies highlight the impact of framing debt as ordinary or exceptional on repayment attitudes and behaviors.
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Presentation Transcript
Experimental Evidence on Saving and Debt DR. BRIANNA MIDDLEWOOD | RESEARCH PSYCHOLOGIST Disclaimer: The views expressed here are my own and do not necessarily represent the views of the CFPB or the United States.
Problem Question Design & Sample Findings Answer Discussion
Labeling Debt as Ordinary versus Exceptional to Motivate Consumers to Increase Credit Card Repayments REMI TRUDEL SIMON J. BLANCHARD KERI L. KETTLE
Problem & Question Problem: There is a lot of credit card debt, and we d like people to pay it down. Question(s): Can we leverage what we know about mental accounts and norms to nudge people to pay down more of their credit card debt? 1. Specifically, do people find it less acceptable to use credit cards for ordinary, as opposed to exceptional, purchases? 2. And does this negative view lead consumers to pay more on ordinary balances when their ordinariness is pointed out?
Design & Sample STUDY 1 MTURK (N= 179) STUDY 2 STUDENTS (N = 240) All participants viewed hypothetical scenario with two credit cards One card with more ordinary expenses, one with more exceptional expenses. Outcome: Allocate $600 Participants assigned to 1 of 4 hyp. scenarios with one credit card: 2(Debt Type: more ord. or more exc. ) X 2 (Debt Labeling: yes, no) Outcome: Allocate $400 surplus
Design & Sample STUDY 3 MTURK (N = 125) STUDY 4 HELLO WALLET (N = 3777) Participants assigned to 1 of 2 cards, one card with more ordinary or exceptional majority of expenses Outcome: Is it ok that Alex has these types of expenditures when trying to get out of debt? Examined effect of unusual spending notifications conditional on the extent to which their debt was more exceptional (larger amounts) vs. ordinary
Findings Study 1, 2, 3: o People put more money toward ordinary debt when it is labeled as ordinary Study 3: o Alex has more financial control when his debt is ordinary o Less acceptable to have ordinary debt Study 4: o An unusual spending alert when most expenses are small increased repayment, but when most expenses are large decreased repayment
Answer Maybe yes! Participants did increase payments to ordinary credit card statement when it contained mostly ordinary expenses. They also did so when a statement was flagged as something that Alex would not be able to repay. Participants do find it less acceptable to have ordinary debt.
Discussion o There are alternative explanations for paying more on ordinary debt? The fact that most payments are ordinary signals that the card is used a lot. So, payments could be higher because people want to free up space on a card that is used a lot. Consistent with the finding that Alex has more financial control when his bill is more ordinary. P s may respond to this question thinking Alex uses a credit card for all spending with the intention of paying it off every cycle. o Participants view Alex s debt as a bill until it s labeled as debt? The payment questions in studies 1 and 2 sounds like people are just told about a credit card statement, so it s not clear whether it s debt. In study 3, P s are asked in the question is it okay that trying to get out of debt. So at that moment, you ve signaled to people that this is not just a bill, it s debt And the repayment question now is specifying that he can't repay (so he overspent on ordinary things) o o o
Discussion o Measuring the mediator Always the possibility that measuring something will result in an observed effect of that thing, so measuring alternatives and manipulating the mediator in follow-ups is important o Hypotheticals Do people tend to know how their own spending is shaking out in terms of ordinary versus exceptional? Interested in how consumers define ordinary vs. exceptional, and whether that is something that is subject to context or motivated reasoning. Is ordinary debt better defined qualitatively or in terms of relative size, as in S4?
o Is it your credit card balance? Statement? The amount left over after you make your payment? o Does it depend on whether you could pay off the whole thing, but you choose not to? How is this different from closed- ended credit? What is credit card Debt? Open-ended debt is psychologically interesting. In the absence of firm rules for how to pay it down, consumers use their own rules, which are subject to social and emotional contexts.
Does Saving Cause Borrowing? PAOLINA MEDINA MICHAELA PAGEL
Problem & Question Problem: We want to nudge people to save more, but there s a risk that this ultimately results in some people taking on more debt. Question(s): Does nudging people to save ultimately mean they take on more debt to meet expenses? Might this effect be stronger for certain groups, like those who tend to co-hold savings and debt at the same time?
Design & Sample Customers of Banorte, a Mexican bank 3,054,438 Control Treatment 374,893 7 savings nudges Weekly Biweekly
Answer o No, nudges to increase savings amounts do not appear to lead to increased borrowing. o A decrease in discretionary spending likely underlies the observed increase in savings for the treatment group o As opposed to taking on more credit card debt.
Discussion o It s tough with small treatment effects to evaluate whether the treatment is harmful. o Really cool idea to try to tackle this issue using machine learning to identify what seem to be the most treated groups or the groups that are most likely to be harmed.
o This question motivates a lot of cool research, but o What about removing barriers to savings products or creating new products to help people save more easily? o Bureau is forming partnerships with Fintech companies to learn about new products Why don t Why don t people people make themselves save more moreeven when it s super unreasonable to expect them to? ? save o What about interventions that reduce the cost of banking services? o This report says vulnerable households spend 13% of their income in 2020 on fees and interest related to everyday financial services
Bureau Research: Balancing Savings and Debt When asked if savings should be used to pay down credit card debt, people think that a good chunk should go to debt (~60%), but that another chunk of savings should be retained. This is true even if the credit card debt exceeds the savings by quite a lot, even if the savings is twice the amount of the debt.
