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Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Making Poor Choices with Credit Card and Other Types of Debt
In the back of your mind, you know that getting into debt is a bad idea. You have also realized that credit cards (whether student credit cards or not) and “creative” mortgage loans may not offer the best funding options. However, as humans, behavioral economics come into play. Just because something is rational does not mean that humans will choose to do it. Credit card use and credit card debt are prime examples of how human desires and poor choices manifest themselves in undesirable situations.
Cass Sunstein is one of the most prominent figures in behavioral economics. He, along with co-author Richard Thaler, points out in Nudge: Improving Decisions about Health, Wealth, and Happiness that people often make poor choices and are amazed by the stupidity of their decisions. This is often the case with credit cards. Credit card use is so common that it is hard to believe that the cards would be abused or used irresponsibly.
“There’s no reason to think that markets always drive people to what’s good for them.”
—Richard Thaler
Traditional economists say that all humans will choose a rational path, leading to maximum wealth, when making economic decisions. By that logic people would never drive themselves into credit card debt. Behavioral economists point out that this theory assumes that humans are rational beings, which they are not.
Poor-decision making often contributes to credit card debt in several ways. People buy more than they need or purchase items that they simply “want.” Then, they refuse or are unable to pay more than the minimum balance each month. By charging more than they have, people cannot pay off their debt. As the months go by, and they purchase more items, the outstanding balances grow.
Our money system doesn’t help either. People are allowed, and often encouraged, to spend money that they don’t have. In their short-sightedness, they fail to recognize that the bills will mount if they aren’t careful. It is this departure from rational and orderly theories of economics, which encourage people to buy only what they can afford with the money they have at any given time, that eventually leads to credit card abuse and debt.
Next: Why We Get in Debt, Part 2: Lack of Self-control
All posts in this series:
Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations
