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Why We Get in Debt, Part 2: Lack of Self-control
One of the main reasons people often get into debt has to do with short-sightedness and lack of self-control. Myopia occurs when objects at a distance appear blurry, while objects nearby are clear. Financial myopia is one of the causes of debt. When you only see what is in front of you and look at a purchase’s short-term benefits, you lose sight purchase’s long-term impacts.
“People often make poor choices – and look back at them with bafflement! We do this because as human beings, we all are susceptible to a wide array of routine biases that can lead to an equally wide array of embarrassing blunders in education, personal finance, health care, mortgages and credit cards, happiness, and even the planet itself.”
— Cass Sunstein
Related to the idea of financial myopia is the concept of hyperbolic discounting. This is another outlook that focuses on the short-term instead of the long-term. The idea is that you can have a smaller payoff immediately, rather than holding out for a larger payoff down the road. Again, this becomes a problem because of a lack of self-control. Rather than putting off a reward until later, people tend to want something now regardless of negative long-term effects.
Buying something expensive on a credit card is a good example of hyperbolic discounting and myopia. If you buy a $2,500 TV on a credit card, and you pay only the minimum every month, you could end up paying $4,000 or more for the TV because of the interest charges every month. Rather than having the self-discipline to save the $2,500 over the course of six or seven months, you finance your purchase with debt and it takes five or six years to pay it back — with interest.
The best way to counteract the effects of hyperbolic discounting- or myopia-induced debt is to exercise self-control in your spending. Stop to think about how much something really costs if you include interest charges. Also, remember that it often takes longer to pay something off than it does to save up the money to make a purchase.
Next: Why We Get in Debt, Part 3: Cumulative Cost Neglect
Previous: Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
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
