The Psychology of Credit Cards

Credit card minimum payments have an unintended side effect. Certainly, they help the small proportion of card holders who would otherwise make no repayment and thus experience interest compounding out of control. But, because of the psychological phenomenon of anchoring, including minimum payments reduces the repayments that everyone else makes and thus increases their interest charges. Pilot work is reported in Stewart (2009).

This research will develop the theory of anchoring to explain why such small variations in minimum payments will have large effects on actual repayments. A second objective is to examine interventions currently under discussion by UK and US regulators including the current warnings on the dangers of making only the minimum repayment and the suggestion of introducing tables relating repayments to interest charges.

Co-investigators:

William Matthews
Adam Harris
Dani Navarro Martinez

Funding

This research was funded by a 1-year ESRC grant.

Related Publications

Navarro-Martinez, D., Salisbury, L. C., Lemon, K. N., Stewart, N., Matthews, W. J., & Harris, A. J. L. (in press). Minimum required payment and supplemental information disclosure effects on consumer debt repayment decisions. Journal of Marketing Research.

Stewart, N. (2009). The cost of anchoring on credit card minimum payments. Psychological Science, 20, 39-41.

Media

Read the press release and listen to the podcast.

Decision by Sampling

Decision by sampling (DbS) is a theory about how our environment shapes the decisions that we make. Economic values—such as money, probability, and time—are valued by comparing them with a sample of values from memory. So how we feel about these attributes depends on the contents of our memory, which in turn depends on the environmental distribution of these values. This project tests the theory and explores its limitations.

Co-investigators:

Gordon Brown

Christoph Ungemach

Funding

This project was funded by a three-year ESRC grant.

Related Publications

Ungemach, C., Stewart, N., & Reimers, S. (2011). How incidental values from our environment affect decisions about money, risk, and delay. Psychological Science, 22, 253-260.

Stewart, N. (2009). Decision by sampling: The role of the decision environment in risky choice. Quarterly Journal of Experimental Psychology, 62, 1041-1062.

Stewart, N., Chater, N., & Brown, G. D. A. (2006). Decision by sampling. Cognitive Psychology, 53, 1-26.

Stewart, N., & Simpson, K. (2008). A decision-by-sampling account of decision under risk. In N. Chater & Oaksford, M. (Eds.), The probabilistic mind: Prospects for Bayesian cognitive science (pp. 261-276). Oxford, England: Oxford University Press.