The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels Not Sofas
Using transaction data from a sample of 1.8 million credit card accounts, the authors provide the first field test of a major prediction of Prelec and Loewenstein’s (1998) theory of mental accounting. The prediction is that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Results were consistent with the prediction, as they found that repayment of debt incurred for non-durable goods is 9% more likely than repayment of debt incurred for durable goods. The size of this effect is large and comparable to an increment in 15 percentage points in the credit card APR.
This paper was first published as an SSRN working paper. It was accepted for publication by Management Science and published online in May 2019, and in print November 2019 Vol 65 (11) pp 4951-5448. Research is ongoing under NIBS2 and the authors have been successful in securing a NIBS 'small grant' to undertake further research.
Authors: Edika Quispe-Torreblanca University of Warwick, Neil Stewart University of Warwick, John Gathergood University of Nottingham, School of Economics and George Loewenstein Carnegie Mellon University, Department of Social and Decision Sciences.
Posted on Friday 29th June 2018