Credit Cards, Preference Reversals, and Debt

My friend Herb argued in a recent column — and I’m paraphrasing here — that “debt is high and the end is nigh”. I cordially disagreed with him on CNBC during one of our twice-weekly on-air visits, in part because I’m more sanguine about debt, about people’s general competence to make basic financial decisions, and about changes in the economy that have made it rational for people to have more debt than they did in the past. I’m also considerably less convinced about the quality of the NIPA data (it overstates expenditures, and understates income) etc.

But I digress. The bottom line, economically speaking, is can the average person be trusted? Not people at the margin, because they’re all mad, but the average person. Can they hold off their baser selves and postpone consumption when offered credit? There is oodles of research in this area, but I ran across an interesting talk from MIT tonight, which gets touches on some of this, and along the way points out the following:

[Some research] demonstrates that people like to save the best for last. In ordering a sequence, study participants chose to eat strawberries, then liquorice, and then jelly beans — holding out for “the better thing later,” in this case, the sweetest treat. In another example of people preferring “improving sequences,” subjects chose to dine at a quotidian Greek grill first, followed by a fancy French restaurant.

But in a “weird preference reversal,” people chose to pay more for a “declining sequence,” where they would eat first at the expensive French restaurant, and then at the Greek grill. There is incoherence in people’s preferences, which has long puzzled thinkers from different disciplines.

More here.

Related posts:

  1. NatPost Column: Coining Kedrosky’s Law of Reversals
  2. You’re Bankrupt? Here, Have a Credit Card
  3. Research Watch: Disagreement, Stock Sentiment, and Gift Cards
  4. Bear Stearns and Credit Markets
  5. Bill Gross on Credit Markets & Rate Risks

Comments

  1. who knew says:

    The bottom line, economically speaking, is can the average person be trusted? Can they hold off their baser selves and postpone consumption when offered credit?
    if you look at the woman i am ‘seeing’, the answer is a big fat NO. impulse buying, too many credit cards, shopping made waaaaay too easy on the world wide web / internet – she is going to be in debt ( in over her head ) for the rest of her life. she is currently mugging peter and paul to pay raoul.

  2. Andi says:

    Irresponsible lending leads to default and bankruptcy, recent changes in the bk law ensure that irresponsible borrowers will be forever enslaved. Slaves who can be bought and sold when their debt is repackaged. But they can’t be jailed or beaten, that’s illegal. :)