A recent study published in Psychological Science sheds light on why some people have low credit. Here are some tips on how to win the mental battle against impulsive spending.
There is a lot of overlap between psychology and economics, because both focus on certain aspects of how we make decisions.
When I look at the current state of our economy – especially growing personal debt and low credit scores among consumers – I often wonder what psychological factors are driving this behavior.
A recent study published in Psychological Science discovered a key predictor of low credit – impatience. Researchers from Stanford University recruited 437 individuals from low-to-moderate income families; after conducting a questionnaire, and getting permission to access the participants’ credit scores, they found that individuals with low credit also tended to be more impatient and impulsive.
Impatience is our tendency to choose immediate rewards rather than wait for a larger reward in the future. It reflects a need for short-term gratification, as well as an inability to see and plan for the future.
For example, would you rather have a million dollars right now or a penny doubled everyday for 30 days? At first, the million dollars seems like the most tempting choice. However, when you do the math, a penny doubled everyday for 30 days actually totals $5,368,709.12 – over five times more the first option.
As long as you don’t have an immediate need for cash, the best option is to go with the penny doubling everyday for 30 days. However, to correctly make this choice, you would need to be able to delay your need for short-term gratification – a million dollars right now sounds very tempting, but holding out a bit longer will lead to a much larger reward in the end.