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Background Anchoring Stewart, 2009

› Survey› Experiment› Author’s Conclusions› Limitations› Implications› Future Researcho Summary & Conclusions

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One of the main costs of having a credit card are the interest charges.

Minimum-repayment is the minimum amount of money you have to pay on your credit card in order to avoid further fees.

From April 1st 2011 all credit card companies must request a minimum monthly repayment from their customers.

Minimum repayments are usually the total interest incurred that month.

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However, the inclusion of minimum repayment information on the bill may act as a psychological anchor.

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“…people make estimates by starting from an initial value that is adjusted to yield an answer.” – Tversky and Kahneman (1974)

Tversky, A. & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics an Biases. Science: New Series, 185(4157), 1124-1131.

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The study examined the effect of minimum repayment information as a psychological anchor.

In order to investigate this the author conducted a survey and an experiment.

He hypothesised that anchoring decreases monthly credit card repayments.

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Participants were asked about their credit card repayment behaviour.

All were United Kingdom credit card holders.› N: 248› Age range:18-65› 50:50 sex ratio

Including:› Outstanding balance› Most recent repayment › The size of the minimum repayment required

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Figure 1. Bar chart extrapolated from Stewart, N. (2009). The Cost of Anchoring on Credit-Card Minimum Repayments. Psychological Science, 20(1), 39-41.

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Figure 2. Bar chart extrapolated from Stewart, N. (2009). The Cost of Anchoring on Credit-Card Minimum Repayments. Psychological Science, 20(1), 39-41.

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For partial repayments:› Positive correlation between minimum

repayment and actual repayment.› Correlation remained significant when:

The size of balance was accounted for The people who only made the minimum

repayments were removed from the analysis Those with balances under £500 were

removed from the analysis

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Participants received a mock credit card bill, of £435.76, and were asked to state how much:› they could afford to repay› they would repay

Minimum repayment information, of £5.42, was either included or omitted.

Participants were recruited from various sources.› 97campus visitors› 215 Web page visitors› 101 recruited by a market research company

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Inclusion of minimum repayment information:› Reduces

payment of all sizes

Exclusion of minimum repayment information:› Payment

increase 70%Figure 3. Taken from: Stewart, N. (2009). The Cost of Anchoring on Credit-Card Minimum Repayments. Psychological Science, 20(1), 39-41.

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Inclusion of minimum repayment information acts as a psychological anchor.› This may be costly to the consumer

Warnings about anchoring are ineffective.› Alternative repayment scenarios should be

provided.

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Overly simplified design of experiment. Focus on United Kingdom and United

States. There are cultural differences in repayment strategies (Quilgars, Jones, and Abbott, 2008).

No information about the Socio-economic status of the participants. This factor has been shown to influence repayment strategies (Norvilitis, Merwin, Osberg, Roehling, Young, & Kamas, 2006).

Quilgars, D., Jones, A,. & Abbott, D. (2008). Does Difference Make a Difference in Financial Planning for Risk? Social Policy & Administration, 42(6), 576-592.Norvilitis, J.M., Merwin , M.M., Osberg, T.M., Roehling, P.V., Young, P., & Kamas, M.M. (2006). Personality Factors, Money Attitudes, Financial Knowledge, and Credit-Card Debt in College Students. Journal of Applied Social Psychology, 36(6), 1395-1413. 14

“About three quarters of credit-card accounts attract interest charges. In the United States, credit-card debt is $951.7 billion of a total of $2,539.7 billion of consumer credit. In the United Kingdom, credit-card debt is $ 55.1 billion of $174.4 billion of consumer credit”- (Stewart, 2009).

“Warnings about the dangers of making only minimum repayments…are likely to lead to disengagement rather than behavior adjustment (cf. Loewenstein & O’Donoghue,2006)”- (Stewart, 2009).› Incorrect referencing may reduce perceived validity of

the statements.

Loewenstein, G. & O'Donoghue, T. (2006). "We Can Do This the Easy Way or the Hard Way": Negative Emotions, Self-Regulation, and the Law. The University of Chicago Law Review, 73(1), 183.

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Shows a strong relationship between minimum repayment information and monthly repayment strategies.

Reinforces the power of anchoring in the financial sector.

May provide useful information for legislation of credit cards.› Leads to the question “In who’s interest is

the minimum repayment legislation?”

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Following from authors suggestion that providing a table of alternative repayment should diminish anchoring:› Provide participants with three types of bills

1. Including minimum repayment information2. Excluding minimum repayment information3. Including a table of detailed alternative

repayment options› This would show that including a single

alternative payment is the main factor in psychological anchoring.

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The effects of anchoring in repayment strategies in different socio-cultural groups could be investigated.

Quilgars, Jones, and Abbott (2008) suggest that differences in culture, ethnicity, sexual orientation and religion should be greater understood in the area of finance.

Quilgars, D., Jones, A,. & Abbott, D. (2008). Does Difference Make a Difference in Financial Planning for Risk? Social Policy & Administration, 42(6), 576-592. 18

Using the methods suggested above, with a student population could prove difficult yet rewarding.› Finding constant anchoring effects across a student

population, would strengthen the findings of Stewart (2009).

This is because universities have varieties of students with different:› Ethnicities,› Cultural backgrounds,› Sex orientation

However, students may have different attitudes and behaviours towards debt management (Chudry, Foxall & Pallister, 2011).

Thus, findings should be verified by comparing results with a non-student sample.

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Chudry, F., Foxall, G., & Pallister, J. (2011). Exploring Attitudes and Predicting Intentions: Profiling Student Debtors Using an Extended Theory of Planned Behavior. Journal of Applied Social Pyschology, 41(1), 119-149.

Anchoring is a noticeable issue when repaying credit card bills.

Stewart (2009) clearly shows this with a clever study.

This is not a purely hypothetical issue, as it has an impact on individuals debt management techniques.

Debt management is a highly salient issue at the moment.

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In May, credit card interest rates hit a 13 year high (Insley, 2011).

Norvilitis et al. (2006), suggest that lack of financial knowledge (amongst other factors) are related to debt.› Thus better information about anchoring

should reduce its effects.

Insley, J. (2011, May 5). Credit card interest rates hit 13-year high, analysis shows. The Guardian, Retrieved November 7, 2011, from http://www.guardian.co.uk/money/2011/may/05/credit-card-

interest-rates-13-year-high.Norvilitis, J.M., Merwin , M.M., Osberg, T.M., Roehling, P.V., Young, P., & Kamas, M.M. (2006). Personality Factors, Money Attitudes, Financial Knowledge, and Credit-Card Debt in College Students.

Journal of Applied Social Psychology, 36(6), 1395-1413. 21

Figure 4. Graph showing example repayment strategies. Calculation made using: http://www.stewart.psych.warwick.ac.uk/decisiontool/ 22

Figure 5. Graph showing example repayment strategies. Calculation made using: http://www.stewart.psych.warwick.ac.uk/decisiontool/ 23

Background Anchoring Stewart, 2009

› Survey› Experiment› Author’s Conclusions› Limitations› Implications› Future Researcho Summary & Conclusions

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Chudry, F., Foxall, G., & Pallister, J. (2011). Exploring Attitudes and Predicting Intentions: Profiling Student Debtors Using an Extended Theory of Planned Behavior. Journal of Applied Social Pyschology, 41(1), 119-149.

Insley, J. (2011, May 5). Credit card interest rates hit 13-year high, analysis shows. The Guardian, Retrieved November 7, 2011, from http://www.guardian.co.uk/money/2011/may/05/credit -card-interest rates-13-year-high.

Loewenstein, G. & O'Donoghue, T. (2006). "We Can Do This the Easy Way or the Hard Way": Negative Emotions, Self-Regulation, and the Law. The University of Chicago Law Review, 73(1), 183.

Quilgars, D., Jones, A,. & Abbott, D. (2008). Does Difference Make a Difference in Financial Planning for Risk? Social Policy & Administration, 42(6), 576-592.

Norvilitis, J.M., Merwin , M.M., Osberg, T.M., Roehling, P.V., Young, P., & Kamas, M.M. (2006). Personality Factors, Money Attitudes, Financial Knowledge, and

Credit- Card Debt in College Students. Journal of Applied Social Psychology, 36(6), 1395- 1413.

Stewart, N. (2009). The Cost of Anchoring on Credit-Card Minimum Repayments.Psychological Science, 20(1), 39-41.

Tversky, A. & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics an Biases. Science: NewSeries, 185(4157), 1124-1131.

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