Thursday, February 19, 2009

Behavioral Personal Finance: Customers' Fixation On Minimum Payments

Anchoring is a term often discussed within the realm of Behavioral Finance. Like its closely related sibling heuristics (or using rules of thumb), Anchoring may lead us to expect that a stock price will go back to a previous high just because we remember it being there. It also can give high priced stocks the appearance of being better than low priced stock. Here is an interesting look at what I guess I would call Behavioral Personal Finance.

Customers' Fixation On Minimum Payments Drives Up Credit Card Bills:
"The research, by University of Warwick Psychology researcher Dr Neil Stewart, is to be published in Psychological Science, in a paper entitled “The Cost of Anchoring on Credit Card Minimum Payments”. It focuses on the psychological phenomenon of “anchoring” in which arbitrary and irrelevant numbers bias people's judgments. The research reveals that anchoring affects the way people repay their credit card bills. For those people who make only partial repayments of the outstanding balance (about 35% of card holders), the suggested minimum payment on the credit card statement acts as an anchor and lowers the actual repayments people choose to make."

BTW here are some more behavioral finance posts if you are interested. If you are interested in the field (and I have no idea how you would not be!), Wikipedia has a pretty good intro, but if you have just a bit more time both Jay Ritter and Behavourial (Martin Sewell) have excellent "primers" on the field. (HT to

No comments: