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Credit Cards, Preference Reversals, and Debt

Guest post by: Paul Kedrosky

Article Overview: 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.

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.

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Article Tags: average person, bottom line, cnbc, competence, credit cards, disciplines, expenditures, fancy french restaurant, financial decisions, incoherence, jelly beans, nipa data, oodles, preference, quotidian, reversals, sequences, strawberries, study participants, thinkers



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What is your age - Hi there, Life is not dull. It is amazing, how one thing can lead to an entire different subject. It began with the age question. Finally it referred to 'Credit Cards'. I was interested to know, the age groups involved in the forum. It indicates that most of the users are between 20 - 35 years old. I am sure there are some visitors who are in the older group. Let us have your vote. Kindest Regards, Beat "Unlock People's Potentials!"
Building credit - Credit is like reputations, I suppose. Takes a lifetime to build, and only a second to destroy.
Marketing and PR ideas related to a Credit Organization - Hello Everybody! I would be very grateful if you suggested some PR and Marketing ideas for a Credit Organization which target market is poor public who live in village and haven't any access to the internet. Thanx in advance
Offer Credit instead - I'm not sure if ChrisH was referring to this but i'll state it more expicitly .. Charge upfront and offer a refund of double the value back in "Credit" towards your Product or Service you have for sale at the end of the event.
Research & Dev Tax Credit - at No Cost (Canada) - Brian, I have a colleague that can provide you guidance and even assist in maximizing a R&D Tax Credit from the Government of Canada (If you are Canadian). All this at No Cost to You. I know her well and have referred other people to her. She's got plenty of experience in the field. If you're interested (anyone else on this forum too) just send me a PM and I will share her details with you.


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