7 ms·

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollar

by ovi256 18y ago

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future - experimental economists found this, but I can not retrieve references right now, my googlefoo is failing. This is a textbook case for regulation. A similar case is car insurance : your (irrational) choice is to not buy it. However, as this increases the cost on society, and (I think) on yourself in the long term, regulation is imposed - in the form of compulsory insurance.

mseebach 18y ago
Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.
- awt 18y ago
  Wouldn't you agree though that if enough people screw themselves, people who haven't screwed themselves start getting screwed, too?
  - sokoloff 18y ago
    In the long run, I do not. In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate. Honestly, even though I bought a house in summer 2007 (which is now worth somewhat less than I paid), I've been made vastly better off by the free and easy credit that others took part in and that I for the most part did not. Sure, the economic turmoil/headwinds now are less pleasant than 2004-2006/early 2007, but that's far from saying "I got screwed by this obviously unsustainable great ride ending."
    - jimbokun 18y ago
      "In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate." The entire U.S. financial industry and the entire U.S. auto industry have, for all intents and purposes, been vaporized out of existence. To me, that seems a pretty high price to pay for "artificially high good times." Enough so that regulations that would have kept the good times from being quite so good in exchange for the down times not being disastrous, are more than a fair exchange. Do you disagree?
      - sokoloff 18y ago
        First of all: IMO, the US auto industry woes have not one damn thing to do with credit boom/bust, and if anything, their run (the companies and the UAW) was extended by the credit freedom, but in any free market, if your costs are 1.5x your competitors and the desirability of their product is 1.5x yours, you're in for a world of hurt. (I own three American cars: one Jeep and two sixties Mustangs, and if I had to do it over again, I probably wouldn't have bought the Jeep.) The US financial industry, I'd agree with you IF I thought we could effectively modulate without introducing deadweight losses for no net gain. (Historically, I don't think we have a good track record at this, in this or any other country.) What do I mean by that? The minute you introduce legislation to try to modulate something, a substantial result of that is to take smart people and apply them to figuring out how to comply with and/or work within/around the new regulations. So instead of building something people want or that makes the world better/more efficient, they're instead working on regulatory compliance. Then the most powerful institutions bid up the prices of the services of those people who are the very best at working around the regulation, or at lobbying for their activities to be exempted, and the cycle continues. If we could come up with a means to instanteously generate perfect regulation, I would indeed agree with your proposal. I'm not holding my breath for it...
- netcan 18y ago
  It's true. That's an important distinction. But apart from 'information' requirements like those imposed on tobacco in many places (advertising bans, warning labels, mass propoganda campaigns) I don't think any more information would help. If you go that path, you may as well regulate. What would happen if all regulations beyond basic information availability requirements were lifted? If you could sell people whatever they would buy? We know what happens in lower risk, higher value credit. The effect of large scale defaults is a flavour of everyone else is screwed.
- iamelgringo 18y ago
  What other product can you purchase, and have the price change after you purchase the product? What other form of loans/credit can you purchase and then have the interest rate changed without your knowledge and without informing you because of a missed or late payment on a different loan? What other form of loan can increase your interest rate (cost) based on an increase in the balances on accounts with completely different companies? I've meet well educated Md's and people with Master's degrees who've gotten screwed by credit card companies. It's not a matter of education, IMHO. It's a matter of deceptive business practices that people don't really get wise to until they've gotten burned badly. Have you ever tried to read through a credit card agreement? I'm a well educated man, and I can't make heads or tails of those agreements. I'm sorry, but even an industry needed regulation, its the credit card industry.
  - ars 18y ago
    The price is not changing after the fact - you agreed to all the rates and changes before you start. If they want to change those in any other way then they have to contact you and you have the option to stop using the card and pay off the balance at the old rate. The agreements are not that complicated - people simply don't read. I see it happen all the time with website UI's - the instructions are right there and people never read them. You don't need to read the full agreement - everything you need to know about the rates is on the back of the application - in a format set by congress. How much more regulation do you need? Edit: apparently there is more regulation coming: http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b07658.html?nclick_check=1 http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b076...
    - sethg 18y ago
      I can't find the page where I saw the numbers, but a staggering proportion of American adults don't know basic math well enough to figure out which grocery store has the lowest prices. I assume an even more staggering proportion doesn't really understand how compound interest works.
      - eru 18y ago
- fallentimes 18y ago
  I agree. When used properly, credit cards are unbelievably useful for consumers & businesses alike. The blame should lie on the person who makes the poor decisions with the credit cards, not the credit cards themselves.
  - eru 18y ago
    Though credit cards can be replaced by less dangerous debit cards for most of their functions.
    - fallentimes 18y ago
      Actually, debit cards are significantly more dangerous (when talking about external events, not accountability). The amount of liability you have + paperwork in the event of fraud is exponential compared to credit cards.
      - eru 18y ago
        I do not know if we are talking about the same thing. But I configured my debit card not to be able overdraw my bank account and I make sure that there is always not too much money in it.
        fallentimes 18y ago
        You're talking about money management; I'm talking about fraud and liability. http://www.consumer-action.org/english/articles/understanding_debit_cards/ http://www.consumer-action.org/english/articles/understandin...
        eru 18y ago
        Yes. I agree. (Edit: I have read the linked article. The debit card system is somewhat different in Germany, where debit cards are much more widespread that credit cards. In fact credit cards are still somewhat of a rarity while everyone seems to have a debit card.)
- ovi256 18y ago
  A counter-example: think about tainted food. When you unknowingly buy and eat tainted food, you get screwed. When you don't get insurance, everyone else is screwed. That's why tainted food is a classical case for information, not regulation. Just stick an ol' label explaining that it contains dioxin, and let the free market decide. Of course, that's not what happens. So the harm limited to self argument does not apply.
gaius 18y ago
Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future How do you assess that except on a case-by-case basis?
nazgulnarsil 18y ago
um...not buying it is rational. if buying insurance was positive sum then how would insurance companies make money?
- ovi256 18y ago
  Because it is positive sum - which means that it creates value. Fiduciary, insurance companies gain more than you, but you gain non-fiduciary value (tranquility etc).
  - nazgulnarsil 18y ago
    my comment was towards the use of the word "irrational" in the parent comment.

by ovi256 18y ago

mseebach 18y ago

Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.

awt 18y ago
Wouldn't you agree though that if enough people screw themselves, people who haven't screwed themselves start getting screwed, too?
- sokoloff 18y ago
  In the long run, I do not. In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate. Honestly, even though I bought a house in summer 2007 (which is now worth somewhat less than I paid), I've been made vastly better off by the free and easy credit that others took part in and that I for the most part did not. Sure, the economic turmoil/headwinds now are less pleasant than 2004-2006/early 2007, but that's far from saying "I got screwed by this obviously unsustainable great ride ending."
  - jimbokun 18y ago
    "In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate." The entire U.S. financial industry and the entire U.S. auto industry have, for all intents and purposes, been vaporized out of existence. To me, that seems a pretty high price to pay for "artificially high good times." Enough so that regulations that would have kept the good times from being quite so good in exchange for the down times not being disastrous, are more than a fair exchange. Do you disagree?
    - sokoloff 18y ago
      First of all: IMO, the US auto industry woes have not one damn thing to do with credit boom/bust, and if anything, their run (the companies and the UAW) was extended by the credit freedom, but in any free market, if your costs are 1.5x your competitors and the desirability of their product is 1.5x yours, you're in for a world of hurt. (I own three American cars: one Jeep and two sixties Mustangs, and if I had to do it over again, I probably wouldn't have bought the Jeep.) The US financial industry, I'd agree with you IF I thought we could effectively modulate without introducing deadweight losses for no net gain. (Historically, I don't think we have a good track record at this, in this or any other country.) What do I mean by that? The minute you introduce legislation to try to modulate something, a substantial result of that is to take smart people and apply them to figuring out how to comply with and/or work within/around the new regulations. So instead of building something people want or that makes the world better/more efficient, they're instead working on regulatory compliance. Then the most powerful institutions bid up the prices of the services of those people who are the very best at working around the regulation, or at lobbying for their activities to be exempted, and the cycle continues. If we could come up with a means to instanteously generate perfect regulation, I would indeed agree with your proposal. I'm not holding my breath for it...
netcan 18y ago
It's true. That's an important distinction. But apart from 'information' requirements like those imposed on tobacco in many places (advertising bans, warning labels, mass propoganda campaigns) I don't think any more information would help. If you go that path, you may as well regulate. What would happen if all regulations beyond basic information availability requirements were lifted? If you could sell people whatever they would buy? We know what happens in lower risk, higher value credit. The effect of large scale defaults is a flavour of everyone else is screwed.
iamelgringo 18y ago
What other product can you purchase, and have the price change after you purchase the product? What other form of loans/credit can you purchase and then have the interest rate changed without your knowledge and without informing you because of a missed or late payment on a different loan? What other form of loan can increase your interest rate (cost) based on an increase in the balances on accounts with completely different companies? I've meet well educated Md's and people with Master's degrees who've gotten screwed by credit card companies. It's not a matter of education, IMHO. It's a matter of deceptive business practices that people don't really get wise to until they've gotten burned badly. Have you ever tried to read through a credit card agreement? I'm a well educated man, and I can't make heads or tails of those agreements. I'm sorry, but even an industry needed regulation, its the credit card industry.
- ars 18y ago
  The price is not changing after the fact - you agreed to all the rates and changes before you start. If they want to change those in any other way then they have to contact you and you have the option to stop using the card and pay off the balance at the old rate. The agreements are not that complicated - people simply don't read. I see it happen all the time with website UI's - the instructions are right there and people never read them. You don't need to read the full agreement - everything you need to know about the rates is on the back of the application - in a format set by congress. How much more regulation do you need? Edit: apparently there is more regulation coming: http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b07658.html?nclick_check=1 http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b076...
  - sethg 18y ago
    I can't find the page where I saw the numbers, but a staggering proportion of American adults don't know basic math well enough to figure out which grocery store has the lowest prices. I assume an even more staggering proportion doesn't really understand how compound interest works.
    - eru 18y ago
fallentimes 18y ago
I agree. When used properly, credit cards are unbelievably useful for consumers & businesses alike. The blame should lie on the person who makes the poor decisions with the credit cards, not the credit cards themselves.
- eru 18y ago
  Though credit cards can be replaced by less dangerous debit cards for most of their functions.
  - fallentimes 18y ago
    Actually, debit cards are significantly more dangerous (when talking about external events, not accountability). The amount of liability you have + paperwork in the event of fraud is exponential compared to credit cards.
    - eru 18y ago
      I do not know if we are talking about the same thing. But I configured my debit card not to be able overdraw my bank account and I make sure that there is always not too much money in it.
      - fallentimes 18y ago
        You're talking about money management; I'm talking about fraud and liability. http://www.consumer-action.org/english/articles/understanding_debit_cards/ http://www.consumer-action.org/english/articles/understandin...
        eru 18y ago
        Yes. I agree. (Edit: I have read the linked article. The debit card system is somewhat different in Germany, where debit cards are much more widespread that credit cards. In fact credit cards are still somewhat of a rarity while everyone seems to have a debit card.)
ovi256 18y ago
A counter-example: think about tainted food. When you unknowingly buy and eat tainted food, you get screwed. When you don't get insurance, everyone else is screwed. That's why tainted food is a classical case for information, not regulation. Just stick an ol' label explaining that it contains dioxin, and let the free market decide. Of course, that's not what happens. So the harm limited to self argument does not apply.

gaius 18y ago

nazgulnarsil 18y ago

um...not buying it is rational. if buying insurance was positive sum then how would insurance companies make money?

ovi256 18y ago
Because it is positive sum - which means that it creates value. Fiduciary, insurance companies gain more than you, but you gain non-fiduciary value (tranquility etc).
- nazgulnarsil 18y ago
  my comment was towards the use of the word "irrational" in the parent comment.