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2.  Background  Anchoring  Stewart, 2009 › Survey › Experiment › Author’s Conclusions › Limitations › Implications › Future Research o Summary & Conclusions 2

3.  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 1 st 2011 all credit card companies must request a minimum monthly repayment from their customers.  Minimum repayments are usually the total interest incurred that month. 3

4. However, the inclusion of minimum repayment information on the bill may act as a psychological anchor. 4

5. “…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. 5

6.  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. 6

7.  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 7

8. Figure 1. Bar chart extrapolated from Stewart, N. (2009). The Cost of Anchoring on Credit-Card Minimum Repayments. Psychological Science, 20(1), 39-41. 8

9. Figure 2. Bar chart extrapolated from Stewart, N. (2009). The Cost of Anchoring on Credit- Card Minimum Repayments. Psychological Science, 20(1), 39-41. 9

10.  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 10

11.  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 11

12.  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. 12

13.  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. 13

14.  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

15.  “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. 15

16.  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?” 16

17.  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 information 2.Excluding minimum repayment information 3.Including a table of detailed alternative repayment options › This would show that including a single alternative payment is the main factor in psychological anchoring. 17

18.  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

19.  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. 19 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.

20.  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. 20

21.  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

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

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

24.  Background  Anchoring  Stewart, 2009 › Survey › Experiment › Author’s Conclusions › Limitations › Implications › Future Research o Summary & Conclusions 24

25.  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. 25

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