AFCPE Research Snapshots

Written By: Dr. Mindy Joseph, CFP®

AFCPE Research Snapshot

Article: The Effect of Scarcity and Information Avoidance on Debt Management Behavior 

Authors: Kinga Barrafrem, Mario Kienzler, Daniel Västfjäll, and Gustav Tinghög 

Summary:  

This experimental study was conducted online with UK residents. The debt management game developed for the study was used to examine the impact of scarcity on debt repayment strategies.  Their findings suggest that scarcity can shift an individual’s attention toward short-term, immediate needs, while ignoring longer term benefits of more cost-effective repayment options.  

Study Highlights: 

• Scarcity is not limited to conditions of poverty. Within the context of a financial shock, the psychological state of scarcity affects rich and poor alike. 

• Negative financial shocks may lead to the less optimal debt repayment strategy of paying smallest debts first, whereas the more optimal debt repayment strategy of paying off higher interest rate debt first was found in conditions of less scarcity. 

Important Implications for Practitioners: 

• Debt management strategies can be influenced by perceptions of not having enough. 

• Borrowing is often a response, and short-term solution, to feelings of scarcity. 

• Financially vulnerable individuals are most at risk of entering a cycle of poor debt repayment strategies leading to reliance on higher-cost debts. 

• Debt repayment plans that incorporate a client’s perceptions of scarcity, regardless of current financial status, may prove most effective. Additionally, formalizing steps for repayment of debt before the crisis of scarcity shows up would avert impulsive financial decisions. 

Important concepts and definitions: 

• Scarcity: Defined as less than one feels is necessary to meet their needs. 

• Debt management: describes how people pay off debt and categorized as an optimal strategy (payoff highest interest rate first) and a debt account aversion strategy (pay smallest debt first).

Highlights of the sample population: 

• 1,000 UK residents participated in the experiment. 

• Approximately 55% of the sample were women. 

• The mean age of participants was 36, ranging from 18 to 81. 

Citation Information: 

Barrafrem, K., Kienzler, M., Västfjäll, D., Tinghög, G. (2024). The Effect of Scarcity and Information Avoidance on Debt Management Behavior. Journal of Financial Counseling and Planning, 35(3), 366-380.