December 13, 2011
Desire For Immediate Rewards Tied To Low Credit Scores
Okay, some of you will respond by saying this is a study that finds what you'd predict with high confidence. Okay. Still, sometimes it helps to study and quantify the obvious. People who go for immediate rewards rather than holding out for more later tend to have lower credit scores.
NEW YORK – December 13, 2011 – A study conducted by Columbia Business School's Prof. Stephan Meier, Regina Pitaro Associate Professor of Business, Management, and Charles Sprenger, Assistant Professor, Stanford University Department of Economics, determines that there may be a psychological reason for why people default on their mortgages. The research, which will be featured in an upcoming issue of Psychological Science, a journal of the Association for Psychological Science, finds that the participants in the study with poor credit scores were more impatient and were more likely to choose immediate rewards rather than wait for a larger reward in the future.
My take: The study provides the occasion to discuss some interesting things about human nature. First off, surely there are genetic variants that govern time preference. People more willing to wait longer to get more probably have genetic variants that make them different in this regard. Second, once those genetic variants are discovered prospective parents will be able touse the information once offspring genetic engineering (or even just pre-implantation embryo selection using genetic tests) becomes popular). Okay, will they opt to make their kids have longer or shorter time horizons? To be more or less patient than themselves?
While working at the Federal Reserve's Center for Behavioral Economics and Decisionmaking in Boston, Massachusetts, the researchers created a study that would help determine if there are factors beyond the screening for mortgage applicants or other institutional reasons that leads to people to make the decision to default. Meier and Sprenger recruited 437 low-to-moderate income people at a community center in Boston that offered tax preparation help. Each person was given a questionnaire that featured choices between a smaller, immediate reward and a larger reward they would receive in the future. The participants also agreed to let the researchers access their FICO credit scores.
The study shows that time discounting and FICO scores were significantly correlated, and that this correlation was comparable to previously found correlations between time discounting and health behavior. Participants who were the most willing to delay rewards and exhibited more patience had FICO scores that were approximately 30 points higher than those of participants who were the least willing to delay. Also, the impatient participants fell below the subprime lending cutoff of 620. At this score, individuals generally face substantially elevated borrowing rates.
I'd like to see this repeated with an IQ test to adjust for IQ. People with greater capacity to understand the long term consequences of their choices are probably more likely to make choices with greater long term pay-off at the expense of getting less now.
Another point: the impulsive buyers with shorter time horizons probably make less optimal buying choices between competing products. If you are in a rush to buy you'll invest less time in production comparisons. So then does advertising work more powerfully on those impulsive buyers? I would expect so. So then is advertising increasing the amount of impatience and increasing impulsive spending?
You mean that the grasshoppers have lower credit scores than the ants?
If only somebody in human history had warned us.
Junk science. People who get laid off from their jobs also tend to have lower credit scores.
>"A study conducted by Columbia Business School's Prof. Stephan Meier, Regina Pitaro Associate Professor of Business, Management, and Charles Sprenger, Assistant Professor, Stanford University Department of Economics, determines that there may be a psychological reason for why people default on their mortgages."
When educated people are stupid, they are stupid in a different fashion than we find in uneducated people. An uneducated person would doubtless sometimes say stupid things, but never anything stupid in the same sense as this.
People do not, as a rule, default on their mortgage for "psychological reasons". They default on their mortgage for financial reasons. In case you had not noticed, we're in the middle of the worst economy since the Great Depression.
I know some people who defaulted on their mortgages (on their second or third homes) because it made the most economic sense for them to do so. These are rich and/or smart people. I know other people who defaulted on their mortgages because they were out of work or working for a lot less money than when they bought their property. It's possible that somewhere in this country of 300 million people there is somebody who defaulted for "psychological reasons" but they're going to be rare exceptions.
>"Desire For Immediate Rewards Tied To Low Credit Scores"
Even your headline is incorrect. A statistical correlation between A and B is not the same thing as A being "tied" to B. Tall men may tend to have higher earnings than short men, but this does not mean that income is "tied" to height.
I'm a blue collar worker, no degree, have been laid off four times in 25 years, yet I have an excellent credit score, because I lived within my means, only bought what I needed, paid my bills before treating myself. If only the clowns in Washington had blue collar values.
Didn't bother to click the link, did you, solaris?
"The researchers acknowledge that defaulting on a loan isn't always a deliberate choice. People may default for a variety of reasons, such as when they lose their job. However, as Meier explains, "There is a little bit of strategic defaulting going on, where some people make a cost-benefit analysis and choose to have more money now and deal with the repercussions later.""
This is the "no duh" result: "The study shows that time discounting and FICO scores were significantly correlated".
Alternate hypothesis: For someone with a credit card balance that is racking up non-deductible interest at a rate somewhat north of 20% will have a very different cost/benefit analysis for the value of an amount of money now vs. a larger amount later than will someone who has only a low rate, deductible mortgage and will just drop the money into a savings account earning a fractional percent interest. You are, in effect, offering less of a monetary benefit for waiting to people in one group than you are for people in another, and one could conclude that everyone is making rational decisions based on the size of the reward being offered, and their FICO score is an indicator of their cost-of-money, not an indicator of their time horizon.
People with Executive Functioning deficits such as ADD/ADHD - or impairment resulting from head injuries - have an extremely difficult time with foresight and impulsivity - leading to purchases of things they shouldn't buy - with the resulting financial distress. The reality is that these people usually have normal to above average IQ's and can function quite well in many arenas of endeavor - yet they are always behind the eight-ball money-wise. 'Self-Discipline' is a meaningless term to these people because they literally are incapable of it. Unless outside constraints are placed on them, they'll continue to get into trouble (because one of the other major symptoms of Executive Functioning Impairment is an inability to learn from mistakes). Emerging research is pointing in the direction of a mal- or dys-function of the short-term memory. Because these people aren't stupid but do - what appear to be - stupid things, they are also at a much higher risk for substance abuse, legal trouble, depression and suicide.
I've never seen a correlation between IQ and time horizon. They aren't the same thing so conflating the two is inappropriate.
>"Didn't bother to click the link, did you, solaris?"
I did read it, you nitwit. That's why I objected to Parker's claim of a "tie". His headline:"Desire For Immediate Rewards Tied To Low Credit Scores".
Their headline:"Study reveals an association between impatience and lower credit scores".
The claim that people default on their mortgages for "psychological reasons" has a vaguely Soviet ring to it. Let's commit those crazy people/enemies of the state to sanatoriums! It's a far cry from the foundational belief of free market capitalism - that individual people are the best judge of their own economic situations.
Actually, the study reinforces the corollary of that foundational belief, solaris ... that individuals have the RESPONSIBILITY to prudently manage their economic situation ... as opposed to the popular pastime of blaming it all on the "banksters" and the "rich", then expecting the government to cover for them while they chase after McMansions, iThingies, and Starbucks.
No one is saying that every person in dire financial straits is irresponsible ... but a lot of them have been and/or are irresponsible (I include myself here, having bought a house with zero down, only to have to take a big check to closing when I sold it as the result of a job change).
Psychological =/= psychiatric. To say that psychological qualities have no impact on choices is like saying "I'm not responsible for committing a crime: society/cirumstances made me do it." If you're psychologically inclined to be short-sighted and impulsive, then you only have yourself to blame when the decisions you make based on these qualities land you in hot water. It is possible to change one's ways, as well: being short-sighted is something you can modify by choice, in the same way that poor memory can be improved by working on remembering things. It requires motivation, time, work, and, most of all, accepting that if you want to change these poor qualities, you must accept that they exist and only you can rectify them.
Erect as many straw men as you want to. Reason will incinerate them all.
Selecting children based on their supposed genetic inclination towards short or long time-frame rewards? Wow. I'm certainly glad you weren't either of my parents.
This is a bit unusual. They had a decent-size sample of 437 people instead of handing a questionnaire to a handful of freshmen? This could be the end of psychological research as we know it. Soon journals might actually insist on real data.
The next study will be of 437 bankers to see if the more impatient bankers were more willing to lend with no money down ... followed by a study of 437 regulators to see if impatience is correlated with passing regulations in a preposterous hurry.
The final study will be of 437 psychological researchers to see if impatience is correlated with publishing studies of small samples.
It should be obvious that a study of 437 blog commenters will be going too far.
"The claim that people default on their mortgages for "psychological reasons" has a vaguely Soviet ring to it."
Not to me. Depending on the circumstances, it has a sensible ring. It all depends on your cost/benefit analysis. If you can live with 7 years of a crappy credit score and it saves you enough money, it makes sense to send the keys into the bank. I've got a house that's been on the market for well over a year. So far it hasn't made sense to send in the keys. But psychologically that's been very expensive. If the prices keep dropping...I may well just pitch the whole works, even if on a strict numbers basis the time hasn't come yet.
"It should be obvious that a study of 437 blog commenters will be going too far."
I would like to see the results of that study, actually.
James Q. Wilson's work on crime showed that time discounting was important in that context as well.
This is such a misleading study. A good FICO credit score is one obtained from constantly borrowing money from banks and paying it back. If someone pays cash for all of their purchases, they have a zero (0) FICO score. Is someone that buys things on credit instead of waiting and paying cash for it really the one that is putting off immediate rewards? Of course not! So, you see that this whole story is based on garbage that furthers the concept that spending money that you do not have is good; that somehow if you do this you are genetically smarter than others. This is total Ivy League trash!
Sometimes I have worked at H&R Block during the Feb-to-April high activity period. Plenty of poor people use its services. For an example: $12,000 income in a family with 3 kids will mean zero "income tax" but child tax credits mean a net receipt of $250(just for an example.) Now these folks are VERY keen on getting that money right away. So instead of receiving $250 in four weeks, they can sign a willingness to receive a smaller(!!) amount(say, $180) in 7 to 10 days. I've been lead to believe that the difference represents their payment for an insurance policy on their refund: the 7-10 day period is needed to get the return first submitted/processed; the 4-week period is needed to get all forms fully run through the system.
I've been amazed to witness how it is that not a SINGLE person will opt for the full waiting period to get the full amount! I'd almost eat dog food in order to wait for the full $250, but the exact opposite occurs! I've tried all sorts of ways to explain how there is this LARGER refund that's due; in many cases a poor couple knows the setup better than me, because they've done this time after time. I never imagined that this group of persons would universally accept the lesser amount sooner, Whereas my friends and I would hold out for the larger amount. This seems to be a striking difference in perspective.
It's an interesting question, but I really doubt the numeracy of people who simply don't have a credit score(outside of me, but I'm just out of college!).
Most people I know who are good with money have a good credit score because they use a credit card, pay the whole thing off each and every month, plus get the 1%~ cash back. Anecdotally I don't see a whole lot of evidence for these creditless adults, and your assertion that it must be so many that will make the results garbage a little difficult to swallow.
This study reveals a lot about human nature. The comments in response to it reveal a lot about people's politics. Conservatives and libertarians tend to look first to ourselves for the source of our failures. If things aren't going right for us, we ask ourselves what we could be doing differently. We admire those who have succeeded in ways that are important to us and seek to learn from them and/or emulate them.
Leftists tend to want to blame others, or to find some systemic external explanation for why things aren't working out for them. When that fails they blame "bad luck." They resent those who have succeeded in ways they feel are important. Rather than seek to learn from them or emulate them, they try to explain away that success as being due to forces beyond that person's control.
Now we come to the ways in which a person's FICO score, and measurements of their financial behavior in general, tie into that person's character and tendency to make certain kinds of decisions. Conservatives and libertarians look at this and say "Well no duh, I could have told you that." Leftists look at this and immediately begin trying to explain it away.
Character really is destiny.
I worked part time at a convenience store in college that was on the edge of a bad part of town. People from this bad area would come into the store on a regular basis. They were a study in foolishness, stupidity, and self-sabotage.
The first foolish thing they would do is buy groceries, junk food mostly, using their food stamps. Meanwhile there was an actual grocery store not a quarter mile up the street where they could buy nutritious food, or at the very least make better use of their food stamps since the prices for junk food there were cheaper. I'd try to talk to some of them, and they'd just look at me like I was speaking a foreign language.
The second foolish thing they did was to spend actual money on lottery tickets. Not just the one dollar for a gazillion dollar jackpot ticket that many normal people occasionally do, but the "scratchers" variety. They bought a lot of these tickets. Once again I'd try to talk to them and explain how they were wasting their money, only to have them look at me blankly, or to be told that someone they knew had won. It is said that the lottery is a tax on the stupid and I think that description is quite accurate.
Last, but not least, they would send their children into the store to buy bazooka bubble gum using food stamps. Back then food stamps were used as actual cash in a sense. If someone gave me a $10 food stamp for a $3.50 item, I'd give them 6 dollars in stamps back, and the remaining fifty cents in change. So when junior came up to the counter with a single piece of gum and a dollar food stamp, he'd get 95 cents back in actual currency. Then, at the end of the day, the parents would come in and buy beer and/or cigarettes using a whole bunch of change, items they were not supposed to be able to buy with food stamps in the first place.
It was a life lesson in the differences between the can's and the can not's, the will's and the will not's, the know's and the know-not's, the do's and the do-not's. It was very enlightening.
So I'm not the least bit surprised that the poor folks you were working with went for the instant gratification route. Such patterns of behavior and decision making strategies are the root cause of why they are poor.