Understanding Financial Decision Making

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Research overview

The problem of personal debt is perhaps more universal today than it has ever been. Latest figures indicate that national consumer debt (arising from e.g. credit cards, personal bank loans, payday loans) totaled £158.3 billion in July 2013, a figure which accrued in the region of £164 million in interest alone, on a daily basis. The average value of all County Court Judgements in the second quarter of 2013 amounted to £2766, with the Citizen Advice Bureaux in the UK dealing with close to 8000 new debt issues every day over the past 12 months.

Despite this, access to consumer credit is as widely available now as it has ever been, despite economic hardships. The British Bankers Association estimate that £8.4 worth of consumer purchases on credit cards were made in August 2013, with card borrowing now beginning to increase compared to the previous four years.

Beyond lending from banks, the payday loan industry has become increasingly pervasive in modern society: nine of the top 10 UK payday lenders have doubled their turnover in the previous three years, with the biggest (Wonga.com) having recently reported a 36% increase in earnings for 2012, coming from a 50% increase in the number of loans it granted in that year, resulting in £1m in profits every week. These profits were in spite of the company writing off £96m worth of turnover. In a damning report earlier this year, the Office for Fair Trading noted that 20% of the revenue accumulated in the UK payday lending industry came from 5% of loans rolled over four times or more.

At the Centre for Decision Research we feel there is much to be gained from research which attempts to recognise how peoples’ psychological characteristics play a role in how they choose to act in times of financial desperation. Taking influence from such research, the Centre is about to embark on a programme of research which aims to take a more integrated approach, the objective of which is to understand how people think, act, and feel in relation to financial decisions. More specifically, this research will attempt to ascertain the relative influence that peoples’ emotional characteristics (such as peoples’ tendency to experience shame, guilt, pride, or embarrassment) and cognitive processes (the kinds of thinking that people engage in and how this may be compromised) have on decisions to borrow money, as well as peoples’ behaviours in response to problem debt that results from borrowing.