Behavioral Finance Is Not A 'Get Out Of Debt Free' Card
Tweaking you Financial Decisions Can Only Take You As Far As Your Paycheck Allows
Welcome back to the MOAM weekly newsletter, as always each Monday I round up 2-3 academic studies discussing personal finance, and I provide analysis to see if these ideas are worth your time.
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#1—Does Automatic Enrollment into Savings Plans Actually Work?
A fascinating study by John Beshears, James Choi, David Laibson, and Brigitte Madrian titled "Smaller Than We Thought?: The Effect of Automatic Enrollment on Debt" explores whether automatic enrollment in savings plans truly helps people save more or if it simply pushes them to borrow more instead.
Using data from over 45,000 U.S. Army civilian employees automatically enrolled in the Thrift Savings Plan (TSP), the researchers analyzed how their debt levels changed after enrollment compared to those not enrolled automatically.
The results were encouraging. Automatic enrollment significantly boosted overall retirement savings, with minimal impact on increased debt levels. Specifically, every dollar auto-enrolled into savings resulted in only about 5 cents of increased borrowing, far smaller than earlier studies suggested.
You might notice, that I recently reviewed another study recently which had a similar finding: Automatic enrollment in savings plans does lead to more savings, but can also lead to increased debt levels.
The golden rule of automating your finances is that you only save money that is available in your budget.
#2—Nudging Credit Card Payments: Why Intentions Don't Always Equal Results
The paper "The Semblance of Success in Nudging Consumers to Pay Down Credit Card Debt" by Guttman-Kenney, Adams, Hunt, Laibson, Stewart, and Leary investigates whether subtle behavioral nudges can help consumers reduce credit card debt.
Specifically, the authors tested whether removing the visible option for consumers to automatically pay only the minimum monthly payment—an option known as Autopay Min—could nudge them towards paying more and ultimately reducing their debt.
The researchers conducted a large-scale field experiment involving credit cardholders in the UK. Participants who signed up for automatic payments were randomly assigned to either a control group, which retained full visibility of all payment options (Autopay Min, Autopay Fix, Autopay Full), or a treatment group, where the Autopay Min option was less visible.
They analyzed data on consumer payment behaviors, credit card balances, and linked bank account balances over a six-month period to determine the effect of this nudge.
The results were mixed.
On the surface, the nudge seemed effective.
It significantly decreased the number of consumers choosing Autopay Min by 74% and reduced the likelihood of customers paying only the minimum amount due by about 23% after six months.
However, despite these promising immediate effects, the nudge did not significantly reduce overall credit card debt. The reason was that nudged consumers tended to select fixed payment amounts that were only slightly higher than the minimum payments.
Additionally, these same consumers often had limited liquid cash reserves, making them unable to significantly reduce their debt even when nudged. It’s a blood from a stone type of situation.
While nudges can change immediate choices and behaviors, their impact on long-term financial health—like reducing debt—depends heavily on your underlying financial situation.
Simply hiding or reframing payment options won't magically free up more money if your finances are already stretched thin.
Instead, effective debt repayment requires carefully balancing automatic payments with realistic budgeting based on actual financial capabilities. Regularly reviewing and adjusting your payment plans and budgeting strategy to match your financial reality is crucial.
This Week's Behavioral Finance Intervention (for Paid Subscribers Only)
Each week, I share an actionable behavioral economics exercise designed to help improve your financial decision-making.