Why Looking At The Minimum Payment Is A Bad Idea
Plus can robo advisors beat a 60/40 portfolio and the increasing subscription fatigue
Welcome back, as always each Monday I round up 3 academic studies discussing personal finance, and I provide analysis to see if these ideas are worth your time.
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#1 — Breaking the Minimum-Payment Trap
Does displaying the minimum payment amount on credit card statements anchor people to pay only the bare minimum? A recent study finds that strategically bolding the minimum-due line can cause people to pay less towards their credit card balance.
The authors partnered with a major U.S. credit card company to run an experiment on 50,000 cardholders.
Here’s how the experiment worked:
Half saw the usual statement
Half saw a version with the minimum-due amount highlighted.
Then they tracked how each groups payments changed over the next six billing cycles.
This is an experiment in what is known in behavioral finance as an ‘anchoring effect.” Basically, the researchers wanted to know if showing people are shown the lowest possible payment, their brain will anchor their payment decision around that number.
If the anchoring effect is real, people who see the bolded minimum payment will make a smaller payment—even if it’s higher than the minimum—compared to those who don’t see the bolded minimum payment.
Results
Those exposed to the anchor paid on average 15 % less of their balance each month.
Late-payment rates climbed 8 %, suggesting many treated the minimum as their target rather than a floor.
The control group showed no change, ruling out seasonal or macro effects.
Takeaways for your wallet
Treat the minimum as a floor, not a goal—aim to pay at least double the minimum each month.
Cover or ignore the minimum-due line when choosing your payment amount.
Automate a fixed-percentage or fixed-dollar payment plan to sidestep anchors altogether.
This is compelling evidence that the anchoring effect is a very real thing an can have severe implications for your finances.
If you want a deep dive into the research behind the anchoring effect (including how to avoid it) check out this article:
Here's How Our Brains Are Tricked into Spending Too Much Money
“Price is what you pay; value is what you get.”
#2 — Robo-Advisor Resilience
Can a robo-advisor algorithm deliver strong returns even when investing in markets outside the U.S? A new study titled “Artificial intelligence-driven financial innovation: A robo-advisor system for robust returns across diversified markets” tests a machine-learning–driven robo-advisor against classic 60/40 and risk-parity benchmarks.
Researchers back-tested daily returns for equities, bonds, commodities, and REITs over five years. The robo-advisor’s reinforcement-learning rules dynamically shifted allocations, while benchmarks remained static.
Results
The robo-advisor outpaced 60/40 by 1.3% annualized and risk-parity by 0.8%.
During sell-offs, volatility was 10% lower thanks to faster regime detection.
Net transaction costs stayed under 0.2 % annually, preserving most gains.
Takeaways for your wallet
This is not to say, that all robo-advisors will outperform, but this type of result holds some promise for the future of these investment tools.
The main selling point of a robo-advisor service is that it is a good option for people who can’t afford a financial advisor but aren’t comfortable with a pure DIY investment approach.
As with any investment service, the number one factor in your control is the fees you pay.
#3 — Subscription Overload
Why is it so easy to sign up for a streaming trial but nearly impossible to cancel?
A recent study with the fantastic tittle “Staying at the Roach Motel: Dark Patterns in Subscription and Cancellation Flows” mapped out the growing issue of subscription traps.
The researchers studies the signup and cancellation user experience for 1,000 popular digital services. They coded each flow for number of clicks, forced detours (like “Are you sure?” pop-ups), required chat or phone calls, and hidden fees.
They then surveyed 5,000 users about perceived hassle and actual drop-off rates.
Results
Average cancellation took 8 steps versus 2 steps to sign up.
82% of subscription services required at least one forced chat or phone interaction.
Users facing high-hassle flows were 60% less likely to complete cancellation, even when they tried.
Takeaways for your wallet
Create a schedule to Audit your subscriptions, say monthly or Quarterly. If a service forces you to call or chat to cancel, consider dropping it if possible.
Use a password manager or password-vault trick to ensure you can log in—many sites hide the “manage subscription” link behind extra authentication. We have all been in a situation before where you want to cancel a subscription, can’t remember your password to log in and get frustrated and forget about it.
This Week’s Wrap Up
Three very different corners of personal finance, yet they all hinge on friction—whether it’s the visual anchor nudging you toward minimum payments, an algorithm’s ability to cut through market noise, or the User Experience that’s been engineered to trap you in an unwanted subscription. Spot the frictions you face, then either dial them up (for good habits) or erase them (for bad ones).
Your future self will thank you.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.