Live data from Hacker News

Why Don't People Manage Debt Better?

blogs.scientificamerican.com

31–40 of 369 posts

Re: Why Don't People Manage Debt Better?

#31
post #8

This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…

I have literally have people tell me that this is still rationality because it's the rational thing "for them". Like, the weirdest one was a cognitive psychology doctoral student. I mean, okay, if you can redefine rationality to be completely subjective, then sure, rationality is flargikriggendurf.

[deleted]

Re: Why Don't People Manage Debt Better?

#32
post #23
post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and that is the only sensible strategy. Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earni…

I can see how a share buyback would put upward pressure on the share price, but how could it have a positive effect on earnings? Seems like it would have to have a negative effect on net earnings over the long term if the buyback was financed via a loan, due to the need to repay the loan.

Re: Why Don't People Manage Debt Better?

#33
post #19
post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you c…

Wouldn't being able to continue your life unobstructed by the need for some potential purchases be an asset in the same way the parent described student or car loans as potential assets? If something comes up outside your usual cash flow, say a tire blows, and smoothing out that irregularity helps you keep your job, I would consider that a worthwhile investment.

Re: Why Don't People Manage Debt Better?

#34
"The greatest shortcoming of the human race is our inability to understand the exponential function." --Albert Allen Bartlett

Considering that 97% of the survey participants allocated their debt payments in financially suboptimal ways, perhaps the second greatest shortcoming of the human race is our inability to understand the compound interest.

"Put God in your debt. Every stroke shall be repaid. The longer the payment is withholden, the better for you; for compound interest on compound interest is the rate and usage of this exchequer."

--Ralph Waldo Emerson, Compensation,' Essays, First Series (1841)

Re: Why Don't People Manage Debt Better?

#35
post #19
post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you c…

I don't even think of myself as using debt. I see credit cards as a way to get an extra $50-70 a month in rewards[1] and increase my credit score. I have never paid a cent of interest.

[1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for using the cards.

Re: Why Don't People Manage Debt Better?

#36
post #8

This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…

I have literally have people tell me that this is still rationality because it's the rational thing "for them". Like, the weirdest one was a cognitive psychology doctoral student. I mean, okay, if you can redefine rationality to be completely subjective, then sure, rationality is flargikriggendurf.

Isn't it rational to use the strategy you know you will follow?

Logic depends on a subjective choice of axioms, and an unstated one is "a plan that motivates permanent improvment is better than a temporary one".

Re: Why Don't People Manage Debt Better?

#37
post #23

Earlier quoted context omitted.

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and that is the only sensible strategy. Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earni…

I can see how a share buyback would put upward pressure on the share price, but how could it have a positive effect on earnings? Seems like it would have to have a negative effect on net earnings over the long term if the buyback was financed via a loan, due to the need to repay the loan.

Parent was writing about "earnings per share", key word being "per share". So with fewer outstanding shares, this obviously increases.

Re: Why Don't People Manage Debt Better?

#38
Could someone well-versed with bankruptcy please explain the pros/cons of going that route? I have heard that credit card debt is essentially free money because filing for bankruptcy will wipe out all the debt.

If you already own a home/car, and have no intention of getting a loan in the next 10 years, what is wrong with this strategy?

Re: Why Don't People Manage Debt Better?

#39
post #19
post #17

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you c…

"Only" 34% ?

I imagine it is still a huge amount in absolute terms.

Re: Why Don't People Manage Debt Better?

#40
This article makes much of rationality, but the concept of a rational actor in economic terms is really way more complicated and sophisticated than these sorts of analyses. So much so that it's possible to argue that there is no such thing as an objectively defined rational actor at all.

To do my best to shorthand the issue, assume that a rational actor is defined as someone who takes the course of action presumed to have the greatest likelihood of a positive (or the most positive) outcome. In order to evaluate their current strategy for rationality you have to have forward looking prescience to determine if the strategy is in fact the most probable to lead to the desired outcome.

This runs headlong into the issue of uncertainty, familiar stuff like sensitive dependence on initial conditions or just simple complexity.

For a thought experiment, consider a game such as chess. The game is completely discrete, all possible game states can be easily defined, the rules are known, and there is no element of random chance or rules changing during the game.

Nonetheless, the idea that you can put an average person in front of a chess board and say "OK, play rationally" and expect everyone to cheerfully plot out the exact same sequence of moves is obviously ludicrous. There are too many possible outcomes and threads to reason about fully, there are competing priorities in any strategy, etc.

Then when confronting an economic system that is certainly as or more complex than a simple game of chess, we expect rational economic decisions to be an objective truth?

Post reply on HN