Bozo sapiens has been on a buying spree.  The US Census reveals that there are more than 159 million credit cards in America; put in one stack, they would rise 70 miles into space.  US families currently owe about $973 billion to card companies; their total indebtedness, not including mortgages, is $2.56 trillion - just a smidgen more than size of the government's bailout plan for the financial industry.  Clearly, credit is huge, but it is not uniform; to reach these totals took billions of individual purchasing decisions, where one consumer decided to buy something despite not having the cash in hand.  Why do we do it?  And why do we do it so often?

"I would gladly pay you Tuesday for a hamburger today;" the words of Popeye's J. Wellington Wimpy sum up a strange but vital quirk of behavioral economics: payment now and payment later mean entirely different things to humans.

Conventional economics assumes the idea of discounting: the further in the future I receive a good, the less I need pay for it today. This is the flipside of paying interest and is usually calculated the same way, using a linear scale representing some fixed discount rate. So if I am willing to pay one dollar for a hamburger today, I should pay, say, 90 cents now to get hamburger tomorrow and 81 cents for a hamburger the day after.

Emotionally, though, "sometime soon" and "right now" have entirely different values. Confronted by the prospect of an immediate good - the warm, fluffy bun and juicy beef; the prospect of crisp, cool lettuce with the sharpness of well-made relish - we act like Wimpy and throw all calculation out the window. We want it now.

The result of this overwhelming desire is called "hyperbolic discounting": we can only judge accurately between two goods – hamburger vs. price – as long as both are right in front of us, or both far enough in the future. If only one good thing is present, it sweeps the board. Although test subjects agree that being given $1.10 in thirty-one days is clearly better than $1 in thirty, they will always take $1 today in preference to $1.10 tomorrow. We even use entirely separate parts of the brain to value immediate and delayed rewards - the first through the emotionally intense limbic system and the second through the more coolly judgmental prefrontal cortex.

This might be sound instinct ("a bird in the hand," and so on) if it weren't for the fact that any economic choice is also an implied purchase. That is, if you really consider a dollar today to be worth $1.10 tomorrow, someone is going to try to sell it to you on those terms - by offering you a credit card.

The brain decides whether a price is fair by balancing the anticipated pleasure against the pain of financial loss; both of these are emotions of the moment. But if the pleasure is immediate and the pain is in the future, how can we compare them? This is the secret horror of credit: by punting payment off into the middle distance, it brings hyperbolic discounting into play whenever we feel the urge to acquire.

Barter is clearly different: if I want your Steve Dalkowski baseball card I know I'll have to hand over two of my Nolan Ryans; paying cash, too, offers a physical sensation of loss, a worrying lightness of pocket, by which to judge how desirable a purchase really is. But consumer credit is the love-child of corporate greed and individual irresponsibility: it removes the pain (and thus the brain) from the decision. We order the hamburger - because, basically, we think Tuesday will never come.

If you enjoy such tales of human fallibility, you will find a new one every day at http://bozosapiens.blogspot.com.  See you there.

About the Author

Michael Kaplan

Michael Kaplan writes about chance, fate, probability and error. He is the author of Bozo Sapiens: Why to Err is Human.

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