aTypical Joe: a gay New Yorker living in the rural South

Wednesday, April 02, 2008

Dan Ariely’s “Self-Control” credit card

Among the books I’m reading these days is Dan Ariely’s Predictably Irrational. Dan’s in the news a lot lately, as well he should be. The book is a joy to read, and reduces very complicated concepts to easily understood highly readable chapters.

The other day I noted that college students are crying out for limits to be placed on credit card marketing. This is absolutely consistent with much of Ariely’s work. His 2002 study, Procrastination, Deadlines, and Performance: Self-Control by Precommitment, is referenced in his book and available at SSRN.

But the brilliant joy of his book is the way he hypothesizes applications for his research. Here, for example, from page 123, the idea of a “self-control” credit card:

A FEW YEARS ago I was so convinced that a “self-control” credit card was a good idea that I asked for a meeting with one of the major banks. To my delight, this venerable bank responded, and suggested that I come to its corporate headquarters in New York.

I arrived in New York a few weeks later, and after a brief delay at the reception desk, was led into a modern conference room. Peering through the plate glass from on high, I could look down on Manhattan’s financial district and a stream of yellow cabs pushing through the rain. Within a few minutes the room had filled with half a dozen high-powered banking executives, including the head of the bank’s credit card division.

I began by describing how procrastination causes everyone problems. In the realm of personal finance, I said, it causes us to neglect our savings-while the temptation of easy credit fills our closets with goods that we really don’t need. It didn’t take long before I saw that I was striking a very personal chord with each of them.

Then I began to describe how Americans have fallen into a terrible dependence on credit cards, how the debt is eating them alive, and how they are struggling to find their way out of this predicament. America’s seniors are one of the hardest-hit groups. In fact, from 1992 to 2004 the rate of debt of Americans age 55 and over rose faster than that of any other group. Some of them were even using credit cards to fill the gaps in their Medicare. Others were at risk of losing their homes.

I began to feel like George Bailey begging for loan forgiveness in It’s a Wonderful Life. The executives began to speak up. Most of them had stories of relatives, spouses, and friends (not themselves, of course) who had had problems with credit debt. We talked it over.

Now the ground was ready and I started describing the self-control credit card idea as a way to help consumers spend less and save more. At first I think the bankers were a bit stunned. I was suggesting that they help consumers control of their spending. Did I realize that the bankers and credit card companies made $17 billion a year in interest from these cards? Hello? They should give that up?

Well, I wasn’t that naive. I explained to the bankers that there was a great business proposition behind the idea of a self-control card. “Look,” I said, “the credit card business is cutthroat. You send out six billion direct-mail pieces a year, and all the card offers are about the same.” Reluctantly, they agreed. “But suppose one credit card company stepped out of the pack,” I continued, “and identified itself as a good guy--as an advocate for the credit-crunched consumer? Suppose one company had the guts to offer a card that would actually help consumers control their credit, and better still, divert some of their money into long-term savings?” I glanced around the room. “My bet is that thousands of consumers would cut up their other credit cards-and sign up with you!”

A wave of excitement crossed the room. The bankers nodded their heads and chatted to one another. It was revolutionary! Soon thereafter we all departed. They shook my hand warmly and assured me that we would be talking again, soon.

Well, they never called me back. (It might have been that they were worried about losing the $17 billion in interest charges, or maybe it was just good old procrastination.) But the idea is still there-a self-control credit card-and maybe one day someone will take the next step.

We have groups like Working Assets setting up credit cards for social ends. I expect one day soon some progressive organization like MoveOn.org will set up the self-control credit card on its own.

RELATED: Ariely is hardly the only hero of behavioral economics. I’ve long been a fan of the libertarian paternalism work of Cass Sunstein and Richard Thaler.

Friends say they’d better do something about that name. I’d say that the title of their new book, Nudge: Improving Decisions About Health, Wealth, and Happiness, is a promising move in the right direction.