Understanding the Debt Trap

"By Chris Chittenden"

"There is, of course, a gold mine or a buried treasure on every mortgaged homestead. Whether the farmer ever digs for it or not, it is there, haunting his daydreams when the burden of debt is most unbearable."

… Fawn M. Brodie (1915-1981) US author

Do you ever wonder why people find themselves way over their heads in debt? If you do then you are not alone. For many people, the festive season is a period of extensive gift giving and the month of January finds a lot of them scratching their heads over the size of their credit card bills and how they are going to pay them off.

We can even look to the current so-called "financial cliff" that the United States faces and ask how they could possibly amass a sixteen trillion dollar debt that is growing by the minute and which is rapidly bringing the US and the rest of the world to a nasty financial shock.

How the hell do we get ourselves into these situations? After all, it is not as though we cannot see it coming. Most people, with debt problems continue to spend beyond their means even when they know they cannot afford to do so.

One way to answer this question lies in how human beings make decisions.

Much as we would like to think that we are rational decision makers, this is actually far from the truth. Rather than always calmly weighing up the pros and cons of a situation, our decision making process is largely the result of a continuous battle between our internal reward and loss systems. This battle centres around dopamine which is produced by dopamine neurons in the brain and is fought in the subconscious. The upshot of this is that we are constantly torn between what we might gain and what we might lose - what we term "expanding" and "conserving" tendencies in the ontological approach. As a general rule, we tend to place more emphasis on what we might lose compared to what we might gain. This means that we have to believe the potential reward will have to considerably outweigh the potential loss if it is to be our main driver.

Enter the credit card. Before the widespread use of credit cards, most people used cash to buy goods. In other words, when they bought something, they had to give something up. We gave the shopkeeper something physical and knew we were losing something now. This tended to temper our purchasing decisions. The introduction of credit cards changed all that. When buying something with a credit card, we get the pleasure of the purchase whilst being detached from pain of the loss of money. We tend to overvalue the immediate gain and undervalue the future loss. Hence many people end up buying more than they can afford. The buzz we get from buying something new is so pervasive that we have even created a term for it, "retail therapy". You just have to go to a shopping mall on any weekend to see how addictive this therapy can be. You only have to look at the statistics of credit card debt to see how debilitating it can also be for some.

This tendency to overvalue immediate gain and undervalue future loss is just one aspect of the unseen processes of human decision making. Given that each one of us is constantly making decisions, it is remarkable how little most people know about just what is involved when we do so. The example of buying with a credit card and its possible impact is but the tip of the iceberg.

If you want to find out more on this subject and you are looking for something interesting to read during the holiday season, one book that will help you understand how we humans decide to do what we do is "How We decide" by Jonah Lehrer.

More articles on Being Human

© 2012 Chris Chittenden