Effects of Perceived Scarcity on Financial Decision Making

Abstract

How are financial decisions compromised as scarcity increases? Extant research focuses mostly on the consequences of financial scarcity; moreover, this factor is treated simply as a lack of liquidity. Using a mixed-method approach, the authors investigate the dimensions of perceived scarcity and the ways they work in tandem to negatively influence perceptions and decisions. Internal influences (including perceived consequences) and external influences (including decreased lending options) lead to results described in this article as the "triple scarcity effect." Experimental results show how perceived financial scarcity undermines loan decisions, particularly for consumers at the greatest financial risk. Next, qualitative data collected from the Consumer Financial Protection Bureau are used for a between-method triangulation of the earlier findings. Understanding the multidimensionality of perceived financial scarcity is important for designing preventive measures that improve decisions (e.g., not reborrowing) and decision making (e.g., accurately calculating cost). Results from two interventions demonstrate how these improvements are made when consumers' perceptions of scarcity are reduced. Finally, the authors discuss the welfare impact for lenders, marketers, and policy makers, and they offer an agenda for future research.

Young adults’ borrowing to purchases of desired consumer products related to present‐biased temporal discounting, attitude towards borrowing and financial involvement and knowledge

“…The observed differences between the treatment conditions were as expected although not statistically significant, thus showing only a weak effect of present‐biased temporal discounting. The results thereby failed to fully agree with any of the previous findings that feelings of deficits cause present‐biased temporal discounting and impaired cognitive processing (Cook & Sadeghein, ; Shah et al, ). It may be argued that participants did not feel a financial deficit since they on average rated ability to pay in cash relatively high.…”

“…In their review, Kamleitner et al () noted that previous research has found that past frequency of borrowing is a determinant of subsequent borrowing, but it is unclear whether the reviewed studies controlled for attitudinal and economic factors. Cook and Sadeghein () showed more over‐borrowing for past users of payday loans. These findings suggest that it is important to implement policies that prevent young adults from developing a habit of borrowing.…”

“…Effects of feelings of financial deficits have been demonstrated in laboratory experiments employing video games (Shah et al, ) and scenario studies of cognitive biases (Shah et al, ) or money concern (Shah et al, ). In contrast, Cook and Sadeghein () directly investigated borrowing to consumption. The hypothesis was tested that insufficient liquidity, limited lending possibilities and personal loss consequences evoke feelings of financial deficits with consequences for borrowing.…”

Denial Without Determination: The Impact of Systemic Market Access Denial on Consumer Power and Market Engagement

“…The tendency for consumers who experience repeated failure to resort to suboptimal market solutions (Study 3) suggests that these individuals are particularly more vulnerable to predatory lending practices such as payday loans (Cook and Sadeghein 2018), an issue that requires attention from policy makers. Low-quality loans become a more attractive option for individuals who have faced repeated failure, and this creates a situation in which some individuals sort away from the higher-quality loan, likely because of their prior experience of being denied.…”

Leveraging the Existing US Healthcare Structure for Consumer Financial Well‐Being: Barriers, Opportunities, and a Framework toward Future Research

“…Providers should also share information to allay financial anxiety (e.g., financial support or payment plans). Research could consider what kinds of information providers can give patients upfront to best manage cost concerns and subsequent decisions (Cook and Sadeghein )—while understanding that certain consumers may prefer paternalistic care over shared decision‐making (Levinson et al ) or withdraw from necessary care due to financial constraints (25% of US consumers or a family member; Frankel ; Ringel and Sturm ). Finding ways to efficiently disseminate information to patients while avoiding physician work overload (e.g., specialists with financial and medical expertise) is a promising topic of research.…”