Comments on: The end of jam-tomorrow culture A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: dsquared Fri, 01 May 2009 20:06:41 +0000 [ if your balance is so low that a regular monthly payment presents a risk more than a convenience, the yield could be negative]

well yes, but how many people do you know who a) have enough money that they don’t need to worry about $100 payments driving them negative, and b) have loads of installment credit?

By: Jacob Fri, 01 May 2009 11:28:13 +0000 dsquared, if your balance is so low that a regular monthly payment presents a risk more than a convenience, the yield could be negative. That should be reflected in the personal discount rate you apply to the offer. Read his and my comments again; the underlying theory helps explain why you would choose one payment method over the other based on your individual risk tolerance and other factors.

By: dsquared Fri, 01 May 2009 06:44:47 +0000 I’m not surprised by nomad5’s results – in my experience, installment credit (by which I mean catalogue credit) is invariably associated with people who have serious financial problems.

I am not sure which way the causation runs (and suspect that it might be because installment credit is typically so inconvenient and overpriced that the only people who look at it are the ones that nobody else will lend to), but thinking back through all the family and friends and people I grew up with, I can’t think of a single one who had a load of stuff on the catalogue and dealt with their finances sensibly and without drama.

So my conclusion would be that the population of people who need this sort of externally imposed discipline is a lot smaller than Felix or Mike assume. It’s kind of like shutting yourself up in a rehab clinic – which is also a great way of making sure that you don’t ruin your life with drink and drugs, but most people tend to prefer less drastic methods that are cheaper and less inconvenient.

(I seriously disagree with Mike on the “convenience yield” issue, btw – having a $100 payment deducted from your a/c every month gives you 12 opportunities to go overdrawn, with all the associated expense and inconvenience).

By: Geoff Thu, 30 Apr 2009 20:18:25 +0000 Great comments everyone. Cheers to all of you for illuminating the day. I’d just like to add that I tend to go with payments on large ticket items that are in the shady want/need zone because:

A)Said big-ticket item is a lifestyle enhancement
B)Without payments I wouldn’t take the time (outside of my true long term savings strategy) to create a separate “big ticket item fund”.
C)It’s too much work for a lifestyle enhancement item.

I’m talking a nice tv, large appliance, or large ticket sporting items. As long as you do the math and some sensible budgeting, you can easily snatch up on no-interest deals for 6,12,24 mo’s and be fine with your jam ahead of time.

By: Chuck Thu, 30 Apr 2009 20:11:16 +0000 “Dsquared asks if my view isn’t “just a leetle bit patronising” and accuses me of basically saying this:

‘I myself would of course choose option B, but as for the poor little feckless working class, they’re not really to be trusted with money, so they’d better go for option A.”

My view on this is, most people I know who are not ‘money people’ agree with the sentiment that the payment plan is more ‘advantageous’ because it is harder to screw up through failure of discipline or wishful thinking (as in, ‘I don’t need to save today, I’ll double tomorrow’).

I wanted to pay down my mortgage faster, and I could have just payed ahead on my 30 year mortgage, but instead I refi’d into a 10 year so that I didn’t have to ‘make the choice’ every month.

It’s a way to leverage a moment of good intentions into long term concrete discipline.

By: bdbd Thu, 30 Apr 2009 18:22:59 +0000 John Caskey at Swarthmore College has also done research on financial services and choices available to lower income folks.

By: Jacob Thu, 30 Apr 2009 18:16:52 +0000 Mike, an excellent question. Some of my professors have done just that (I certainly didn’t come up with it by myself), but all too many do not. It does seem like there aren’t very many prominent people championing this view out there…maybe Paul Wilmott? I think this goes hand in hand with the debate over complete markets and all that nonsense; the discipline needs to do a better job acknowledging risk-aversion, impulse control, etc. as you say.

By: Mike Thu, 30 Apr 2009 18:05:40 +0000 Of course the major assumption behind these questions is that you have access to cheap and convenient financial services in the first place. But where does one go to find a bank willing to pay interest on 12 deposits of $100 spaced over the course of a year? Certainly not in the less wealthy neighborhoods, especially since deregulation.

Also, if 93% of respondents answered the question incorrectly, we are not talking about a “feckless working class.”

Finally, regarding empirical evidence, you might want to check out papers by Paige Marta Skiba (Vanderbilt Law) and Jeremy Tobacman (Wharton). Not 100% on point, but in the neighborhood.

By: Rortybomb Thu, 30 Apr 2009 17:49:36 +0000 OMG – Jacob, thank you for pointing out the “convenience yield” angle on this and elaborating.

I think finance has a serious problem with this, speaking as a finance theory guy. In most other situation, be it how much you’d pay for a coin flip, how much you pay for insurance, the premium over interest on a bond or a CDS, we assume that people aren’t idiots but instead take that information as given and use it to find an ‘implied’ risk-premium.

Why can’t the finance professors think that the 15% APR extra they are willing to pay functions as that same type of risk-aversion or the price of the convenience yield of budgeting (or impulse control)?

By: hortense Thu, 30 Apr 2009 17:29:20 +0000 congrats felix, you made the who’s who of finance bloggers today whos-who-of-financial-bloggers/