For most consumers, serious incidents of overindebtedness lack “availability,” so consumers understandably underestimate the risk of their own overborrowing.  If consumers have not been exposed frequently or recently to a liquidity crisis or other potential financial problem, they are likely to underestimate the possibility of such a problem in the future.  Even if consumers are bombarded with statistics about default rates and levels of bankruptcies among others, the sheer number and dry, impersonal nature of such statistics might rob them of salience.  Just as people discount the likelihood of cancer or lung disease because the risk of one cigarette at a time lacks salience, consumers understandably discount the risks of small, incremental borrowing (especially using credit cards) leading to big financial trouble.  

Indeed, even if default or other financial crisis has struck the consumer personally, the powerful overconfidence bias might well overcome even “available” negative events, leading consumers to distinguish and discount distant past negative events from future similar risks—after all, “it can’t happen to me.”  Combining a lack of availability—particularly salience—with the overconfidence bias leads consumers to underestimate financial risk substantially.   The bias toward overconsumption of credit plagues consumers coming and going.

C.  Hyperbolic Discounting and Bounded Willpower

Confirming something that most of us have witnessed in ourselves and others, behavioralists have amassed evidence that individuals systematically overvalue immediate benefits and costs and undervalue delayed benefits and costs.   In particular, present gratification tends to be highly overvalued, and future costs tend to be heavily discounted.  The magnitude of the discount on future costs (and benefits) increases over time.  To use the scholarly jargon, individuals apply “hyperbolic discounting” to downplay future costs more and more as the costs move farther and farther into the future.

A closely related problem is the tendency of individuals to suffer from “bounded willpower.”  People often minimize the benefits and acknowledge the costs of risky future activity (e.g., smoking or eating fatty foods) and may decide to avoid such behavior while its benefits lie in the future.  But once the “moment of truth” arrives, the immediate (and now overvalued) present benefit of the risky activity outweighs the still distant (and still heavily discounted) future costs.  In many cases, this skewing of the relative weights of costs and benefits results in weakening or abandonment of the earlier willpower to forego that risky activity.    

The effects of bounded willpower and hyperbolic discounting are especially pronounced in the average consumer credit transaction, particularly those involving revolving credit sources like credit cards.  Consumer credit facilitates if not, indeed, enhances consumers’ susceptibility to the bias toward present consumption and against delayed gratification.  Hyperbolic discounting explains (at least in part) why consumers can only be expected to overvalue the benefits of “buying now” while downplaying the costs of “paying later.”