Even if a consumer understands the potential costs of present borrowing in excess of certain future income, when the time comes to choose whether to buy a thing on credit or save for later, hyperbolic discounting pushes the decision powerfully in favor of borrowing.  The overvalued present benefit of having the thing can be expected to outweigh the heavily discounted future benefit of having the thing unencumbered by debt.  And the overemphasized present cost of foregoing present consumption can be expected to outweigh the discounted future cost of paying back the loan (or the discounted future risk of being unable to do so).  Even if the objective future costs and risk of default accurately gauged might outweigh the present benefit, hyperbolic discounting skews this decision-making process and blinds the consumer decision-maker to this negative reality. 

It turns out that the urge for instant gratification is not a character flaw of “Generation X,” but a deep-seated psychological phenomenon that affects most consumers.  While the bias toward present consumption and against delayed gratification is not a shocking discovery, behavioralists offer scientific evidence that human nature—not individual “prodigality”—underlies this bias.

Before credit was widely available to consumers, these biases remained largely in the shadows.  Now that credit has been “democratized,” consumers are diving into the water, confident of their ability to swim, but not knowing that millstones hang from their necks.  Social and economic Darwinism offers no acceptable answer to this problem.  Unlike in the business world, “market corrections” cannot destroy consumers who suffer more from these biases, leaving only those strong enough to resist.  Society cannot allow the weak to be devoured in the new economic jungle—at least Western societies have signaled their unwillingness to do so.  The question is how to deal with the epidemic of overindebtedness caused in part by these biases.

II.  Overindebtedness Likely Cannot Be Prevented by Demand-Side Efforts

If behavioral economics offers compelling explanations for the causes of over-borrowing, then behavioral economics should be consulted for directly countervailing potential solutions to the problem.  It turns out that these biases are exceedingly difficult to overcome, perhaps so much so that we ought to abandon thoughts of curing overindebtedness and focus on treating its inevitable effects. 

The revelations of behavioral economics not only suggest that consumers labor under a variety of powerful biases, but that “debiasing” is difficult if not impossible.  Behaviors like the overconfidence bias and hyperbolic discounting stubbornly persist even when people are made keenly aware of such biasing forces and the actual probabilities of adverse events.  

This suggests that most if not all ex ante efforts at getting more information to consumers about the risks of over-borrowing will do little to avoid consumer overindebtedness.  Information can help consumers only if they are able to use it to gauge risk more accurately and avoid “too much” risk.  But behavioralists have shown that people are often simply unable to benefit from more information.  Biases and heuristics influence behavior more powerfully than information—indeed, inaccurate predictions of risk persist even in the presence of accurate statistics about risk. 

Perhaps we ask too much of bankruptcy law if we expect it to change overly risky consumer borrowing behaviors.  Current “debtor education” programs that focus on money-management skills seem more likely to exacerbate the biases explored above.  These programs enhance the illusion of control that leads to overconfidence in future borrowing.  Indeed, behavioral evidence strongly suggests that inevitable failure awaits even debtor education that reveals these biases and focuses consumers on avoiding them.   Passive debtor education on the ills of borrowing too much is no match for the powerful psychological forces driving overconfidence and over-enthusiasm for present borrowing.  To be sure, consumer financial education is valuable.   But behavioral economics suggests that we ought not to expect too much from passive “debtor education” as a core part of consumer overindebtedness treatment.