Exploring emotions and irrationality in attitudes towards consumer indebtedness: Individual perspectives of UK payday loan consumption
Summary
The aim of this research is to explore contemporary consumers’ emotions and irrationality in attitudestowards indebtedness, using the UK payday loan industry as a focus point. UK consumers’ have recently experiences a significant financial crisis, the result of which is expected to be altering consumers’ spending, saving and borrowing habits. By using existential-phenomenological interviews to discuss individual’s experiences of these activities, we observe some of the key issues emerging from this context. A primary theme is the influence of emotions on decision making, and how this shapes ‘irrationality’. This paper aims to draw attention to this emotive thinking, which may be significant in thinking about how payday loans are communicated to users in the future.
Keywords: consumer behaviour, credit, debt, borrowing, payday loans, emotion
The authors are indebted to Dr Julie Robson, Doctoral Colloquium Conference Chair, Professor Jillian Farquhar, Doctoral Colloquium Session Chair, the anonymous reviewers for AM 2014, Bournemouth University and the anonymous reviewers for this special issue of JFSM. Their suggestions and guidance have been invaluable in the preparation of this paper and are greatly appreciated.
Exploring emotions and irrationality in attitudes towards consumer indebtedness: Individual perspectives of UK payday loan consumers
Introduction
The most significant financial crisis in living memory has gripped the UK, since the economic downturn at the end of 2008 (Allen, 2010; Hardieand Perry, 2013). Consumers have experienced lowered household incomes combined with increasing prices for everyday items, forcing them to re-examine and alter previous spending habits (KotlerandCaslione, 2009; Pentecost and Andrews; 2009; Roubini, 2009; Perriman, Ramsaran-FowdarandBaguant, 2010; Voineaand Filip, 2011). It is predicted the longer the current situation continues, more new patterns of behaviour will develop and stay with today’s consumers (Choueke, 2009; Kappler, 2009; Perriman et al., 2010).
Debt in the United Kingdom
In the UK, 15 million people have reported signs of financial difficulty, with those on average incomes, families with children and people in full-time work most at risk of falling into debt (StepChange, 2014). Citizens Advice (2012, p.1) stresses ‘…Debt problems rarely exist in isolation: many people face clusters of problems, of which debt may be the main or simply a component part. Over-indebtedness can be caused by, and contributes to, social exclusion, financial exclusion and poverty’.
In light of these pressed times, a major consideration facing contemporary consumers is how to pay for purchases. Levels of personal debt stand at an all-time high as the cost of living rapidly rises. The total amount of personal debt in the UK is £1.456 trillion, with the average amount per adult standing at £29,634; approximately 122% of average earnings (Federal Management, 2012). This figure is higher for graduates, who are expected to leave university with debts of over £40,000 (The Guardian, 2012). The average family owes nearly £10,000 (Aviva, 2012; Read, 2012) or £55,988 including mortgages (Federal Management, 2012). Credit cards, loans and overdrafts account for the majority of debt (Aviva, 2012). Other unsecured, short-term options available to UK consumers’ include unauthorised overdrafts, payday loans, doorstep loans (home credit), instalment loans and credit cards (Sharifi and Flores, 2013). Within these options, payday lending is emerging as an increasingly popular choice, having experienced significant growth (figure 1) in usage over the last 15 years.
Year / Number of payday borrowers2006 / 0.3 million (Burton, 2010)
2009 / 1.2 million (Burton, 2010)
2011 / 1.3 million (Ellison, Forster, Whyley and Jones, 2011)
2013 / 1.6 million (FCA, 2014)
Figure 1.Growth in UK consumer usage of payday loans.
The UK payday loan industry
Payday lending has been an established form of lending in the US, but is a relatively new product to the UK (Lawrence and Elliehausen, 2008; Burton, 2010). A payday loan is an unsecured form of credit that allows an individual to borrow on average £300 (up to £1000), for a short period of time; typically the borrower’s next payday (Burton, 2010; Conway, 2012; Sharifi and Flores, 2013). In the UK in 2013, 1.6 million people took out 10 million loans, valued at £2.5 billion (FCA, 2014). The average customer took 6 payday loans from a variety of lenders, with each loan averaging around £260 (FCA, 2014). They are a less expensive alternative to unauthorised overdrafts with almost immediate availability. In the UK, payday loans are available in physical store locations and online.
Payday lenders are often characterised as predatory towards vulnerable consumers (Johnson, 2002; Graves and Peterson, 2005; Hawkes, 2013; Hughes, 2013). This is usually due to the product’s availability to people with poor credit ratings, and/or have been refused credit from other sources, having a four-figure plus APR rate, being risky to the borrower, ability to be ‘rolled over’ multiple times, and over-simplified marketing campaigns that gloss over the dangers of not being able to repay.
The profile of UK payday loan consumers’ is very different to that of borrowers in the US (Burton, 2010), which indicates a need for more UK-based research as theory built around an American context may not be relevant to the UK. Some characteristics of UK borrowers have been identified, e.g. Borrowers tend to be under 35, single, without children (Burton, 2010; FCA, 2014), whereas US borrowers tend to be older with young families (Lawrence and Elliehausen, 2008; Burton, 2010). The FCA (2014) indicates users have an average income of £16,500, 64% have outstanding debts from other types of lender; 55% used the loan for utilitarian spending (e.g. living expenses, bills) and 20% for hedonic spending (e.g. holidays, social activities). Payday loans are often used to either to ‘bridge financial shortfalls by enabling [individuals] to smooth liquidity shocks [or] tempt individuals to overconsume’ (Morse, 2011, p. 29).
Key concepts regarding personal debt and borrowing
There is scant literature focusing on payday loans specifically; that which is available is often situated within an American context, at an industry level (Graves and Peterson, 2005; Bertrand and Morse, 2011; Payne andRaiborn, 2013). For the purpose of this study, we have reviewed literature with a debt and/or borrowing focus to identify key ideas. This literature spans a wider geographical focus, and is usually not from the level of the individual.
Research into personal indebtedness and individual behaviour has focused on key aspects such as financial literacy and decision making (e.g. Estelami, 2009; Lusardi and Tufano, 2009; Stango and Zinman, 2011; Duca and Kumar, 2014) and studies of cognitive bias (the way in which people think and make judgements based on aspects such as predisposition, personality, moral systems and experience that may, or may not be rational) (e.g. Frederik, 2005; Baumeister, et al., 2007; Oechssler, Roider and Schmitz, 2009; Banks, O’Dea and Oldfield, 2010; Bertrand and Morse, 2011; Hoppe and Kusterer, 2011; Wu and Cheng, 2011; Brahmana, Hooy and Ahmand, 2012).
Personal debt and issues around money management have come to the fore particularly since the start of the 21st century as a significant aspect in consumption and consumer behaviour (Eccles, Woodruffe-Burton and Elliott, 2002; Veludo-de-Oliveria, Ikeda and Santos, 2005).
Irrationality
Irrationality is an underlying theme acrossbehavioural finance; a paradigm evolved from traditional economics and the assumption that people act rationally, considering all available information in the decision making process (Kishore, 2004; Azar and Fetchenhauer, 2012; Riepe, 2013). As Shefrin (2002, p. x) states: ‘...People are imperfect processors of information and are frequently subject to bias, error, and perceptual issues’. Behavioural finance tries to acknowledge these imperfections, exploring how consumers actually behave and the potential reasons behind these actions. In light of traditional ‘rational’ finance theory, sometimes decisions can appear highly irrational and unexplainable in given contexts (Kishore, 2004).
Irrationality falls into two categories; predictable and unpredictable. Unpredictable irrationality covers decisions made without any systematic logic. Dolan and Stevens (2013, p.116) state that, ‘…predictable irrationality represents an outcome that is "wrong" in the strict sense of being an optimal decision, but it is nonetheless expected using the constructs of behavioral finance (e.g., mental accounting, reliance on heuristics).’
Riepe (2013, p. 35) argues that the modern field of behavioural finance needs to move away from the discussion of whether people are rational or irrational, and start thinking ‘…toward the admittedly messier, but more realistic terrain where people reside somewhere on a continuum’.
Delay discounting is associated with money (mis-)management (Hamilton and Potenza, 2012). Delay discounting is also known as hyperbolic discounting (Angner, 2012; Wilkinson and Klaes, 2012). This is where a consumer favours smaller, immediate rewards over larger, delayed ones (Hamilton and Potenza, 2012). In behavioural finance, this behaviour is associated with impulsive or seemingly irrational behaviour (Angner, 2012; Hamilton and Potenza, 2012). – I’ve moved this but it doesn’t seem to fit anywhere? JB
Financial literacy
Financial literacy refers to a consumer’s ‘…understanding of financial concepts and ability to correctly interpret financial data’ (Gathergood, 2012, p. 590). The concept of financial literacy tends to concentrate on knowledge acquired through financial education, typically through formal sources (Lusardi, Mitchell and Curto, 2010; Postmus, Plummer, McMahon and Zurlo, 2013). As such, much of the research in the existing literature shares the goal of improving consumer understanding of their individual borrowing decisions through education to enhance financial literacy and overcome irrationality. Studies in this field are largely quantitative in nature and the focus is on borrowing behaviour and cognitive skills (e.g. Estelami, 2009; Shen, 2014).
It has been suggested that that consumers with higher levels of financial literacy are more likely to have lower levels of borrowing debt (Lusardi and Tufano, 2009; Gathergood, 2012; Stango and Ziman, 2011; Huston, 2012). Several factors influence financial literacy, e.g. gender, social class, location and education. For instance; it is thought that consumers with higher education levels are more likely to have ‘…extended decision processes than those with lower levels of education. This observation may be attributed to greater cognitive ability and efficiency in search’ (Lawrence and Elliehausen, 2008, p.308). Disney and Gathergood (2013, p.2224) note that heads of households with poor financial literacy were typically self-aware of that fact “…and less likely to acquire information relating to consumer finance through reading the financial pages in the press”. A study by Shen (2014) showed that financial literacy, affected by cognitive ability, financial knowledge and financial education can improve consumers’ behaviour when making decisions about credit card borrowing, as consumers may try to be rational but still do make mistakes in their individual financial decisions. Again, the focus is on cognition rather than those affective elements which might impact on borrowing behaviour. However, the FSA (2008, p. 6) suggest that ‘…if even the most financially sophisticated individuals do not take sensible decisions when confronted with apparently simple choices, the problems may not primarily be due to financial ignorance and lack of financial education’.
Cognitive Bias
Similarly, cognitive bias is a popular theme explored in the borrowing literature. A cognitive bias infers to the way in which people think and make judgements based on aspects such as predisposition, personality, moral systems and experience, which may, or may not be rational. Cognitive psychology is one of the main building blocks behind the paradigm of behavioural finance (Ritter, 2003). The Financial Services Authority deliberated several biases in considering financial capability through a behavioural economics perspective, namely; procrastination, loss aversion, regret aversion, mental accounting and status quo bias (FSA, 2008). Existing literature within this area is mainly quantitative in approach (Oechssler, Roider and Schmitz, 2009; Banks, O’Dea and Oldfield, 2010; Bertrand and Morse, 2011; Hoppe and Kusterer, 2011).
Consumer attitudes
However we aver that individual consumer attitudes towards borrowing and indebtedness play a key role in individual responsibility and financial (mis-)management. Attitudes were famously defined by Allport (1935) as ‘…learned predispositions to respond to an object or class of objects in a consistently favourable or unfavourable way’. The ABC model of attitudes suggests that attitudes consist of three components; affect, behaviour and cognition (Assael, 1998). Solomon et al., (2010, p. 277) define each component:
Affect refers to the way a consumer feels about an attitude object (e.g. loans)
Behaviour involves the person’s intentions to do something with regard to an attitude object
Cognition refers to the beliefs a consumer has about an attitude object
The ABC model is commonly arranged into several hierarchies of effects, of which we believe the experiential hierarchy to have particular impact in this instance. This hierarchy stresses the emotional response as a central consideration towards attitude construction (Assael, 1998).
It is well documented in consumer behaviour and marketing literature that it is necessary to change attitudes in order to influence consumer decision making and change consumer behaviour (Hoyer et al, 2012, p.128). To change attitudes, all three components must be understood. Our examination of the extant literature has shown that, as far as we can see, there is little research studying indebtedness from an individual experiential perspective focusing on the affective heuristic; that explores what it feels like to be in debt, the emotional implications of the impact of indebtedness on daily lives, and how individuals cope with the stigma and stress associated with debt. Little is known about the ‘tipping point’ – when manageable debt becomes unmanageable – except that it is different for individuals (Eccles, Woodruffe-Burton and Elliott, 2002). Cohen, Pham and Andrade (2008, as cited by the FSA, 2008, p. 53) suggest that ‘…judgements that are evoked by genuine subjective feelings and moods are influenced by the affective heuristic’. Further, while irrationality and irrational behaviour in relation to financial (mis-)management is often discussed, underlying feelings and emotions which may contribute to irrationality appear overlooked (FSA, 2008; Dunning, Fetchenhauer and Schlösser, 2012; FCA, 2013.).
As part of a larger, UK-based qualitative study of the payday loans market from an individual consumer perspective, our research explores consumers’ lived experience of payday loans in the context of consumption, taking into account the role of emotions in borrowing behaviour and the emotional impact of debt in an attempt to address this gap and to begin to theorise personal borrowing and indebtedness from an attitudinal perspective. In this paper we review the extant literature to provide support for our position and we present some data from the findings of our ongoing research to illustrate the affective factors which play a role in attitudes towards borrowing and indebtedness.
Accordingly, our research addresses the several gaps identified in the current literature; firstly, by investigating the UK payday loans market and secondly by exploring individual consumer experiences, and thirdly exploring consumers’ emotions and feelings around borrowing and indebtedness.
Methodology
The data was obtained through depth interviews, underpinned by existential-phenomenological guidelines (Thompson, Locander and Pollio, 1989). This format is often used by consumer researchers investigating lived experience (Stevens andMaclaran, 2005; Woodruffe-Burton and Elliott, 2005; Eccles, 2009; Woodruffe-Burton and Wakenshaw, 2011; Karanikaand Hogg, 2012). The free-flowing style of existential-phenomenological interviews allows respondents to use their own words to narrate their experiences, attaching their own meaning to the situation and providing narrative at the level of their life-world (Thompson et al., 1989; Woodruffe-Burton and Elliott, 2005; Kvale and Brinkmann, 2009).
Thismethod aims to yield a conversation around how a respondent makes sense of their experiences and is particularly suited to research aiming to elicit feelings and emotional factors. In addition, the six guidelines for depth interviews (Belk, Fischer andKozinets, 2013, p.37 - 40) were a strong influence, advising; funnelling of questions from general to specific, not asking ‘why’ or ‘yes/no’ questions, probing without interrupting the flow of an answer, circling back to earlier topics and exploring tangential topics.
As part of an ongoing wider study, 9 participants have participated in multiple interviews thus far. Individuals were recruited in Northeast England over a 12 month period using friendship pyramiding and snowballing (Stevens andMaclaran, 2005), and through noticeboard announcements in charity shops, credit unionsand libraries. The criterion for taking part was to have used at least one payday loan from a UK lender within the last three years. Uptake has been arduous with a low response rate, and of these respondents, a high dropout rate. On several occasions participants got ‘cold feet’ and cancelled(which may of itself be linked to sensitivities around this subject). Furthermore, approaches made to local lenders and debt charities to assist in the recruitment of participants proved fruitless for various reasons. The individuals were encouraged to select a convenient, quiet location of their choice, to assist in an open dialogue (King andHorrocks, 2012; Belk et al., 2013). Interviews started by asking the individuals about themselves, an overview of their finances, and how they currently manage their money. Individuals were encouraged to talk about their experiences of specific events where possible. Conversations were digitally recorded. In line with the University Ethics policy, confidentiality was assured to individuals and informed consent was obtained. Each interview lasted between 50 and 120 minutes, generating over 300 pages of transcript data.
Currently men and women between the ages of 26 and 47 years have participated in the research (recruitment is ongoing), across a range of marital statuses, education levels and social class. The final sample size is expected to be small; a characteristic of studies utilising depth interviews (Miles andHuberman, 1994; Fossey et al., 2002; Brinkmann, 2013). However, rather than single interviews, several participants have taken part in follow up interviews to generate richer data over time using reflexive research tools to encourage reflection, thus developing in-depth case studies. The interviews have been transcribed verbatim by the researcher, in an attempt to stay as close to the data as possible (Carson et al., 2001). Pseudonyms have been used to protect participant’s identity.
The transcripts have been analysed using a thematic analysis, drawing upon Interpretive Phenomenological Analysis techniques (Smith, 1996; Smith, Flowers, and Larkin, 2013) and Mauthner and Doucet’s (1998) Voice-Centred Relational Method (VCRM). In line with VCRM, interviews were read several times, looking for VCRM identified criteria, or researcher instinct. The first reading sought ‘the plot’,e.g. key subjects or events, the second reading was the voice of ‘I’; how individuals refer to themselves within the discussion, the third reading was for the use of ‘they’, relating to how payday lenders were perceived and experienced, and the fourth reading highlighted use of emotive words.