mental accounting

I finally had a chance to listen to the Planet Money podcast from last month about payday loans.  Overall, it mostly covered familiar territory, but I was intrigued by the research suggesting that rate ceilings tend to act as “anchors” for interest rates, and wind up as floors.

I was also struck by one element of the story of the man who kept on coming back to take out high-interest loan after high-interest loan, in order to support his gambling habit.  In passing, they noted that he owned his house free and clear.  I think the implication was that he was making a mistake taking out payday loans, when he could have taken out a much cheaper mortgage.  Alternatively, I could tell a story that he had figured out a mental accounting scheme that let him keep gambling relatively small amounts, without risking losing his house.  The payday loans may not have been as irrational a choice as all that.

In perhaps related news, Jim McDermott and Barney Frank have introduced bills that would legalize — and tax — internet gambling.   In general, I’m vaguely supportive, mostly because I think it’s pretty much impossible to stop people from gambling on the internet anyway.  I like some of the causes that the money is supposed to support — although I’m also very aware that in most of the states where lottery sales are supposed to support education, they just supplant money the state would have spent from general revenues otherwise, with no net increase in spending.

One Response to “mental accounting”

  1. Jody Says:

    It’s been a little difficult to follow the budget process this year, but I think that our state raided the lottery coffers (taking out of some sort of reserve) to stop education cuts from being worse. I very much oppose lotteries as regressive and deceptive taxation schemes, but it seems pretty clear that without the fiction the lottery creates here — the fiction of the “extra” money — we would have seen greater cuts in education spending. There was no political will to raise income taxes or to fund education via cuts in already decimated services.

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