The credit crunch has been caused in large part by a series of poor decisions both within the financial sector and the regulatory sector.  I was reading a study today that revealed yet another unintended consequence of a regulatory decision.

The rule in question forces credit card companies to take a minimum sum each month from all accounts with an outstanding balance.  The idea behind the rule is that it stops borrowers from getting too heavily in debt.  However a study by Neil Stewart from Warwick University suggests that it has actually had the opposite effect.  It all revolves around a concept called anchoring whereby people rely too heavily on one particular piece of information to make their decision.  In this instance people were anchoring the minimum amount they had to repay, thus not paying off as much as they otherwise may have done, costing them significantly in the long run.

The anchoring process was famously illustrated in a 1974 study by Daniel Kahneman and Amos Tversky.  The study asked participants to estimate the number of UN countries were African, but only after having rolled a roulette wheel.  Those that landed a higher score on the wheel estimated there were more African nations than those that scored lower on the roulette wheel.

Steward does provide salvation however by suggesting that more information would remedy the situation.  He’s set-up a simple calculator on his website that allows people to caculate how much their actions could save (or cost) them.