BEHAVIOR

THINKING AUTOMATICALLY
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Figure 1.3 Reframing decisions can improve welfare: The case of payday borrowing
a. The standard envelope
A payday borrower receives his cash in an envelope. The standard envelope shows only a calendar and the due date of the loan.
b. The envelope comparing the costs of the payday loan and credit card borrowing
In a field experiment, randomly chosen borrowers received envelopes that showed how the dollar fees accumulate when a payday loan is outstanding
for three months, compared to the fees to borrow the same amount with a credit card.
How much it will cost in fees or interest if you borrow $300
How much it will cost How in fees much or it interest will cost if you in fees borrow interest $300 if you borrow $300
PAYDAY LENDER
CREDIT How CARD much it will cost in fees or interest if you borrow $300
PAYDAY LENDER PAYDAY LENDERCREDIT (assuming a 20% CARD APR) CREDIT CARD
(assuming If you fee is repay $15 per in: $100 (assuming loan) fee is $15 per $100 loan) (assuming PAYDAY
If you repay a 20% APR) LENDER
in: (assuming a 20% APR) CREDIT CARD
if you repay in: if you repay in: (assuming if you repay fee is in: $15 per $100 if you loan) repay in:
(assuming a 20% APR)
2 weeks $45 2 weeks if you repay $2.50 in:
if you repay in:
2 weeks 2 $45 weeks 2 $45 weeks 2 $2.50 weeks $2.50
1 month $90 1 month 2 weeks $5 $45 2 weeks $2.50
1 month 1 $90 month 1 $90 month 1 $5month $5
2 months $180 2 months 1 month $10 $90 1 month $5
2 months 2 $180 months 2 $180 months 2 $10 months $10
3 months $270 3 months 2 months $15 $180 2 months $10
3 months 3 $270 months 3 $270 months 3 $15 months $15
3 months $270 3 months $15
(assuming two-week fee is $15 per $100 loan)
Borrowers who received the envelope with the costs of the loans expressed in dollar amounts were 11 percent less likely to borrow in the next four
months compared to the group that received the standard envelope. Payday borrowing decreased when consumers could think more broadly about
the true costs of the loan.
Source: Bertrand and Morse 2011.
Note: APR = annual percentage rate.