The Mental Pitfalls That Lead Us to Excessive Debt
An accident, an illness, the loss of a job: unpredictable events that can shake our household budget when, suddenly, there isn't enough money to cover expenses. If these include loan instalments and other debts, the damage can be compounded by finding ourselves over-indebted - a condition of severe hardship, not only financial, which unfortunately criminals exploit through usurious lending, with catastrophic consequences for victims' lives.
Sometimes, however, we are the ones who damage our budget and push ourselves into over-indebtedness: we take out loans we cannot repay because we miscalculated - or didn't calculate at all. This happens due to a lack of knowledge about the features, risks and opportunities of a loan, but also because of the way we make decisions that are not entirely rational, influenced by mental shortcuts and distorted perceptions. We call these mental slips cognitive biases or "behavioural traps".
Beware of the Traps!
Many cognitive biases contribute to excessive borrowing. Present bias leads us to satisfy immediate needs while underestimating the future costs of loans. Overconfidence makes us overestimate our ability to repay. Framing effects and anchoring focus our attention on attractive information or on a single "affordable" instalment rather than the total cost of debt. Loss aversion, for example when faced with a drop in income or an unexpected event, pushes us to borrow beyond our repayment capacity just to avoid a perceived loss in living standards.
We need to be especially careful with borrowing tools that have simplified access procedures, such as Buy Now Pay Later or revolving credit cards. The first step to avoiding these traps is to know them. Two disciplines help us understand the link between mind and money: behavioural economics and neurofinance. The former explains how cognitive biases and emotions influence the way we manage money; the latter explores how the brain deals with risk, uncertainty and losses.
An example. Is paying by card the same as paying in cash? Neurofinance tells us it is not: using a card exposes us more to impulsive or compulsive spending. In our brain, the areas linked to evaluating actions and emotional involvement are less active; it's an "anaesthetic effect" that makes us less aware of the real cost of our consumption choices.
But where can we learn about these traps? Not only in scientific articles. Banca d'Italia shares this knowledge through this website - in the dedicated section Behavioural Biases and in the News - as well as through other financial education initiatives, such as training programmes.
Fabio Bernasconi, Deputy Head of the Directorate General for Consumer Protection and Financial Education at Banca d'Italia, recently addressed these issues at the 30th Anniversary of the Salus Populi Romani Foundation of the Diocese of Rome, highlighting how parish communities, where Caritas offers daily listening, material support and human closeness, can be transformed into a widespread financial education network.
Banca d'Italia and Caritas Against Over-Indebtedness and Usury
Diocesan drop-in centres are places where people in difficulty are heard and helped to find solutions to their problems. Regional branches of Banca d'Italia will provide their experts to train volunteers and centre managers. Those who turn to these centres will find people prepared to detect early signs of financial distress, inform them about their rights and available tools, guide them towards safe channels for borrowing, and support them in regaining autonomy.
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