ILLIQUIDITY TRAP: OVER-INDEBTED SUBJECTS AND THEIR COGNITIVE CONSEQUENCES

Toro-García, Guillermo León; Cobo, Sandra Balanta; Castellanos, Alexander Alegría

doi:10.1590/S0034-759020240103x

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ARTICLES • Rev. adm. empres. 64 (1) • 2024 • https://doi.org/10.1590/S0034-759020240103x copy

ILLIQUIDITY TRAP: OVER-INDEBTED SUBJECTS AND THEIR COGNITIVE CONSEQUENCES

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This research aims to show the cognitive constraints experienced by resulting from financial concerns and problems. A case study was conducted involving eight individuals living in different Colombian cities, who got into debt and faced an insolvency process. The results obtained are consistent with the theoretical-empirical framework proposed by Mullainathan and Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company., regarding the cognitive strain experienced by individuals with feeling of scarcity. This work contributes to the existing empirical literature and represents a first step toward the existence of a debt illiquidity trap that drives debtors to perpetuate their critical financial situation.

Keywords:
over-indebtedness; scarcity; scarcity trap; attention; judgment and decisionmaking

	Participant
	1	2	3	4	5	6	7	8
Age	49 years old	49 years old	51 years old	54 years old	57 years old	60 years old	59 years old	54 years old
Gender	Female	Male	Male	Female	Male	Male	Male	Male
Socioeconomic status	4	5	4	5	4	3	6	3
Residency	Cali	Cali	Bogotá	Cali	Barranquilla	Cali	Bogotá	Cali
Education Level	Undergradute	Posgraduate	Specialist Degree	Undergradute	Specialist Degree	Technical degree	Undergradute	Specialist Degree
Number of chidlren	2	1	2	2	2	2	2	1

1^st Category
Codes	Subcode	Theoretical Support
Slack waste		Mullainathan y Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company. Shah et al. (2012)Shah, A. K., Mullainathan, S., & Shafir, E. (2012). Some consequences of having too little. Science, 338(6107), 682-685. https://doi.org/10.1126/science.1222426 https://doi.org/10.1126/science.1222426...
Feeling of scarcity
Attentional capture	Focus divided
Attentional capture	tunnel vision
Cognitive depletion		Mullainathan y Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company. Kahneman (2013)Kahneman, D. (2013). Pensar rápido, pensar despacio. Debolsillo. Shah et al. (2012Shah, A. K., Mullainathan, S., & Shafir, E. (2012). Some consequences of having too little. Science, 338(6107), 682-685. https://doi.org/10.1126/science.1222426 https://doi.org/10.1126/science.1222426... , 2015Shah, A. K., Shafir, E., & Mullainathan, S. (2015). Scarcity frames value. Psychological Science, 26(4), 402-412. https://doi.org/10.1177/0956797614563958 https://doi.org/10.1177/0956797614563958... , 2018Shah, A. K., Zhao, J., Mullainathan, S., & Shafir, E. (2018). Money in the mental lives of the poor. Social Cognition, 36(1), 4-19. https://doi.org/10.1521/soco.2018.36.1.4 https://doi.org/10.1521/soco.2018.36.1.4... ) Mani et al. (2013)Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (2013). Poverty impedes cognitive function. Science, 341(6149), 976-980. https://doi.org/10.1126/science.1238041 https://doi.org/10.1126/science.1238041...
hyperbolic discounting		Mullainathan y Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company. Ericson y Laibson (2019)Ericson, K. M., & Laibson, D. (2019). Intertemporal choice. In B. D. Bernheim, S. DellaVigna, & D. Laibson (Eds.), Handbook of behavioral economics: Applications and foundations 1 (Vol. 2, pp. 1-67). North Holland. Frederick et al. (2002)Frederick, S., Loewenstein, G., & O’Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40(2), 351-401. https://doi.org/10.1257/002205102320161311 https://doi.org/10.1257/0022051023201613...
short-sighted behaviors (bad decisions)		Mullainathan y Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company. Shah et al. (2012Shah, A. K., Mullainathan, S., & Shafir, E. (2012). Some consequences of having too little. Science, 338(6107), 682-685. https://doi.org/10.1126/science.1222426 https://doi.org/10.1126/science.1222426... , 2015Shah, A. K., Shafir, E., & Mullainathan, S. (2015). Scarcity frames value. Psychological Science, 26(4), 402-412. https://doi.org/10.1177/0956797614563958 https://doi.org/10.1177/0956797614563958... , 2018Shah, A. K., Zhao, J., Mullainathan, S., & Shafir, E. (2018). Money in the mental lives of the poor. Social Cognition, 36(1), 4-19. https://doi.org/10.1521/soco.2018.36.1.4 https://doi.org/10.1521/soco.2018.36.1.4... ) Mani et al. (2013)Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (2013). Poverty impedes cognitive function. Science, 341(6149), 976-980. https://doi.org/10.1126/science.1238041 https://doi.org/10.1126/science.1238041...
2^nd Category
Codes	Subcode	Theoretical Support
Psychological Effects	Depression	Drentea y Reynolds (2012)Drentea, P., & Reynolds, J. R. (2012). Neither a borrower nor a lender be: The relative importance of debt and SES for mental health among older adults. Journal of Aging and Health, 24(4), 673-695. https://doi.org/10.1177/0898264311431304 https://doi.org/10.1177/0898264311431304... Bridges y Disney (2010)Bridges, S., & Disney, R. (2010). Debt and depression. Journal of Health Economics, 29(3), 388-403. https://doi.org/10.1016/j.jhealeco.2010.02.003 https://doi.org/10.1016/j.jhealeco.2010.... Fitch et al. (2011)Fitch, C., Hamilton, S., Bassett, P., & Davey, R. (2011). The relationship between personal debt and mental health: A systematic review. Mental Health Review Journal, 16(4), 153-166. https://doi.org/10.1108/13619321111202313 https://doi.org/10.1108/1361932111120231... .
	Insomnia	Mullainathan y Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company.
	Suicidal inclination	Sweet et al. (2013)Sweet, E., Nandi, A., Adam, E. K., & McDade, T. W. (2013). The high price of debt: Household financial debt and its impact on mental and physical health. Social Science & Medicine, 91, 94-100. https://doi.org/10.1016/j.socscimed.2013.05.009 https://doi.org/10.1016/j.socscimed.2013... Meltzer et al. (2011)Meltzer, H., Bebbington, P., Brugha, T., Jenkins, R., McManus, S., & Dennis, M. S. (2011). Personal debt and suicidal ideation. Psychological Medicine, 41(4), 771-778. https://doi.org/10.1017/S0033291710001261 https://doi.org/10.1017/S003329171000126...
	Physical health detriment	Chou et al. (2016)Chou, E. Y., Parmar, B. L., & Galinsky, A. D. (2016). Economic insecurity increases physical pain. Psychological Science, 27(4), 443-454. https://doi.org/10.1177/0956797615625640 https://doi.org/10.1177/0956797615625640...
	Irritability or lack of control	Mullainathan y Shafir (2013)Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Henry Holt and Company.
Common practices	Financial shell game	Bernthal et al. (2005)Bernthal, M. J., Crockett, D., & Rose, R. L. (2005). Credit cards as lifestyle facilitators. The Journal of Consumer Research, 32(1), 130-145. http://dx.doi.org/10.1086/429605 http://dx.doi.org/10.1086/429605...
	Revolving debtor	Walker et al. (2014)Walker, C., Hanna, P., Cunningham, L., & Ambrose, P. (2014). ‘A kind of mental warfare’: An economy of affect in the UK debt collection industry. The Australian Community Psychologist, 26(2), 54-67. Packman (2014)Packman, C. (2014). Payday lending: Global growth of the high-cost credit market. Palgrave Macmillan UK.
	Debt refinancing and consolidation	Sparkes et al. (2018)Sparkes, M., Gumy, J., & Burchell, B. (2018). Debt: Beyond Homo economicus. In The Cambridge handbook of psychology and economic behaviour (pp. 198-233). Cambridge University Press.
Pressure from creditors		Poster (2013)Poster, W. R. (2013). Hidden sides of the credit economy: Emotions, outsourcing, and Indian call centers. International Journal of Comparative Sociology, 54(3), 205-227. https://doi.org/10.1177/0020715213501823 https://doi.org/10.1177/0020715213501823... Walker et al. (2014)Walker, C., Hanna, P., Cunningham, L., & Ambrose, P. (2014). ‘A kind of mental warfare’: An economy of affect in the UK debt collection industry. The Australian Community Psychologist, 26(2), 54-67. Edwards (2003)Edwards, S. (2003). In too deep: CAB clients’ experience of debt. Citizens Advice.

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