Time Discounting Predicts Creditworthiness

Abstract

In the recent subprime crisis, many individuals defaulted on their loans. Though the institutional sources of defaulting and delinquencies were much debated in the aftermath of the crisis, much less attention was given to individual differences in defaulting behavior. How do individuals decide whether to repay borrowed money? The decision to default can be viewed as an intertemporal choice, as defaulting provides monetary benefits in the near future and costs in the more distant future (Chatterjee, Corbae, Nakajima, & Rios-Rull, 2007; Fehr, 2002). Therefore, interpersonal differences in time discounting may influence defaulting. Psychological research shows substantial heterogeneity in time discounting and often large degrees of time discounting, especially if immediate rewards are available (e.g., Frederick, Loewenstein, & O'Donoghue, 2002; Kirby & Herrnstein, 1995). Measured time discounting is predictive of life outcomes such as scholastic achievement and health-related behavior (Chabris, Laibson, Morris, Schuldt, & Taubinsky, 2008; Chapman, 1996; Eigsti et al., 2006; Kirby, Petry, & Bickel, 1999; Mischel, Shoda, & Rodriguez, 1989). In this report, we document that the degree of time discounting predicts repayment as measured using the standard U.S. metric of creditworthiness, an individual's Fair Isaac Corporation (FICO) credit score. The component of time discounting previously found to be associated with deliberate decision making (Figner et al., 2010; McClure, Laibson, Loewenstein, & Cohen, 2004) is more predictive of creditworthiness than is the immediacy-bias component associated with affective or impulsive decision making. The findings indicate that time discounting predicts creditworthiness and that repayment decisions may be associated with deliberative, rather than affective, processes.

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