Monetary debt = M
Effective debt = M – P(n)

where P(n) = psychological inclination as a function of n number of accounts with a balance; note P(n)=0 only for androids or people w/ no emotions

In this case, P(n) increases with decreasing n. For a person with n=10 credit cards, say P(n) = -10,000

If M = $30,000 and P(10)= -10,000,
Effective debt = $40,000

…Getting rid of two accounts by paying them off (even if they owed say $1,000 on each account) has an additional psychological benefit in that now P(n) = P(8) = -8,000

causing
Effective debt (of 8 accounts) = $26,000

But as a counterexample, if the same $2,000 was targeted toward accounts with the highest interest rate without actually resulting in any reduced # of accounts, P(n) would still be equal to P(10) = 10,000

and

Effective debt (of 10 accounts) = $28,000

That’s how you incorporate psychology into mathematics and allow the math to do its thing!

Zb

If someone says “I owe Sam $10 and I owe Jill $7. Therefore I’m $5 in debt.” they are being irrational. But if someone says “My plan for eliminating my debt will take into account my understanding of human nature” then I would say they are being rational.

@John: Debt consolidation would be perfect (mathematically, economically and psychologically) if the interest rate they offered was not as high as currently offer. But of course, a lot of people needing debt consolidation may end up not paying, and the company has to enable some money recouping system.

Cheers,

Ruben

Cheers,

Ruben
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