7 Cognitive Biases and How They Impact Consumer’s Debt Decisions

Sep 7, 2023

Cognitive biases are systemic thought processes that differ from rational judgments, like mental shortcuts our brains take to process information faster. Cognitive biases can affect various aspects of our lives, including financial decisions. Sometimes, they can lead to errors in judgment.

Understanding cognitive bias and the role it plays in financial decisions is important for collection firms. It can help you figure out strategies to overcome objections, offer better payment options, and ultimately resolve more accounts.

Here are a few of the cognitive biases that could play a role in a consumer’s decision to pay their debt.

Loss Aversion

People tend to feel the pain of losing something more than they feel the pleasure of gaining something of equal value. The loss aversion bias could make consumers reluctant to pay because they see parting with money as a loss.

  • Consumers may choose to pay only the minimum even if they can afford to pay more. This way, they avoid feeling like they’re losing money in the short-term.
  • Even though it makes more financial sense to pay off some debts with savings, seeing their savings account balance decrease outweighs the long-term benefits of paying off a debt.
  • For some consumers, the simple thought of confronting their debt can be so painful that they avoid thinking about it or addressing it.
  • Consumers may be hesitant to accept a generous settlement offer if it means paying a lump sum of money upfront.

Status Quo Bias

People tend to resist change, instead keeping things the way they currently are. The status quo bias is sort of like emotional inertial; we like to stick with what we’re already doing simply because it’s what we’re doing.

When it comes to collections, a consumer might:

  • Continue ignoring phone calls and letters out of habit. They could be afraid of what might change if they start engaging with a collection firm.
  • Resist making changes to their payment plan, even if it could benefit them in the long run.
  • Avoid receiving new information about their options, because it might challenge the status quo.
  • Ignore the collector altogether, since they’re used to dealing with the original creditor.

Confirmation Bias

Confirmation bias is a tendency to accept information that support information that we already believe or that aligns with our existing values. This also leads people to reject information that contradicts what thy believe.

  • If a consumer believes they shouldn’t pay a debt collector, they might only look for articles, stories, or advice that supports that belief.
  • Consumers who believe that collectors are aggressive may view the language in letters and phone calls as threatening or harassing when it’s not. They may recall only previous negative interactions with debt collectors to support their belief.
  • If someone provides information or advice that goes against what the consumer believes, they may dismiss it as irrelevant, not accurate, or not relevant to their specific situation.

Overconfidence Bias

The overconfidence bias leads people to be more confident in their abilities or knowledge than they realistically should be.

  • An overconfident consumer may believe they won’t suffer any negative consequences from not paying the debt. Or, they may think their circumstances are special or unique in some way that protects them from consequences.
  • They may believe they can talk their way out of the debt or that they can get a better deal later if they postpone payment long enough.
  • They may think the debt is smaller than it actually is, or may believe they can pay it off faster is realistically possible. They may think their finances will change in some way that will allow them to easily pay off the debt in the future.

Choice Overload

Sometimes having too many options is a bad thing. Choice overload is a situation where having too many options makes it more difficult for a person to make a decision. This “analysis paralysis” can make it impossible for some people to make suboptimal decisions. That’s if they make any decision at all.

  • Consumers with multiple debts may not know which debt to pay first, especially if they’re all being actively collected.
  • Too many payment plan options can lead to uncertainty. Even introducing choices about internals, amounts, and payment terms can make it harder for consumers to commit to a payment plan.
  • While choice overload can cause some consumers to delay making a decision, others may make hasty decisions to simply get the process over with.

Sunk Cost Fallacy

Behaving under the sunk cost fallacy, people might be reluctant to pay off a debt because of their how much they’ve already paid. The sunk cost fallacy is a cognitive bias that influences people to continue a behavior based on how much time, money, or effort they’ve previously invested rather than based on the current and future value or benefits.

The sunk cost fallacy might influence a debtor’s decision-making regarding paying a debt.

  • Consumers may refuse to take a settlement offer because of the amount they’ve already paid on a debt.
  • If a consumer commits to an aggressive payment plan, they may stick with it for longer than is reasonable, even if it becomes affordable.
  • A consumer who invests in a debt relief service to help with their debts, may continue using the service because of the money they’ve already spent, even if they haven’t received the expected results.
  • They may object to paying additional interest, penalties, or fees if they feel like they’ve already paid enough on the debt.


When consumers feel their choices are being restricted or forced, they may resist paying debts in defiance against their perceived restrictions, even if it’s not in their best interest.

  • Being contacted by a collection agency can feel confrontational to a consumer. They may feel the agency is attempting to infringe on their autonomy or personal freedom and may avoid or delay payment.
  • If a collector is pressuring the consumer, they may resist cooperating as a knee-jerk reaction against the perceived threat.
  • Consumers may rationalize non-payment by convincing themselves the debt isn’t valid, the collection agency is unethical, or that they have legal grounds to resist payment.
  • A heightened sense of reactance may cause a consumer to be more proactive in disputing a debt, requesting proof, or even taking legal action, even when the debt is valid and the collector is acting within legal limits.


Cognitive biases can lead to powerful emotional responses from consumers regarding their debts. For debt collectors, understanding these biases can help tailor communications and strategies more effectively.

The first step is recognizing that biases can influence a consumer’s reactions and decisions. Understanding these biases can help you communicate more productively. Aim to provide clear, concise, and transparent information to avoid overloading the consumer with information and options. Avoid using biases to manipulate consumer. Instead, use the information to reduce conflicts and foster more positive interactions.

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