The Drug-Like Effects of Credit Cards and Why Women Don't Own as Many Stocks

Beyond the Headlines: Personal finance news and research you may have missed

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You couldn’t have missed the big personal finance news of the past week: the approval of the $1.9 trillion American Rescue Plan, a package of economic relief measures set to have a seismic effect on American pocketbooks, even after being scaled back by moderate Democrats in the Senate. 

Many families are set to get direct payments of thousands of dollars, and later this year, those eligible for the child tax credit will even get an unprecedented monthly payment of $250 to $300 per child. Unemployed Americans were also given more time to collect benefits, and will be able to avoid a tax bill on at least some of the payments they collected in 2020 (though it’s unclear whether those who have already filed their tax returns will have to amend them.)

And then there were the mounting signs of brighter days ahead. Consumer optimism about future spending rose again, weekly unemployment claims dipped to almost a pandemic low, and forecasters only got more encouraged about economic growth and putting a serious dent in unemployment, citing the ramp-up of vaccination efforts and the injection of cash from the rescue plan. 

But here’s what you may not have heard. Did you know that using credit cards can activate the same reward centers of your brain that addictive drugs can? Or that women know more than they think they do about finances, but their lack of confidence is one reason they’re less likely to be in the stock market? 

To reach beyond the biggest headlines, we scoured the latest research, surveys, studies, and commentary to bring you the most interesting and relevant personal finance news you may have missed.

What We Found

This Is Your Brain on Drugs, Er ... Credit Cards

A silver lining of the pandemic has been the decline in overall credit card and other revolving credit balances. Not only have many people shown extra discipline, using stimulus checks to pay down debt, but spending in general has been down as restrictions on activities have upended lives. Now a big question is just how much people will shell out as the economy reopens, and whether that will affect the overall debt burden.

And what about the role of credit cards themselves in spending? Studies have linked cards to overspending in the past, but researchers at MIT decided to figure out why. Does using a card, which delays payment, reduce the pain of paying or actually make it more rewarding to spend? 

To find out, the researchers used an fMRI to scan the brains of test subjects while they shopped in an experimental store where they could pay with either their personal credit card or cash. (They used screens to choose which items to buy, with payment collected at the end of the test.) 

As it turned out, an area of the brain associated with the “pain-of-paying” did not distinguish between card and cash purchases. But a “reward network”—notably, the same part of the brain that is involved in addictions to drugs like cocaine and amphetamines—was more active when participants paid with plastic, the researchers said in a study published in the journal Scientific Reports in February. 

In addition, the study found that not all credit cards trigger the same neural response. 

“The card you use for restaurants and vacations creates a different appetite for spending than the card you use to buy gas for your card,” Drazen Prelec, an MIT professor, said in a statement about the study. “We need to be aware of this, as technology is making it possible to pay with our phones, which can create different purchase cravings.”

Women Know More Than They Think They Do 

Studies suggest women around the world tend to know less about finance than men, and there are plenty of potential reasons: a lower likelihood to own stocks and other assets, less access to financial services, and yes, the gender pay gap. 

But new research shows at least part of the financial literacy gap stems from lack of confidence, not knowledge. A group of economists in the U.S. and Europe wanted to test whether women were underestimating their own financial know-how, so they gave a group of people from the Netherlands two versions of the same quiz six weeks apart: one which had a “do not know” option, and one that did not. 

The women who took the quiz, which asked about inflation, compounding interest, and diversifying investment risk, disproportionately answered “do not know” on the test, but when the option was unavailable, they often chose the correct answer. Overall, the researchers found that about a third of the gender literacy gap seen in their study could be explained by underconfidence. 

What’s more, the researchers (who happened to take inspiration from the “Fearless Girl” statue that stood in front of the Charging Bull sculpture near New York’s Wall Street) determined that fewer women in their study owned stocks probably because of this underconfidence, in addition to lack of knowledge. About 34% of men in the test owned stocks, versus 20% of women.

“When it comes to financial literacy, women know less than men, but they know more than they think they know,” the researchers concluded in a working paper published this month. 

Using Tweets for More Than Just Trolling 

With economists and traders scanning for signs of problematic inflation down the road (it has yet to appear), what consumers think inflation will be may become increasingly important. That’s because, economists say, consumer expectations of inflation end up driving actual inflation, informing a variety of financial decisions. 

But what’s the best measure of those expectations? A group of researchers from the Bank of Italy recently published a working paper that suggests we consider a new real-time proxy for these expectations that’s right underneath our nose. It’s a vast publicly available source of information where large numbers of people post their every thought and feeling around the clock. It’s called Twitter. 

By using machine learning to drink from the social media platform’s river of information, researchers were able to evaluate keywords related to price expectations, yielding some 11 million tweets posted between 2013 and 2019.

This new source of data was potentially more timely and/or more informative, but still tracked nicely with the trends found in both surveys and daily market-based measures, the bankers found. 

Fear of Crime Could Be Holding Back Women’s Pay

The more researchers delve into the wage gap between men and women, the more factors they find to explain it. A new study published by the University of the Andes in Colombia in February suggests part of it may stem from women’s desire to avoid dangerous late-night shifts, where they are more likely to be victimized by crime.

In order to measure women’s relative willingness to forgo earnings in order to secure a safer shift, researchers at the university asked undergraduate students to sign up for a task taking place at a campus in the center of Bogota, where sexual offenses frequently occur within the public transportation system.

The students could choose from either 9 a.m. to 10 a.m. or 8 p.m. to 9 p.m., but the earlier shift would cost them, they were told. So what happened? Despite the cost, women were more likely than men to take the earlier shift, the researchers found. 

Given the findings, researchers said one way to help close the pay gap may be to improve safety conditions. 

Another would be to encourage remote working. In fact, part of the study was conducted during the pandemic and involved asking the students to make a similar choice of shift for an online activity. In keeping with the rest of the results, there was no real gender difference in the average willingness to pay for an early online shift, the researchers said.