ARIELY:Imagine you have two credit card debts, one is for $10,000, one is for $4,000. The one that is for $10,00 you're paying 10 percent interest rate, the one that is $4,000 you pay 4 percent interest rate. Which one would you pay first?
Ryssdal: I'm going to pay down the $10,000 one because it's got the higher interest rate, and it's the larger principle.
ARIELY: That's right. And it seems quite trivial that that's what people should do.
Ryssdal: All right, just for the record I think that's the first time in one of your hypothetical studies that I've actually gotten the right answer. I'm just saying. Anyway, go ahead.
ARIELY: So it sounded quite a simple problem to solve. And we assumed initially that people would just get it right, but nevertheless we did an experiment. We gave people six different loans, that's varied on how much money they owed, and how big the loan was, and what was the interest rate. And people played this game over time, with 36 periods. And what we saw was that people overemphasized closing loans. So if you had four loans, and you could put some money into closing one of them, this was too tempting for people, and they did it very often. And they did it instead of putting the money where it could work the best.
Why do you think people don't reduce their high-interest loans first?