Article citing our research in the Journal of Consumer Research (via Wayback Machine)
Debt Snowball vs. Debt Avalanche, the Psychology
The math strikes a hard blow, but Joe has heard Dave Ramsey ranting and raving about the debt snowball. He decides to look at Dave’s reasoning.
“Money is 20 percent head knowledge and 80 percent behavior.” No argument there. “You need some quick wins to stay motivated.” Interesting.
Knowing he’s saving thousands and getting out of debt faster overall is a powerful idea, but is that enough? He decides to take a more in-depth look.
Dave often cites a study by the Harvard Business Review to back up his use of the mathematically inferior debt snowball.
The study conducted three separate experiments to find the best debt repayment methods, as shown by the “stick-with-it-ness” of each technique.
Keri Kettle, Simon Blanchard, Gerald Häubl, and Remi Trudel obtained a large proprietary dataset from a financial guidance company, HelloWallet. The data covered 36 months and nearly 6,000 people with an average of 2.5 credit cards. The data only accounted for credit cards and not all debt types like car loans, personal loans, or student loans.
The data gave them a few hypotheses to test.
First, whether concentrating on a single debt or spreading payments equally among accounts was more effective.
Participants began with five equal debts and were divided into two groups, one paying off all five equally and the other concentrating on one at a time.
To pay off the debt, participants played an anagram-like game. They found the one-at-a-time payment group repaid 15% faster than the equal payments group.