The gradual escalation of household debt in China has emerged as one of the prominent concerns in the lives of its citizens. Debt is a legally or morally binding obligation on the part of an individual to repay another person or institution, either immediately or at some point in the future. Although debt is a concept rooted in the domain of economics, the economic actions of individuals can be elucidated through the lens of psychological mechanisms. Specifically, the decision-making and management of debt exhibit inherent psychological characteristics. Simultaneously, debt can exert a significant influence on personal behaviors and result in distinct psychological consequences. However, there exists a notable absence of a comprehensive and systematic review regarding debt from a psychological standpoint. Therefore, this paper endeavors to provide an in-depth review of the psychological and behavioral ramifications associated with various forms of debt and their underlying psychological mechanisms.
Clarifying the classification framework for debt is an essential prerequisite for elucidating its potential effect. Grounded in its intrinsic attributes, debt can be dichotomized into objective and subjective debt. Objective debt pertains to the concrete obligation of an individual or household to reimburse a debt and the attendant degree of that obligation, whereas subjective debt concerns the subjective perception of the burden imposed by a debt. Debt can also be classified based on its specific utilization or repayment time.
Debt stress is a direct consequence of indebtedness. The extent to which individuals experience debt stress is positively associated with the magnitude of their actual debt, i.e., the higher the objective debt level, the greater the subjective perception of debt stress. The relationship between debt and debt stress is further influenced by the type of debt and individual differences. On one hand, various debt categories elicit varying degrees of perceived threat. Mortgage and long-term loans, for example, entail lower levels of threat and consequently result in reduced debt stress. On the other hand, diverse demographic cohorts exhibit differing levels of perceived threat when confronted with debt. Specifically, women and individuals with lower incomes are more prone to perceiving debt as threatening, leading to heightened debt stress when they are indebted.
Debt and debt stress can further result in various psychological and behavioral consequences. Firstly, debt can diminish an individual’s well-being, giving rise to psychological health issues such as anxiety and depression. Secondly, debt can lead to shortsighted and impulsive behaviors (e.g., dropping out, excessive drinking), shifts in consumption patterns (including irrational and conspicuous consumption), and increased engagement in unethical behavior. Lastly, debt can also detrimentally affect the psychological well-being of the indebted individual’s romantic partner, all while exerting subtle influences on the financial habits and self-regulation capacities of their offspring.
The effects of debt involve psychological mechanisms, one is the threat-compensation mechanism, i.e., debt exerts its influence through mechanisms encompassing the obstruction of psychological needs and compensatory responses. Being a relatively negative personal experience, indebtedness can undermine an individual’s self-esteem and sense of control. This, in turn, leads to an outpouring of unmet psychological needs that affect well-being and psychological health, and a preference for conspicuous consumption as compensation for these thwarted needs. Another is the cognitive resource depletion mechanism, that is, debt signifies a deficiency in objective resources, and prolonged resource scarcity depletes an individual’s cognitive resources. Consequently, individuals become more fixated on immediate gains and encounter difficulties in self-control, thereby engendering short-sightedness and unethical behaviors.
Upon a comprehensive review of the extant literature, we pointed out that existing studies exhibit deficiencies in terms of perspectives, methodology, and theoretical frameworks. Regarding the perspectives, future research could identify the moderators of the effects of debt both at macro and micro levels, with specific attention to the influence of national economic development, cultural differences, and individual perceptions of debt threat. And delve into a broader spectrum of psychological and behavioral consequences of debts, such as unethical behavior for the organization and pro-social behavior.
Regarding tools and methodologies, future research is suggested to systematically delineate the dimensions of debt and develop scales to measure debt stress. Furthermore, in future research, the methodology employed should extend beyond surveys and incorporate a multidisciplinary approach encompassing experimental paradigms, longitudinal designs, and methods from the field of social cognitive neuroscience, which enables the provision of a more robust foundation of causal and physiological evidence concerning the influence of debt.
From a theoretical standpoint, previous studies mostly relied on classical theories to expound certain facets of debt, with a predominant focus on the drivers of borrowing behavior and debt management practices. Future research could construct an integrated theoretical framework that describes the nature of debt and elucidates the consequences of debt.
