Dartmouth’s Eesha Sharma and USC’s Stephanie Tully discuss their research on the changing motivations behind consumer debt.

Consumer debt rose to $12.7 trillion in the first quarter of 2017. That is more debt than at the height of the credit bubble in 2008. A study by researchers at Dartmouth College and the University of Southern California shows that while the amount of debt is increasing, what consumers are spending the money on is very different. More people are buying experiences rather than things. Eesha Sharma, a professor of business administration at Dartmouth, and Stephanie Tully, a professor of marketing at USC, are the authors of the study, “Drivers of Discretionary Debt Decisions: Explaining Willingness to Borrow for Experiential and Material Purchases,” which was published in the Journal of Consumer Research. They recently appeared on Knowledge at Wharton’s SiriusXM show to discuss the forces behind this shift in what consumers value. (Listen to the podcast using the player above.)

An edited transcript of the conversation follows.

Knowledge at Wharton: Let’s start with the research. Take us deeper into what you were trying to examine.

Eesha Sharma: Consumer debt levels have been increasing, and Stephanie and I were interested in understanding what is contributing to why people are taking on more and more debt. We had known some about different characteristics of individuals, like their age and their income, that might contribute to debt — things about the debt form, maybe the interest rates, terms of the loans. But we didn’t know as much about characteristics of the underlying purchase that might contribute to people’s borrowing. That was really what motivated us to study this question.

Stephanie Tully: One of the interesting pieces of this is that people still spend a lot of discretionary money. We were looking at the juxtaposition of the fact that the average American household spends something like $7,000 to $10,000 on discretionary purchases every year. Yet the average American household also has credit card spending suggesting that at least some of the discretionary purchases — the unnecessary purchases we make — are being funded with debt. That is what interested us. It’s not just, “I need to buy a home,” or “I need to buy a car, and I can’t afford it outright,” but rather there seemed to be purchases that we don’t need to make but that we’re still willing to use debt to fund.

Knowledge at Wharton: For many consumers, the decision process of making a purchase was based on what you needed and what you could get out of it. If I’m going to buy a car, I expect to have it for six or seven years, If I’m going to buy a sofa, I want to have it for 10 years. That’s not the basis for buying experiences, correct?

Tully: Yes. We looked at different circumstances under which people borrow. There are circumstances under which people are more likely to borrow for couches and long-term types of purchases because they believe that they are going to get utility from them over time, so they want to pay for them over time. But there’s another reason why people borrow and another driver of debt decisions, which seems to be more common than this propensity to go into debt for more long-lasting discretionary purchases.

Knowledge at Wharton:  Is this is a change in mindset by people?

Sharma: When people typically borrow, it’s because they don’t have the funds outright to make a purchase. When they’re deciding whether or not to borrow, it’s the decision between being able to acquire that purchase with debt or foregoing that purchase in the present. That’s one particular debt context that is different from, “I have money on hand, and I could also borrow with debt.” This is more a source-of-funding decision, and in the prior context, when people were looking at what drives people to borrow, it was a specific situation where they thought, “OK, I would like to make a couple of purchases, maybe furniture, maybe a vacation. Which of these do I fund with cash, and which of them do I fund with debt?”

In that situation, it follows that conventional wisdom, “Why don’t I take out the loan for the more practical thing? As I’m going to be paying for this purchase, I’m also receiving benefits.” What we’re finding is when most people decide to borrow, it’s not a source-of-funding decision, it’s, “Do I want to forego this purchase, or should I use debt to use it?” When that’s the case, experiences — ones that you might not feel like you can get the same purchase later — are more attractive to borrow for.

Tully: With the source-of-funding decision, what we’re really talking about is you might have the money in your savings account, but you go into the store and somebody says, “You can finance this for a low monthly payment. Are you interested in doing this?” And you go, “Do I really want to use my savings, or would I rather just do the financing thing? I’ve got this cushion. I can use it for other things, and I’ll pay this off as I’m using it.” That still happens. But what happens more commonly, and what we end up seeing in terms of more peer-to-peer loans and more credit cards, is that there are experiences that you can’t postpone. Maybe it’s your wedding. Maybe it’s a concert. You say, “Yeah, I’m willing to go into debt. I don’t want to miss this music festival. There might be a music festival next year, but that’s not the same as this year. I’m willing to go into debt so that I don’t have to forgo this opportunity.”

“Over the last 50 years in America, we’ve become largely a service economy to the extent that we’re buying more experiences.”–Stephanie Tully

Knowledge at Wharton: There’s also the view of what the experience is and what it means. A lot of people have thought that if you go to a concert, you go to Niagara Falls, whatever, it’s pretty much over with once that experience is done. That’s not the case anymore. People hang on to that experience and talk about it for years. It’s a personal gain.

Tully: There is an element of experiences that does persist, and there’s certainly research suggesting that experiences can make us happier in the long run. This research looks at that consideration, and we find that it’s not driven by these perceptions of the long-lasting nature of experiences. People aren’t doing this because they believe that they’ll get long-lasting happiness from them, so they don’t mind paying for them later. It’s really more of a short-term focus on not missing out on that opportunity to make that purchase. We do try to disentangle that in our research, and we do show that that’s not what’s driving this, although that is an obvious implication of it.

Sharma: What’s really interesting is what kind of psychological process is contributing to this effect. Compared to material purchases, you have a consumption occasion in mind with experiences. As you begin to think about this experience more and more, you think about the time, the place. The experience gets conceptualized by these contextual factors that make it really challenging to say, “I can let go. I can pass this up.” We were able to find that this isn’t necessarily about an experience or a tangible good per se, but it’s about the planned consumption and what that does to you in terms of that feeling.

Knowledge at Wharton: A lot of people probably don’t see buying a sofa as an experience. That’s not the nature of these items.

Sharma: Right, although our research would suggest that to the extent that you think about the Super Bowl party you will throw while sitting on your new couch, you’ll actually become more likely to go into debt for that new couch.

Knowledge at Wharton: It’s interesting you say that because I remember a few years ago here in Philadelphia when the football team made it to the Super Bowl, you had people taking out second mortgages on their homes so they could buy tickets.

Sharma: Absolutely. It’s incredible, but I think it does happen all the time. In fact, a recent survey from another company showed that one in five Americans is going into debt for their summer vacation this year.

Knowledge at Wharton: Is it the expectation that this trend is going to continue?

Tully: I think there’s a state or a prevalent mindset in terms of just why we go into debt, but I do think there could be a number of factors contributing to an increase in this effect playing out in the real world. One of those factors is related to some other research that I’ve done looking at why people buy experiences versus material goods. I find that financial constraints impact our decisions between these different things, and that financial constraints actually make people more likely to buy material goods. They become more focused on how long-lasting the utility is going to be from these things. To the extent that America and developing nations are becoming wealthier and financial constraints are lessening, I do think that there is a trend, and we see this in aggregate data. Over the last 50 years in America, we’ve become largely a service economy to the extent that we’re buying more experiences. We’re going to go into debt for more experiences.

“Understanding the psychology behind how people view different ways of financing will be critical for organizations to understand.”–Eesha Sharma

The other piece of this is that I think there are more opportunities to fund purchases with debt now that weren’t available before. There is the abundance of credit cards now that wasn’t available before. You couldn’t go to a concert and tell them you’ll pay them later, right? Before credit cards were readily available and people had this credit, I don’t think there were as many opportunities. Peer-to-peer loans is another place that we looked. and we find greater instances of experiences being funded with peer-to-peer loans.

Sharma: What’s fascinating about that data is that not only are there more instances of peer-to-peer loans, but people are paying more for them. They actually have a higher interest rate. Those are opportunities that weren’t there originally, so I think that’s why this trend might be more pronounced now than it may have been 50 years ago.

Tully: We do also have a study showing this propensity to spend on experiences extends to not just debt, but price elasticity. We are less willing to wait until something goes on sale and more likely to just pay a surcharge or whatever it might be in order to get it. So, it’s not just a debt phenomenon.

Knowledge at Wharton: Can you take this data and extrapolate what it will mean for the companies providing these options for people, such as the travel industry?

Tully: I definitely think this suggests that travel companies and companies that offer experiences could benefit by providing opportunities to finance purchases directly through them, especially if people are willing to put it on a credit card with a 17% interest rate. They could be doing this at a slightly lower interest rate but making money off of it. I think that’s certainly a revenue stream that could be considered for these types of businesses.

On the consumer side, it’s not clear to us whether or not this is beneficial for consumers and whether they should be doing this. We can’t make any sort of normative statements about whether people are happier when they do this and maybe come to regret it. We don’t have any data on that yet.

Sharma: This is interesting to consider in light of some of Stephanie’s other work that suggests this greater willingness to borrow for experiences would be attenuated if people feel financially constrained. It would be really interesting to observe what ends up happening because we don’t exactly know right now. To the extent that people are more excited by experiences, companies are promoting products and services as being more experiential. There’s greater opportunity, but at the same time, people are spending more with these greater interest rates. It would be interesting to see what is happening at the intersection of more opportunity versus potentially greater debt. To what extent are these two forces going against each other, and how does that equilibrium end up playing out?

Knowledge at Wharton: What about the recognition by the consumer about the higher interest rate and the long-term impact that would have on them?

Sharma: I do think it’s worthwhile for consumers to be aware of this. Lay wisdom and the academic literature suggest that people would be more willing to borrow for material goods. So, I think this is the type of finding where consumers may not readily know about their susceptibility to doing this. The fact that they might be doing something that they might not be aware of, and it might be costing them more than they think, is worthwhile to be aware of.

Tully: Yes, and to the extent that this is more likely to happen with credit cards than through a business or a company makes it harder for consumers to recognize their susceptibility. You get a bill at the end of the day that’s an aggregate bill of all of your spending, and some of it gets carried over, but you don’t necessarily recognize that the balance is a function of the concert you went to because you also bought a lot of other things during the course of the month. Whereas with the furniture that you buy, you’re paying at the furniture store and you’re very aware of the fact that that debt is attached to the furniture that you bought.

Knowledge at Wharton: Consumers pared down their debt in the wake of the recession, but now we’re seeing more. Obviously, debt servicers are looking at a very profitable time right now and going forward.

“Rather than recognizing the abundance of experiences that are available to us on a regular basis, we instead look at it that we want to be a part of every single one of them.”–Stephanie Tully

Tully: It’s only profitable to the extent that people pay it back, but I agree with you. I do think that this is a good time for them, but the question is whether it’s sustainable in the long run.

Sharma: A related project that Steph and I have been thinking about for a very long time is that as people begin to borrow more and more, the implications of these different types of borrowing or borrowing forms will start to get a lot more important. Understanding the psychology behind how people view different ways of financing will be critical for organizations to understand. We assume that greater access to financing will impact consumers in the same way, but that’s a potentially erroneous assumption.

Knowledge at Wharton: As the economy has gotten better and people have more discretionary money in their pocket, they have this feeling of freedom. That’s a potential trap, isn’t it?

Sharma: Yes, it’s a super-fascinating area. The bulk of my research centers on this idea of consumer financial well-being, which is subjective. It’s a function of not just people’s objective income, but their access to financing and how well they think they’re doing relative to their peers or their past. It’s really fascinating to see how that plays out in their consumption decisions.

Knowledge at Wharton: What can you say about the willingness of millennials to spend on experiences rather than material goods? There’s a social media component to that as well with young people sharing their vacation photos.

Tully: You’re always seeing what somebody else is doing, so it’s a constant reminder that there are other opportunities for experiences out there. In some sense, it should also remind you that if you don’t go to the one this week, there will be one next week. And there will be other opportunities a month from now. But that doesn’t seem to be the way that consumers view these. Rather than recognizing the abundance of ways and the abundances of experiences that are available to us on a regular basis these days, we instead look at it that we want to be a part of every single one of them, and we don’t want to be missing out on any of them.

Sharma: I agree. This is a perfect example of exactly what we’re talking about. It becomes part of that experience and that opportunity in people’s lives that are really difficult to pass up.

Tully: I should point out we actually don’t see any differences across age in our data. It seems to be just as pronounced among older generations as younger generations.

Knowledge at Wharton: Did you have an expectation that there would be a difference because of millennials?

Tully: We certainly thought it was possible, so we wanted to make sure that this wasn’t simply a millennial effect of different values that come from different generations. We also thought it was possible it would just be more pronounced among millennials, but we didn’t find any consistent evidence for that.

Sharma: Going back to the point about how important it is for consumers to be aware of things like this, I’ve found in just casual discussions, people who are older tend to be more skeptical that this is a thing. It’s something that maybe other people do, but not them. To the extent that experiences are more exciting and valuable to younger people, maybe younger people can say, “Oh yeah, I can see myself doing that.” Older people might say, “No, I would never do that.” But we didn’t find that it was specific to a certain cohort.

Tully: We don’t know if there are any nonlinear patterns or things like that, but you can also imagine that as consumers get older and they have their house, they have their furniture, they have the things they need, then this can happen again. Not because they don’t care about those things, but because they already have those things. We can’t differentiate between that. All we can say is that the seeming willingness to go into debt for experiences doesn’t seem to be age-specific.