Bangor University
Lead supervisor:
Dr Graeme Pearce 
Other supervisor(s):
- Dr Charlotte Rimmer
Start date: October 2025 (Full time)
Award: General
Subject Pathway:
Economics
Thematic Cluster:
Economy, Enterprise, and Productivity Cluster
Cognitive Micro-foundations of Consumer Credit Demand: Rationality, Loss Aversion, and the Regulation of Buy Now, Pay Later
My work examines how evolving digital payment systems reshape consumer financial behaviour and contribute to a shift in the perception of money from a tangible resource to an increasingly abstract construct. My PhD adopts a three-paper structure, with each paper addressing a distinct mechanism within this broader agenda.
Current focus (first paper):
Rational Arbitrage or Behavioural Friction? Isolating the Microfoundations of Demand for Buy Now, Pay Later
Introduction & Problem Statement
The rapid expansion of Buy Now, Pay Later (BNPL) services has introduced a significant challenge to the neoclassical assumption of invariance or extensionality, under which a rational agent’s valuation of an outcome must remain constant regardless of the descriptive frame (Tversky & Kahneman, 1986; Bourgeois-Gironde and Giraud, 2009). While standard economic models predict that consumers should rationally arbitrage between identical net-price offerings, empirical evidence suggests a profound gap between objective cost and subjective value. (Hossain and Morgan, 2006; Chetty et al. 2006; Di Maggio et al. 2022; Maesen and Ang, 2024) This study investigates this discrepancy by isolating surcharge aversion (Thaler, 1980) as a distinct optimisation friction that distorts the perception of intertemporal trade-offs.
We frame the BNPL decision as a violation of said assumption, where the explicit labelling of a credit cost as a “fee” creates behavioural friction absent in economically equivalent hidden or “bundled” frames (Berg et al. 2025). By testing the limits of arbitrage against these second order preferences (Frankfurt, 1971), this research identifies how choice architecture leverages reference-dependence to influence credit uptake. Our objective is to determine if this friction persists even when stakes are salient, thereby challenging the bounds of consumer rationality in retail credit markets.
Theoretical Framework & Hypothesis
We hypothesize that the demand for BNPL liquidity is sustained by a behavioural discontinuity at the reference point (surcharge hypothesis). Following Prospect Theory (Kahneman & Tversky, 1979), we model the current price coherence equilibrium as a state of integration, where credit costs are bundled into the sticker price and perceived as a foregone discount or opportunity cost (Edelman and Wright, 2015). In this gain domain, the value function is concave and relatively flat, making consumers more inelastic to the cost of credit.
However, we predict that unbundling these costs into a salient “early access fee” shifts the internal evaluation into the Loss Domain. Due to the kink at the origin and loss aversion (𝜆 ≈ 2.25), the subjective disutility of a segregated fee is significantly higher than an identical integrated opportunity cost (Köbberling and Wakker, 2005; Tversky and Kahneman,1992; Thaler, 1985). This structural shift suggests that BNPL uptake may not be driven by rational arbitrage, but by the psychological bundling of fees. This study tests whether exposing said credit costs triggers surcharge aversion, thereby revealing the latent price elasticity of a demand curve that price coherence currently masks.
Experimental Design
Building on Harrison and List’s (2004) experimental taxonomy this study employs a framed lab experiment with a 2-by-1 between-subjects design to isolate the psychological friction of surcharge aversion from rational intertemporal arbitrage. To ensure the internal validity of elicited preferences, we utilize a Multiple Price List (MPL) format, which provides interval-censored data to bound the Individual Discount Rate (IDR) accurately (Coller and Williams, 1999; Andersen et al. 2006, 2008). The protocol follows five distinct phases:
- Pre-Treatment Stratification: Participants are stratified based on the 3-item Cognitive Reflection Test (CRT) (Frederick, 2005). This partitions out cognitive heterogeneity, reducing residual variance and increasing statistical power for our N=300 sample.
- Buy-In Phase: Subjects complete a Real Effort Task (counting zeroes) to earn their experimental stakes. This labour-for-money exchange establishes a psychological reference point of ownership (Endowment Effect), mitigating the “house money effect” and ensuring that subsequent fees are perceived as out-of-pocket losses. (Cherry et al. 2002; Abeler et al. 2011)
- Treatment Intervention: Participants are randomized into either control (T1, opportunity cost) or treatment (T2, fee frame). Both arms employ a random incentives system through a £50 lottery ticket with a 1-in-15 payout probability and a Front-End Delay (FED) to equalize transaction costs (Coller and Williams,1999; Charness et al. 2016). While mathematically equivalent, T1 presents costs as a reduction in gain, whereas T2 presents them as an explicit “early access fee.”
- Cognitive Control: We elicit a measure of Cognitive Uncertainty to control for valuation errors and decision noise driven by task complexity (Enke and Graeber, 2023).
- Demographic Controls: Final data collection includes financial literacy (Lusardy and Mitchell, 2011) and perceived financial constraint scales (Tully et al. 2013) to control for structural drivers of impatience.
By comparing the switch points between these incentive-compatible lists, we structurally isolate the extent to which demand is sensitive to the salience and framing of credit costs.
Research Impact
This research is designed to provide the first incentive-compatible, structural estimate of how fee-framing drives BNPL uptake; directly addressing the evidentiary gap created by the UK’s incoming regulatory framework. Under FCA Policy Statement PS26/1 (in force 15 July 2026), BNPL providers are subject to full Consumer Duty obligations and must demonstrate that their product architectures do not systematically exploit consumer behavioural biases. The experimental methodology developed here is designed to supply exactly that standard of causal evidence.
The core policy contribution follows from the price coherence mechanism (Edelman and Wright, 2015): if surcharge aversion is confirmed, it suggests that BNPL’s current market equilibrium is sustained in part by the shrouding of credit costs within bundled sticker prices, which artificially suppresses consumers’ perceived cost of liquidity. This offers regulators a market-based alternative to blunt interest rate caps: mandating the segregation of credit costs from sticker prices would reintroduce psychological friction, naturally realigning subjective cost perception with objective economic reality, thus correcting consumption distortions without restricting credit access. This implication is directly relevant to HM Treasury and the FCA’s Consumers, Econometrics and Behavioural Unit as they develop supervisory standards under the Consumer Duty.
The research also advances the methodological frontier. By incorporating a cognitive uncertainty control (Enke and Graeber, 2023), the design distinguishes genuine preference reversals from valuation errors driven by task complexity; addressing a known validity challenge in the intertemporal choice literature and providing a more robust empirical foundation for behaviourally-informed financial regulation. The experiment is pre-registered on the AEA Social Science Registry (Trial 17819).
Bibliography
Abeler, J., Falk, A., Goette, L. and Huffman, D. (2011). Reference Points and Effort Provision. American Economic Review, 101(2), pp.470–492. https://doi.org/10.1257/aer.101.2.470
Andersen, S., Harrison, G.W., Lau, M.I. and Rutström, E.E. (2006). Elicitation using multiple price list formats. Experimental Economics, 9(4), pp.383–405. https://doi.org/10.1007/s10683-006-7055-6
Andersen, S., Harrison, G.W., Lau, M.I. and Rutström, E.E. (2008). Eliciting Risk and Time Preferences. Econometrica, 76(3), pp.583–618. https://doi.org/10.1111/j.1468-0262.2008.00848.x
Berg, T., Burg, V., Keil, J. and Puri, M. (2025). The economics of ‘Buy Now, Pay Later’: A merchant’s perspective. Journal of Financial Economics, 171, p.104093. https://doi.org/10.1016/j.jfineco.2025.104093
Bourgeois-Gironde, S. and Giraud, R. (2009). Framing Effects as Violations of Extensionality. Theory and Decision, 67(4), pp.385–404. https://doi.org/10.1007/s11238-009-9133-7
Charness, G., Gneezy, U. and Halladay, B. (2016). Experimental methods: Pay one or pay all. Journal of Economic Behavior & Organization, 131, pp.141–150. https://doi.org/10.1016/j.jebo.2016.08.010
Cherry, T.L., Frykblom, P. and Shogren, J.F. (2002). Hardnose the Dictator. The American Economic Review, 92(4), pp.1218–1221. https://www.jstor.org/stable/3083309
Chetty, R., Looney, A. and Kroft, K. (2009). Salience and Taxation: Theory and Evidence. American Economic Review, 99(4), pp.1145–1177. https://doi.org/10.1257/aer.99.4.1145
Chetty, R. (2015). Behavioral Economics and Public Policy: A Pragmatic Perspective. American Economic Review, 105(5), pp.1–33. https://doi.org/10.1257/aer.p20151108
Coller, M. and Williams, M.B. (1999). Eliciting Individual Discount Rates. Experimental Economics, 2(2), pp.107–127. https://doi.org/10.1023/a:1009986005690
Di Maggio, M., Williams, E. and Katz, J. (2022). Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns. National Bureau of Economic Research. https://www.nber.org/papers/w30508
Edelman, B. and Wright, J. (2015). Price Coherence and Excessive Intermediation. The Quarterly Journal of Economics, 130(3), pp.1283–1328. https://doi.org/10.2307/26372627
Enke, B. and Graeber, T. (2023). Cognitive Uncertainty. Quarterly Journal of Economics, 138(4), pp.2021–2067. https://doi.org/10.1093/qje/qjad025
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Lusardi, A. and Mitchell, O.S. (2014). The Economic Importance of Financial Literacy: Theory and Evidence. Journal of Economic Literature, 52(1), pp.5–44. https://doi.org/10.1257/jel.52.1.5
Maesen, S. and Ang, D. (2024). Buy Now Pay Later: Impact of Instalment Payments on Customer Purchases. Journal of Marketing, 89(3). https://doi.org/10.1177/00222429241282414
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Tully, S.M., Hershfield, H.E. and Meyvis, T. (2013). Seeking Lasting Enjoyment with Limited Money: Financial Constraints Increase Preference for Material Goods over Experiences. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2311322
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Biography
I am a Colombian-born, US-raised behavioural economist, currently based in the UK. I completed a BA in Economics at the University of Florida and an MSc in Banking with Distinction at Bangor University, before being awarded a fully funded ESRC studentship through the Welsh Graduate School for the Social Sciences to pursue doctoral research in experimental economics.
Alongside my PhD, I hold a placement with the UK Civil Service’s Evaluation Services Unit (Open Innovation Team), applying RCT and quasi-experimental evaluation methods to live government policy in departments such as the Home Office and HM Treasury.
Before moving into academia, I acquired industry experience at PwC (management consulting) and the Bureau of Economic and Business Research at the University of Florida, where I worked on network science and macroeconomic modelling. This private-sector grounding shapes how I approach the policy implications of my research; I am interested in findings that are not only methodologically sound and theoretically rigorous but operationally actionable for regulators and industry.
Bilingual in English and Spanish, I maintain active professional and research interests across the UK, US, and Latin America, particularly in the rapidly developing Colombian and broader LatAm fintech ecosystem. I view the cross-regulatory and cross-cultural dimensions of consumer credit as an underexplored research frontier, and one my background positions me to contribute to in a unique way.