Household debt decision: Poverty or psychology?

This study is motivated by the growing concern with the increase in the level of household debt, particularly in Malaysia. One of the debated issues is whether household borrowings are related to poverty factors or due to psychological factors. This study approaches this issue by taking into account the factors as proposed by conventional (Life Cycle Hypothesis) and heterodox (Relative Income Hypothesis) economic theories. The data presented is micro level data collected from a self- administered survey among urban working class in Klang Valley. We find no conclusive evidence supporting the conventional theory, since though age is statistically significant, yet future income expectations are not. The findings also suggested that household debt is not a poverty related phenomenon since the determinants are more “wants” rather than “needs”. Thus, any policy intervention should include educating households on rational consumption decision making