A Neurological Explanation of Strategic Mortgage Default

Posted: 2 Sep 2015

See all articles by Michael Seiler

Michael Seiler

College of William and Mary - Finance

Eric Walden

Texas Tech University - Area of Information Systems and Quantitative Sciences (ISQS)

Date Written: September 1, 2015

Abstract

This study examines strategic mortgage default on a neurological level. Specifically, we test two mainstream behavioral finance/economic theories: sunk cost fallacy and cognitive dissonance. Using fMRI technology, we identify a number of substrates within the brain that provide a neurobiological explanation for why some homeowners exercise their mortgage put option while others do not. We find that borrowers rationally do not suffer from the sunk cost fallacy as it relates to strategic default in that they significantly prioritize their negative equity position over the amount of their initial down payment. We do, however, find neurological support that cognitive dissonance is relevant in homeowners' though processes as they toil with the hesitancy brought on by the believe that strategic default is immoral against the strong financial incentive to walk away from a substantially underwater mortgage.

Keywords: Neurological real estate; Forensic real estate; fMRI; Strategic mortgage default

JEL Classification: C91, D81, G02, R39

Suggested Citation

Seiler, Michael and Walden, Eric A., A Neurological Explanation of Strategic Mortgage Default (September 1, 2015). Journal of Real Estate Finance and Economics, Vol. 51, No. 2, 2015. Available at SSRN: https://ssrn.com/abstract=2654380

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

Eric A. Walden

Texas Tech University - Area of Information Systems and Quantitative Sciences (ISQS) ( email )

Lubbock, TX 79409
United States
806-742-1925 (Phone)

HOME PAGE: http://ericwalden.net

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