Perceived Wealth, Cognitive Sophistication and Behavioral Inattention

55 Pages Posted: 20 Dec 2019

See all articles by Tiziana Assenza

Tiziana Assenza

University of Toulouse 1 - Toulouse School of Economics (TSE)

Alberto Cardaci

Goethe University Frankfurt

Domenico Delli Gatti

Universita' Cattolica, Milano

Date Written: 2019

Abstract

By means of a laboratory experiment, we show that, contrary to standard consumer theory, financially equivalent balance sheet profiles may be perceived as non fungible in a controlled frictionless environment with no probabilistic attributes. A large majority of subjects indeed have a bias in the perception of wealth, such that balance sheet composition matters: for a given net worth with values of assets and debt that are financially certain and risk-free, a greater asset-debt ratio implies greater perceived wealth. The predominance of this bias is explained by low cognitive sophistication and great inattention. Moreover, biased subjects are less patient, less debt averse, more likely to increase spending out of unexpected gains and report greater propensities to consume. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix (2014, 2019), aligns our key experimental findings.

Keywords: perceived wealth, cognitive sophistication, behavioral inattention, laboratory experiment, household debt, consumption

JEL Classification: C910, D910, G410, G510

Suggested Citation

Assenza, Tiziana and Cardaci, Alberto and Delli Gatti, Domenico, Perceived Wealth, Cognitive Sophistication and Behavioral Inattention (2019). CESifo Working Paper No. 7992. Available at SSRN: https://ssrn.com/abstract=3507263

Tiziana Assenza (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Alberto Cardaci

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Domenico Delli Gatti

Universita' Cattolica, Milano ( email )

20123 Milano
Italy
+39 02 72342499 (Phone)
+39 02 72342923 (Fax)

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