What Could Possibly Go Wrong? Predictable Misallocation in Simple Debt Repayment Experiments
71 Pages Posted: 28 Nov 2020
Date Written: October 13, 2020
How do people repay debt? In a simple debt repayment experiment we provide subjects with two credit cards with different interest rates and levels of debt that are to be repaid. From a rational choice perspective, this is arguably one of the simplest financial decisions. Nevertheless, we observe severe deviations from optimal, i.e. debt minimizing, repayment decisions with one particularly persistent type of misallocation that has not been found before. In consecutive experiments we show that this and further fallacies are predictable so that behavior can be steered towards more efficient repayment decisions.
Keywords: Rationality, Bias, Cuckoo Fallacy, Financial Literacy, Experimental Finance
JEL Classification: D14, D80, D90, G40, G51, G53
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