What Could Possibly Go Wrong? Predictable Misallocation in Simple Debt Repayment Experiments

71 Pages Posted: 28 Nov 2020

See all articles by Florian Gärtner

Florian Gärtner

Justus-Liebig-Universität Gießen

Darwin Semmler

Justus-Liebig-Universität Gießen

Christina E. Bannier

Justus-Liebig-University Giessen

Date Written: October 13, 2020

Abstract

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

Suggested Citation

Gärtner, Florian and Semmler, Darwin and Bannier, Christina E., What Could Possibly Go Wrong? Predictable Misallocation in Simple Debt Repayment Experiments (October 13, 2020). Available at SSRN: https://ssrn.com/abstract=3710493 or http://dx.doi.org/10.2139/ssrn.3710493

Florian Gärtner (Contact Author)

Justus-Liebig-Universität Gießen ( email )

Licher Str. 62
Gießen, 35394
Germany

Darwin Semmler

Justus-Liebig-Universität Gießen ( email )

Licher Str. 62
Gießen, 35394
Germany

Christina E. Bannier

Justus-Liebig-University Giessen ( email )

Licher Str. 62
Gießen, 35394
Germany
+49 641 99 22551 (Phone)

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