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

67 Pages Posted: 28 Nov 2020 Last revised: 31 Jan 2022

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: May 31, 2021

Abstract

How do borrowers repay their debts? In two simple debt repayment experiments, we not only elicit different types of severe deviations from optimal, i.e. debt minimizing, repayment decisions. We rather show how these deviations can be triggered using supposedly irrelevant information and find evidence for a novel heuristic, the “Cuckoo Fallacy”, which is based on the amount of new debt rather than the interest rate. We also demonstrate that simple framing can decrease repayment misallocation, nudging borrowers to more optimal behavior. Our results inform scholars and policy makers on how to improve household’s financial 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 (May 31, 2021). 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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