The Opportunity Cost of Debt Aversion

64 Pages Posted: 22 Nov 2022

See all articles by Alejandro Martínez-Marquina

Alejandro Martínez-Marquina

University of Southern California - Marshall School of Business

Mike Shi

Stanford University - Department of Economics

Date Written: November 15, 2022

Abstract

We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects’ debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent.

Keywords: debt aversion, household finance, experiment, financial frames

JEL Classification: C91, D14, D91

Suggested Citation

Martínez-Marquina, Alejandro and Shi, Mike, The Opportunity Cost of Debt Aversion (November 15, 2022). Available at SSRN: https://ssrn.com/abstract=4278116 or http://dx.doi.org/10.2139/ssrn.4278116

Alejandro Martínez-Marquina (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Mike Shi

Stanford University - Department of Economics

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