What could possibly go wrong? Predictable misallocation in simple debt repayment experiments

Florian Gärtner, Darwin Semmler and Christina Bannier

Journal of Economic Behavior & Organization, 2023, vol. 205, issue C, 28-43

Abstract: How do borrowers repay their debts? In two simple debt repayment experiments, we elicit different types of severe deviations from optimal, i.e. debt minimizing, repayment decisions. We 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: Household finance; Credit cards; Financial literacy; Rationality; Bias; Cuckoo fallacy (search for similar items in EconPapers)
JEL-codes: D14 D91 G41 G50 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:205:y:2023:i:c:p:28-43

DOI: 10.1016/j.jebo.2022.10.032

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