Exploiting context-dependent preferences to protect borrowers

Author(s)
Linda Dezsö, Barna Bakó, Gábor Neszveda
Abstract

Focusing bias describes how people when making choices give disproportionate attention and weight to attributes in which their options differ more. In addition to present bias, focusing bias is one of the key contributors to over-borrowing in situations where paying out-of-pocket is not an option. It describes that consumers excessively focus on the salient difference between getting the loan and not getting it, while ignoring the remote and seemingly minor differences between making and not making repayments. Consequently, consumers maximize a focus-weighted utility on the spot which falls below their ex post consumption utility. In two studies, we demonstrate that in a loan decision, the salience of getting the loan can be decreased by carefully designing the set of plans offered. The crux is to jointly offer a steeply decreasing installment plan (i.e., with initially high installments that decrease over time) alongside the usual flat installments plan (i.e., with equally sized repayments through the whole term). The steeply decreasing installment plan increases consumers’ attention to making repayments, and consequently, they attend less to obtaining the loan. This results in a decreased preference for the flat installment plan and a shift towards not borrowing. We conclude that policy may combat harmful loan consumption by prescribing the presentation of loan offers such that at least one option includes high initial repayments, which is instrumental in decreasing the salience of getting a loan.

Organisation(s)
Vienna Center for Experimental Economics
External organisation(s)
Corvinus University of Budapest
Publication date
08-2020
Austrian Fields of Science 2012
501002 Applied psychology
Keywords
ASJC Scopus subject areas
Applied Psychology
Portal url
https://ucris.univie.ac.at/portal/en/publications/exploiting-contextdependent-preferences-to-protect-borrowers(3227a877-dc45-4df5-b8ca-13fcd54252be).html