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Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness

Author

Listed:
  • Grohmann, Antonia

    (DIW Berlin)

  • Menkhoff, Lukas

    (DIW and HU Berlin)

  • Merkle, Christoph

    (Kühne Logistics University)

  • Schmacker, Renke

    (DIW Berlin)

Abstract

This paper examines whether biased income expectations due to overconfidence lead to higher levels of debt-taking. In a lab experiment, participants can purchase goods by borrowing against their future income. We exogenously manipulate income expectations by letting income depend on relative performance in hard and easy quiz tasks. We successfully generate biased income expectations and show that participants with higher income expectations initially borrow more. Overconfident participants scale back their consumption after feedback. However, at the end of the experiment they remain with higher debt levels, which represent real financial losses. To assess the external validity, we nd further evidence for the link between overcondence and borrowing behavior in a representative survey (GSOEP-IS).

Suggested Citation

  • Grohmann, Antonia & Menkhoff, Lukas & Merkle, Christoph & Schmacker, Renke, 2019. "Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness," Rationality and Competition Discussion Paper Series 152, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:152
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    References listed on IDEAS

    as
    1. David Richter & Jürgen Schupp, 2012. "SOEP Innovation Sample (SOEP-IS): Description, Structure and Documentation," SOEPpapers on Multidisciplinary Panel Data Research 463, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Merkle, Christoph & Weber, Martin, 2011. "True overconfidence: The inability of rational information processing to account for apparent overconfidence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 116(2), pages 262-271.
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    Cited by:

    1. Niklas Gohl & Peter Haan & Claus Michelsen & Felix Weinhardt, 2022. "House Price Expectations," Discussion Papers of DIW Berlin 1994, DIW Berlin, German Institute for Economic Research.
    2. Gohl, Niklas & Haan, Peter & Michelsen, Claus & Weinhardt, Felix, 2022. "House Price Expectations," IZA Discussion Papers 15040, Institute of Labor Economics (IZA).
    3. Friehe, Tim & Pannenberg, Markus, 2021. "Time preferences and overconfident beliefs: Evidence from germany," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 92(C).

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    More about this item

    Keywords

    consumption; borrowing; overcondence; income expectations;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G40 - Financial Economics - - Behavioral Finance - - - General

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