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A Neurological Explanation of Strategic Mortgage Default

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  • Michael J. Seiler
  • Eric Walden

Abstract

This study examines strategic mortgage default on a neurological level. Specifically, we test two mainstream behavioral finance/economic theories: sunk cost fallacy and cognitive dissonance. Using fMRI technology, we identify a number of substrates within the brain that provide a neurobiological explanation for why some homeowners exercise their mortgage put option while others do not. We find that borrowers rationally do not suffer from the sunk cost fallacy as it relates to strategic default in that stye significantly prioritize their negative equity position over the amount of their initial down payment. We do, however, find neurological support that cognitive dissonance is relevant in homeowners' thought processes as they toil with the hesitancy brought on by the belief that strategic default is immortal against strong financial incentive to walk away from a substantially underwater mortgage.

Suggested Citation

  • Michael J. Seiler & Eric Walden, 2015. "A Neurological Explanation of Strategic Mortgage Default," Artefactual Field Experiments 00632, The Field Experiments Website.
    • Handle: RePEc:feb:artefa:00632
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • R39 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other

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