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Debt of high-income consumers may reflect leverage rather than poor cognitive reflection

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  • Da Silva, Sergio
  • Da Costa Jr, Newton
  • Matsushita, Raul
  • Vieira, Cristiana
  • Correa, Ana
  • De Faveri, Dinorá

Abstract

A recent population-wide study for Germany, where credit lines on current accounts are available to 80 percent of the population, finds that overdraft debt is more likely for people who give intuitive but incorrect answers on a cognitive reflection test. This suggests those consumers in debt have poorer cognitive reflection and, thus, lack of self control. The Germany study finds that “surprisingly, the level of income does not play a central role.” Here we discriminate the consumers in terms of their income by considering two experiments. In the first (pilot) experiment we do not discriminate consumers in terms of income and, as result, replicate the Germany study. In a follow-up experiment, which assembles a high-quality sample of high-income consumers, we find debt can no longer be explained by poor cognitive reflection. Apparently, high-income consumers treat debt as mere leverage, as companies do.

Suggested Citation

  • Da Silva, Sergio & Da Costa Jr, Newton & Matsushita, Raul & Vieira, Cristiana & Correa, Ana & De Faveri, Dinorá, 2017. "Debt of high-income consumers may reflect leverage rather than poor cognitive reflection," MPRA Paper 79518, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:79518
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    References listed on IDEAS

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    Cited by:

    1. Ciril Bosch-Rosa & Brice Corgnet, 2022. "Cognitive finance," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 7, pages 73-88, Edward Elgar Publishing.
    2. Seth, Himanshu & Talwar, Shalini & Bhatia, Anuj & Saxena, Akanksha & Dhir, Amandeep, 2020. "Consumer resistance and inertia of retail investors: Development of the resistance adoption inertia continuance (RAIC) framework," Journal of Retailing and Consumer Services, Elsevier, vol. 55(C).
    3. Lorenzo Esposito & Lorenzo Marrese, 2021. "The impact of cognitive skills on investment decisions. An empirical assessment and policy suggestions," DISCE - Quaderni del Dipartimento di Politica Economica dipe0019, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    4. Cesar Leandro, Julio & Botelho, Delane, 2022. "Consumer over-indebtedness: A review and future research agenda," Journal of Business Research, Elsevier, vol. 145(C), pages 535-551.
    5. Sergio Da Silva & Dinorá De Faveri & Ana Correa & Raul Matsushita, 2017. "High-income consumers may be less hyperbolic when discounting the future," Economics Bulletin, AccessEcon, vol. 37(3), pages 1421-1434.

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    More about this item

    Keywords

    consumer behavior; consumer indebtedness; debt; overdraft; cognitive reflection;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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