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The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

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  • Assenza, Tiziana
  • Cardaci, Alberto
  • Delli Gatti, Dominico

Abstract

Existing evidence suggests that individuals frequently misperceive the value of their wealth. We test the existence, and estimate sign and magnitude, of an inaccurate perception of individual net worth. By conducting a laboratory experiment, we find that most subjects perceive a given net worth as greater than its true value and this misperception increases for lower values of the leverage ratio i.e., liabilities-assets ratio. We identify an explanation relating this misperception to low cognitive sophistication and inattentive thinking. Finally, such wealth misperception predicts greater impatience, lower debt aversion and greater marginal propensities to consume out of positive (transitory) income shocks.

Suggested Citation

  • Assenza, Tiziana & Cardaci, Alberto & Delli Gatti, Dominico, 2021. "The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication," TSE Working Papers 19-1055, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:123746
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