Exploiting context-dependent preferences to protect borrowers

Author(s)

Linda Dezsö, Barna Bakó, Gábor Neszveda

Abstract

Focusing bias is one of the key contributors to over-borrowing. It describes how people, when making choices, give disproportionate attention and weight to attributes in which their options differ more. In a loan decision, a consumer excessively focuses on the eye-catching difference between getting the loan and not getting it, while ignoring the smaller differences between making and not making repayments. Here, we show a simple trick that nudges the consumer to increase attention on the repayment dimension. In two experimental studies involving one hypothetical loan decision, we demonstrate that the salience of getting the loan can be decreased if one offered plan includes high initial installments. This steeply decreasing installment plan (i.e., with initially high installments that decrease over time) offered alongside the usual flat installments plan (i.e., with equally sized repayments through the whole term) increases consumers' attention to making repayments, and consequently, they attend less to obtaining the loan. When the choice set includes the steeply decreasing plan, we observe a decreased preference for the flat installment plan and a shift toward not borrowing. Additionally, making repayments on the loan is perceived as a greater burden, and more attention is given to making repayments when the steep plan is present. Policy may combat harmful loan consumption by prescribing the presentation of loan offers such that at least one option includes high initial repayments, which increases attention on making repayments.

Organisation(s)

Vienna Center for Experimental Economics

External organisation(s)

John von Neumann University, Corvinus University of Budapest

Journal

Journal of Financial Services Marketing

Volume

27

Pages

291-305

No. of pages

15

ISSN

1363-0539

DOI

https://doi.org/10.1057/s41264-021-00124-x

Publication date

08-2020

Peer reviewed

Yes

Austrian Fields of Science 2012

501002 Applied psychology

Keywords

ASJC Scopus subject areas

Applied Psychology, Marketing, Finance

Portal url

https://ucris.univie.ac.at/portal/en/publications/exploiting-contextdependent-preferences-to-protect-borrowers(3227a877-dc45-4df5-b8ca-13fcd54252be).html