The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

Abstract

Existing evidence suggests that individuals often misperceive the value of their wealth. We examine the existence, direction, and magnitude of these misperceptions through a laboratory experiment. Our findings indicate that variations in the leverage ratio (the ratio of liabilities to assets) influence how individuals rank financial profiles, even when net wealth remains constant. Most subjects perceive a given net worth as greater than its true value, and this misperception becomes more pronounced in financial profiles with lower leverage ratios. We further explore how cognitive sophistication and behavioral/economic attitudes shape wealth misperception. Experimental evidence shows that misperception is associated with lower cognitive sophistication and inattentive thinking. Moreover, it correlates with greater impatience, lower debt aversion, and higher marginal propensities to consume following positive (transitory) income shocks.

Replaces

Tiziana Assenza, Alberto Cardaci, and Dominico Delli Gatti, “The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication”, TSE Working Paper, n. 19-1055, February 2021, revised February 2021.

Reference

Tiziana Assenza, Alberto Cardaci, and D. Delli Gatti, “The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication”, Journal of Economic Interaction and Coordination, vol. 20, n. 4, September 2025.