March 5, 2019, 12:45–13:45
IAST Lunch Seminar
We postulate the existence of a cognitive bias that alters individual perceptions of wealth in risk-free and time-invariant contexts with no probabilistic attributes. We call it the leverage bias: for a given net worth, individuals have greater perceived wealth when their assets-to-debt ratio (a proxy to measure the leverage) is lower. We assume that the leverage bias correlates with debt attitudes and that greater perceived wealth implies a higher likelihood to borrow. By means of a small scale quasi-experimental survey with some incentivized tasks, we (1) provide evidence of the existence of the leverage bias; (2) we disentangle the role of behavioral characteristics that predict its presence; and (3) we evaluate its relation with attitudes towards debt. Subjects with the leverage bias are less cognitively sophisticated, more impatient, less debt averse, more likely to take on debt and to increase spending out of unexpected gains, compared to subjects with no bias. Our findings shed some light on the possible determinants of individual debt overhang and provide the rationale for policies incorporating behavioral insights aimed at improving financial decisions.