Seminar

The Debt Payment Puzzle: An Experimental Investigation

Hakan Ozyilmaz

April 14, 2021, 17:00–18:00

Online

Post-Doc recruitment seminar

Abstract

This paper studies the sources of suboptimal allocations observed in credit card repayments using a diagnostic laboratory experiment. We find that optimization ability and limited attention are jointly insufficient to explain the puzzle. Moving beyond existing results, we find that the inherent negative frame of the debt payment problem interferes with subjects' ability to optimize and hinders learning. We show that subjects predominantly rely on the irrelevant balance information while forming their decisions, regardless of how vividly the balance information is displayed. Using additional treatments, we find that the debt frame increases subjects' focus on the irrelevant balance information