Financial literacy, present bias and alternative mortgage products

Abstract

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Conned by a Cashback? Disclosure, Nudges and Consumer Rationality in Mortgage Choice

“…We contribute to empirical literature on the role of behavioural biases in the choice of financial products. Our results corroborate with the findings of Gathergood and Weber (2017); Agarwal et al (2016) and Miles (2004), each of which highlight the role of present-bias in mortgage choice. Of particular interest is the similarity of our results with the findings of Gathergood and Weber (2017), where present-bias and financial literacy are recorded as key determinants for the choice of expensive Alternative Mortgage Products (AMP) in the UK.…”

“…Our results corroborate with the findings of Gathergood and Weber (2017); Agarwal et al (2016) and Miles (2004), each of which highlight the role of present-bias in mortgage choice. Of particular interest is the similarity of our results with the findings of Gathergood and Weber (2017), where present-bias and financial literacy are recorded as key determinants for the choice of expensive Alternative Mortgage Products (AMP) in the UK. Further, our assessment of limited attention bias as a determinant of sub-optimal financial choice contributes to the literature on the limited processing power of consumers in making financial decisions, as highlighted in Hirshleifer and Teoh (2003); Brown et al (2010); Einav et al (2014); Gabaix and Laibson (2006) and Maines (1995).…”

“…For mortgages, present-bias leads to the choice of expensive products that offer short-term benefits at the expense of long-run costs. This is demonstrated in the experiment conducted by Gathergood and Weber (2017) where present-bias is found to dominate the choice of expensive Alternative Mortgage Products (AMP) with back-loaded payments. The choice of AMP is attractive to consumers because one of the key features of AMP is that initial payments are small, thus allowing higher consumption in the short-run.…”

A meta‐analytic investigation of consumer over‐indebtedness: The role of impulsivity

“…For example, studies that could not be included in the meta‐analysis, highlight the potential role of other personal traits, such as risk attitude, self‐esteem and money attitude in debt‐decision making (Henegar et al, ; Wang et al, ), as well as personality dimensions, like extraversion or neuroticism (Zainol et al, ). Besides, some studies measured over‐indebtedness using a binary variable and therefore had to be excluded (Celsi, Nelson, Dellande, & Gilly, ; Choi & Laschever, ; Gathergood, ; Gathergood & Weber, , ; Mansfield, Pinto, & Parente, ). From a methodological point of view, it is relevant that future studies on this topic adopt relevant continuous measures, while limiting the use of indicator variables, in order to appreciate the economic significance of the estimated effects.…”

Debt Close to Retirement and Its Implications for Retirement Well-being

“…It is not clear whether this is a true bias, or simply an indicator of lack of financial literacy. A more complete study by Gathergood and Weber (2017) investigated behavioral biases in the presence of low financial literacy, and they showed that poor financial literacy and impatience boosted the likelihood of choosing mortgages with lower up-front costs but larger eventual payments. Indeed, the key feature of many alternative mortgage products is that payments often cover only the interest due, or in some cases, are less than the value of the interest due for an initial period.…”