Present bias and financial behavior

Xiao, Jing Jian; Porto, Nilton

doi:10.1002/cfp2.1048

Cited by 32 publications

(25 citation statements)

References 34 publications

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“…Gathergood (2012) finds among U.K. consumers, "over-indebtedness, measured both as delinquency on repayments and self-reported financial distress, occurs disproportionately among individuals who report self-control problems." See also Xiao and Porto (2019) for similar findings from Chinese data. 3 Ryan et al (2011) point to the fact that in the U.S. in the 1960s, installment credit with fixed repayment terms was steadily replaced by revolving credit which permitted borrowers to customize the repayment (including the emergence of low minimum payments).…”

Section: Introductionsupporting

confidence: 52%

Time Inconsistency and Endogenous Borrowing Constraints

2020

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This paper studies the welfare of time-inconsistent, partially sophisticated agents living under two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the academic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time inconsistent agents economize on the costs of private commitment provision.

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Section: Introductionsupporting

confidence: 52%

Time Inconsistency and Endogenous Borrowing Constraints

2020

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“…Evidence shows that consumers with lower income are more likely to perform budgeting behavior and consumers with higher income are more likely to perform long-term planning behavior (Xiao and O'Neill, 2018a, b). Present-biased consumers are more likely to spend and less likely to save (Xiao and Porto, 2019b).…”

Section: Scope Of Consumer Financementioning

confidence: 99%

Consumer finance/household finance: the definition and scope

Xiao

Tao

2020

CFRI

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PurposeThe purpose of this literature review paper is to define consumer finance, describe the scope of consumer finance and discuss its future research directions.Design/methodology/approachIn this paper, consumer finance is used as a synonym of household finance. Consumers refer to individuals and families. After defining the term “consumer finance,” we conducted a critical review of consumer finance as an interdisciplinary research field in terms of money managing, insuring, borrowing and saving/investing. Future research directions are also discussed.FindingsThis paper discusses similarities and differences among several terms such as consumer finance, household finance, personal finance, family finance and behavioral finance. The paper also reviewed key studies on consumer financial behavior around four key financial functions, namely, money management, insurance, loan and saving/investment and several nontraditional topics such as fintech and financial capability/literacy. The paper also introduced several datasets of consumer finance commonly used in the United States and China.Originality/valueThis paper clarified several similar terms related to consumer finance and sorted out the diverse literature of consumer finance in multiple disciplines such as economics, finance and consumer science, which provide a foundation for generating more fruitful research in consumer finance in the future.

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“…Notably, Financial Homo Ignorans framework is complementary to other mechanisms behind poor financial decisions discussed in the literature. Behavioral ignorance does not preclude financial illiteracy (Lusardi & Mitchell, 2014), self-control problems (Strömbäck et al, 2017), present bias (Xiao & Porto, 2019), mental accounting (Richard H. Thaler, 1999), and other underlying reasons.…”

Section: Financial Homo Ignorans -The Conceptual Frameworkmentioning

confidence: 99%

Financial Homo Ignorans: measuring vulnerability to behavioral biases in household finance

Barrafrem¹,

Västfjäll²,

Tinghög³

2020

Preprint

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Understanding systematic differences in sound financial behavior between individuals is a key area for public policy and the possibility to tailor interventions to promote financial well-being. In this paper we develop and validate a concise 12 item questionnaire measuring individual’s vulnerability to behavioral biases in household finance – the Financial Homo Ignorans (FHI) Scale. We conduct two studies with general population samples (total N=2508) and show that the FHI scale can predict behavior in financial tasks such as consumer purchases, loan choices, or investment decisions, also when controlling for demographics, financial literacy and other related constructs. In addition, we show that consumer heterogeneity as assessed by the FHI scale explains the variation in household finance management and financial well-being. The FHI scale has application potential as it can be used by researchers, policy makers, and financial institutions to study the psychological underpinnings of financial behavior and design interventions by targeting individuals who are particularly vulnerable.

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Present bias and financial behavior

Cited by 32 publications

References 34 publications

Time Inconsistency and Endogenous Borrowing Constraints

Time Inconsistency and Endogenous Borrowing Constraints

Consumer finance/household finance: the definition and scope

Financial Homo Ignorans: measuring vulnerability to behavioral biases in household finance

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