Some Factors Affecting Awareness of Annual Percentage Rates in Consumer Installment Credit Transactions

Parker, George G. C.; Shay, Robert P.

doi:10.2307/2978227

Cited by 8 publications

(9 citation statements)

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“…Most studies establish this by asking respondents to estimate the interest rate implied by a given loan principal, maturity, and repayment stream. This work includes Juster and Shay (1964), National Commission on Consumer Finance (1972), Day and Brandt (1974), Parker and Shay (1974), and Kinsey and McAlister (1981). More recently, Bernheim (1995, 1998) and Moore (2003) find evidence consistent with limited understanding of loan terms, including interest rates.…”

Section: Payment/interest Bias and Future Value Bias: Evidencementioning

confidence: 99%

“…However, despite the focus of previous work on measuring mistakes, it is often easy to infer from summary data provided in the papers that consumers display payment/interest bias. Some papers do make more direct statements about bias; for instance, Parker and Shay (1974, p. 217) note that consumers display “a strong tendency to underestimate annual percentage rates of charge by about one‐half or more …”…”

Section: Payment/interest Bias and Future Value Bias: Evidencementioning

confidence: 99%

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Exponential Growth Bias and Household Finance

Stango¹,

Zinman

2009

The Journal of Finance

585

151

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Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More-biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication. WHAT DRIVES HOUSEHOLD financial decisions? The canonical economic model assumes that consumers choose to consume, borrow, or save based on their preferences , their expectations, and the costs and benefits of borrowing and saving. A growing body of work applies insights from psychology to enrich specifications of three of the model's key pieces: preferences, expectations, and problem-solving conditional on parameter values. 1 In this paper, we bring psychological evidence to bear on a fourth specification issue: How consumers perceive the costs and benefits of borrowing and saving. We begin by tying together existing and new evidence on these cost perceptions to show that most consumers err systematically when given information commonly available in the market. On the saving side, consumers display future value bias: a systematic tendency to underestimate a future value given

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Section: Payment/interest Bias and Future Value Bias: Evidencementioning

confidence: 99%

Section: Payment/interest Bias and Future Value Bias: Evidencementioning

confidence: 99%

Exponential Growth Bias and Household Finance

Stango¹,

Zinman

2009

The Journal of Finance

585

151

View full text Add to dashboard Cite

show abstract

“…This work includes Juster and Shay (1964), National Commission on Consumer Finance (1972), Day and Brandt (1974), Parker and Shay (1974), and Kinsey and McAlister (1981). More recently, Bernheim (1995Bernheim ( , 1998 and Moore (2003) find evidence consistent with limited understanding of loan terms, including interest rates.…”

Section: A Prior Workmentioning

confidence: 99%

Exponential Growth Bias and Household Finance

2008

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“…Markin ( Shay and Schober (1973), Day andBrandt (1973, 1974), Deutscher (1973), Parker and Shay (1974), Turpin (1973) and Samuels (1976) found education and Mandell (1971Mandell ( , 1973, Shay and Schober (1973), Deutscher (1973), Cunningham and Cunningham (1976), Tootelian (1975) and Durkin (1975) found income related to awareness of credit costs or exis tence of credit laws. The present study on women's knowledge of credit regulations is a more conprehensive investigation of the major federal credit regulations.…”

Section: Independentmentioning

confidence: 99%

Differences in consumer credit attitudes, knowledge and experiences among married and non-married women in Des Moines, Iowa

Hull

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Some Factors Affecting Awareness of Annual Percentage Rates in Consumer Installment Credit Transactions

Cited by 8 publications

References 0 publications

Exponential Growth Bias and Household Finance

Exponential Growth Bias and Household Finance

Exponential Growth Bias and Household Finance

Differences in consumer credit attitudes, knowledge and experiences among married and non-married women in Des Moines, Iowa

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