Working Papers

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.

Mental Models and Endogenous Learning (draft available upon request)

This paper experimentally studies how people learn about their environment when their subjective understanding of the environment, their mental model, is misspecified. We use people's tendency to hold optimistic beliefs about their abilities to generate a significant amount of model misspecification and investigate the implications of overconfidence as a misspecified mental model on learning about own ability and a fundamental. Consistent with the theoretical predictions, overconfident subjects develop pessimistic beliefs about the fundamental and take growingly suboptimal actions. Inconsistent with the theoretical prediction, endogenous feedback does not exacerbate the extent of suboptimal behavior. Investigating how subjects learn about their own ability reveals that abundant feedback "weakens" misspecified mental models. The "weakening" of mental models is more pronounced with endogenous feedback and explains why endogenous feedback may not exacerbate the extent of suboptimal behavior.

Restoring Rational Choice in Repayments: Disclosures or Advice? (with Guangli Zhang)
(draft available upon request)

Borrowers with revolving debt on multiple accounts fail to exploit price differences in their accounts while making their repayments and leave a significant amount of money on the table. Constructing a simple repayment environment in the laboratory, we test the role of a set of behavioral mechanisms that would directly inform the design of consumer protection policies. We find that providing salient interest rate disclosure has no effect while disclosing the interest rate in a fee format has modest effects. On the other hand, providing an opportunity to purchase automated financial advice reveals that subjects are predominantly aware of their choice inefficiencies and are relatively good at gauging the extent of their mistakes and using financial advice. Our results suggest that promoting and subsidizing consumer financial technology applications that provide automated financial advice would be a substantially more effective way of protecting consumers from simple arbitrage failures than conventional disclosure policies.

Work in Progress

Two-Sided Financial Technology Underadoption (with Sabrine Bair)
Nonparametric Estimation of a Cognitive Hierarchy Model