Working Papers

Abstract: Why do borrowing individuals fail to repay their debt optimally? We design a diagnostic laboratory experiment where we rule out selection into debt and other confounds present in the field as potential explanations. We document that allocations are predominantly suboptimal even when individuals are attentive to interest rates, equipped with optimization ability, and face unrealistically high interest rate differences. We use revealed preference methods and identify mental accounting as the main mechanism through a novel parametric test of fungibility. We further investigate if optimization failures extend to an algebraically identical investment problem. Our structural estimates reveal debt frame substantially increases fungibility violations compared to an algebraically identical investment frame. Choice process data document the debt frame increases subjects’ focus on the irrelevant balance information. These results have implications on boundedly rational models of decision-making, the design of consumer protection policies, and the evolution of wealth inequality.

Presented at American Finance Association (Poster Session) 2023*, Financial Management Association 2022*, Saint Louis University 2022*, Toulouse School of Economics (2021), Society for Experimental Finance 2021, Bilkent University (2021), METU (2021), Maastricht Behavioral and Experimental Economics Symposium (M-BEES) 2021, NeuroPsychoEconomics Conference 2021, Western Economic Association International (WEAI) 2021, Economic Science Association (ESA) JMC Series 2020, Southwest Experimental and Behavioral Economics Workshop (SWEBE) 2019, Washington University St. Louis EGSC 2019, Economic Science Association (ESA) North America 2019*, UCSB Behavioral Econ Workshop (2019)

Abstract: 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.

Presented at Early Career Behavioral Economics Conference at Harvard 2023, European Economic Association-Econometric Society Meeting Barcelona 2023, Economic Science Association Lyon 2023, Institute for Advanced Studies Toulouse 2023, University of Amsterdam CREED 2023, M-BEES Maastricht 2023, ASFEE Montpellier 2023, ESA Santa Barbara 2022, UCSB Behavioral Econ Workshop (2020)

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

Abstract: 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.

Presented at NTA 2023*, International Institute of Public Finance 2023*, Society for Experimental Finance 2022, ESA North America 2022*

*presentation by the coauthor

Work in Progress

 Two-Sided Financial Technology Underadoption (with Sabrine Bair and Josepa Miquel-Florensa)
(Awarded FIT IN Research Grant)
Summary: What would explain the underadoption of digital wallets by unbanked consumers and merchants? We conduct a field experiment to quantify the extent of underadoption and test the role of various explanations.
Presented at TSE Development Economics Workshop (2023)

Nonparametric Estimation of a Cognitive Hierarchy Model
Summary: I use a variant of the market entry game to nonparametrically estimate a cognitive hierarchy model from choice data. This allows me to test the commonly assumed properties of the distribution of steps of thinking in such models.

Stock Return Ignorance: Information Frictions or Mental Gaps? (with  Yulia Merkoulova, Chris Veld and Guangli Zhang)
Summary: People fail to form accurate stock return expectations. We test if this is due to information frictions or mental gaps.


Things on my mind: revealed preference characterization of behavioral biases, how endogenous feedback affects information processing, consumer protection issues in the developing world, failure to follow financial advice. Send me an email to discuss!