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 a crucial 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.

We study the interplay between consumer and merchant adoption of mobile money through a field experiment in Jordan. Using an incentive-compatible mechanism, we measure willingness to pay (WTP) and beliefs about cross-side adoption. Three key findings emerge. First, WTP is low: consumers and merchants value mobile wallet services at 35% and 40% of market prices. Second, participants hold inaccurate cross-side beliefs, with merchants systematically underestimating consumer adoption. Third, consumers' WTP is sensitive to merchant adoption, but merchants’ WTP is largely unaffected by consumer adoption. A structural model shows a 1 p.p. increase in perceived merchant adoption raises consumer WTP by 0.013 USD. We integrate our findings with theoretical insights to propose alternative financial inclusion policies that exploit network effects.

Borrowers with revolving debt on multiple accounts often fail to exploit price differences when making their repayments and leave a considerable amount of money on the table. Constructing a simple repayment environment in the laboratory, we test the role of behavioral mechanisms that would directly inform the design of consumer protection policies. We find that anchoring on the irrelevant balance information does not contribute to the choice inefficiencies. Instead, participants with low financial literacy struggle to process interest rate information in percentage format as a price and improve their choices when interest rates are presented in a fee format. Providing an opportunity to purchase financial advice reveals that most participants are somewhat aware of their choice inefficiencies, but the majority of participants underestimate the extent of their mistakes, under-demand, and under-utilize financial advice. Our results underscore the critical role of financial literacy, as it not only directly influences the effectiveness of potential disclosure policies but also shapes individuals’ awareness of their mistakes.

I study how people learn about their environment when their subjective understanding of the environment, their mental model, is misspecified. Using people's tendency to hold optimistic beliefs about their abilities to generate model misspecification, I investigate the implications of overconfidence as a misspecified mental model on learning about own ability and a fundamental. Consistent with 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.

A policy brief that discusses the impact of instant payment systems and open banking initiatives on consumer welfare, entrepreneurship, competition, and innovation in emerging markets, primarily focusing on India's Unified Payment Interface and Brazil's Pix.