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Information Disclosure, Cognitive Biases, and Payday Borrowing

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  • MARIANNE BERTRAND
  • ADAIR MORSE

Abstract

If people face cognitive limitations or biases that lead to financial mistakes, what are possible ways lawmakers can help? One approach is to remove the option of the bad decision; another approach is to increase financial education such that individuals can reason through choices when they arise. A third, less discussed, approach is to mandate disclosure of information in a form that enables people to overcome limitations or biases at the point of the decision. This third approach is the topic of this paper. We study whether and what information can be disclosed to payday loan borrowers to lower their use of high-cost debt via a field experiment at a national chain of payday lenders. We find that information that helps people think less narrowly (over time) about the cost of payday borrowing, and in particular information that reinforces the adding-up effect over pay cycles of the dollar fees incurred on a payday loan, reduces the take-up of payday loans by about 10 percent in a 4 month-window following exposure to the new information. Overall, our results suggest that consumer information regulations based on a deeper understanding of cognitive biases might be an effective policy tool when it comes to regulating payday borrowing, and possibly other financial and non-financial products.

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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2011.01698.x
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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 66 (2011)
Issue (Month): 6 (December)
Pages: 1865-1893

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:6:p:1865-1893

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References

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  2. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Financial literacy and retirement planning: New evidence from the Rand American Life Panel," CFS Working Paper Series 2007/33, Center for Financial Studies (CFS).
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Cited by:
  1. Kalaycı, Kenan & Serra-Garcia, Marta, 2012. "Complexity and Narrow Bracketing in Credit Choice," Discussion Papers in Economics 13035, University of Munich, Department of Economics.
  2. Willem Boom, 2011. "Price Intransparency, Consumer Decision Making and European Consumer Law," Journal of Consumer Policy, Springer, vol. 34(3), pages 359-376, September.
  3. Cambpbell, John Y. & Jackson, Howell Edmunds & Madrian, Brigitte & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Scholarly Articles 4450128, Harvard Kennedy School of Government.
  4. Fourcade, Marion & Healy, Kieran, 2013. "Classification situations: Life-chances in the neoliberal era," Accounting, Organizations and Society, Elsevier, vol. 38(8), pages 559-572.
  5. Dean Karlan & Aishwarya Lakshmi Ratan & Jonathan Zinman, 2013. "Savings by and for the Poor: A Research Review and Agenda," Working Papers 1027, Economic Growth Center, Yale University.
  6. McKernan, Signe-Mary & Ratcliffe, Caroline & Kuehn, Daniel, 2013. "Prohibitions, price caps, and disclosures: A look at state policies and alternative financial product use," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 207-223.
  7. Lührmann, Melanie & Serra-Garcia, Marta & Winter, Joachim, 2012. "Teaching teenagers in finance: does it work?," Discussion Papers in Economics 14101, University of Munich, Department of Economics.
  8. Theresa Kuchler, 2013. "Sticking to Your Plan: Hyperbolic Discounting and Credit Card Debt Paydown," Discussion Papers 12-025, Stanford Institute for Economic Policy Research.
  9. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2012. "Can an interest-free credit facility be more efficient than a usurious payday loan?," Working Papers 12008, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  10. Winter, Joachim & Lührmann, Melanie & Serra Garcia, Marta, 2013. "The effects of financial literacy training: Evidence from a field experiment in German high schools," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79744, Verein für Socialpolitik / German Economic Association.

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