Sumit Agarwal () (Bank of America) Souphala Chomsisengphet (Office of the Comptroller of the Currency) Chunlin Liu () (University of Nevada - Reno, Finance Department) Nicholas S. Souleles () (University of Pennsylvania)
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A number of studies have pointed to various mistakes that consumers might make in their consumption-saving and financial decisions. We utilize a unique market experiment conducted by a large U.S. bank to assess how systematic and costly such mistakes are in practice. The bank offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. To minimize their total interest costs net of the fee, consumers expecting to borrow a sufficiently large amount should choose the contract with the fee, and vice-versa. We find that on average consumers chose the contract that ex post minimized their net costs. A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs. Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract. Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub-optimal contracts without switching.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2005/32.
Length: 28 pages Date of creation: 07 Nov 2005 Date of revision: Handle: RePEc:cfs:cfswop:wp200532
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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[Downloadable!]
Other versions:
David Laibson & Andrea Repetto & Jeremy Tobacman, 2000.
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NBER Working Papers
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[Downloadable!] (restricted)
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
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Other versions:
John Y. Campbell, 2006.
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[Downloadable!] (restricted)
Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2008.
"Learning in the Credit Card Market,"
NBER Working Papers
13822, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions: