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What's Psychology Worth? A Field Experiment in the Consumer Credit Market

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Author Info
Marianne Bertrand (University of Chicago, NBER & CEPR)
Dean S. Karlan () (Yale University, Economic Growth Center)
Sendhil Mullainathan (Harvard University & NBER)
Eldar Shafir (Princeton University)
Jonathan Zinman (Dartmouth College)

Additional information is available for the following registered author(s):

Abstract

Numerous laboratory studies report on behaviors inconsistent with rational economic models. How much do these inconsistencies matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experiences? We report on a field experiment designed to address this question. Incumbent clients of a lender in South Africa were sent letters offering them large, short-term loans at randomly chosen interest rates. Psychological “features” on the letter, which did not affect offer terms or economic content, were also independently randomized. Consistent with standard economics, the interest rate significantly affected loan take-up. Inconsistent with standard economics, the psychological features also significantly affected take-up. The independent randomizations allow us to quantify the relative importance of psychological features and prices. Our core finding is the sheer magnitude of the psychological effects. On average, any one psychological manipulation has the same effect as a one half percentage point change in the monthly interest rate. Interestingly, the psychological features appear to have greater impact in the context of less advantageous offers. Moreover, the psychological features do not appear to draw in marginally worse clients, nor does the magnitude of the psychological effects vary systematically with income or education. In short, even in a market setting with large stakes and experienced customers, subtle psychological features that normatively ought to have no impact appear to be extremely powerful drivers of behavior.

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Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 918.

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Length: 57 pages
Date of creation: Jul 2005
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Handle: RePEc:egc:wpaper:918

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Related research
Keywords: Behavioral economics psychology microfinance marketing field experiment credit markets

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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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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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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.)

  1. Karlan, Dean S. & Zinman, Jonathan, 2007. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," CEPR Discussion Papers 6071, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Saez, Emmanuel, 2007. "Details Matter: The Impact of Presentation and Information on the Take-up of Financial Incentives for Retirement Saving," CEPR Discussion Papers 6386, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Dean Karlan & Jonathan Zinman, 2005. "Elasticities of Demand for Consumer Credit," Working Papers 926, Economic Growth Center, Yale University. [Downloadable!]
  4. Maria Salgano, 2006. "Choosing to Have Less Choice," Working Papers 2006.37, Fondazione Eni Enrico Mattei. [Downloadable!]
  5. Craig Landry & Andreas Lange & John A. List & Michael K. Price & Nicholas G. Rupp, 2005. "Toward an Understanding of the Economics of Charity: Evidence from a Field Experiment," NBER Working Papers 11611, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Jim Engle-Warnick & Javier Escobal & Sonia Laszlo, 2006. "The Effect Of An Additional Alternative On Measured Risk Preferences In A Laboratory Experiment In Peru," Departmental Working Papers 2006-10, McGill University, Department of Economics. [Downloadable!]
    Other versions:
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