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Mental Accounting in the Housing Market

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  • Almenberg, Johan

    ()
    (Research Institute of Industrial Economics (IFN))

  • Karapetyan, Artashes

    (Empirical Institute of Economics and SFI)

Abstract

We use a survey to identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a sub-optimal capital structure; but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 798.

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Length: 44 pages
Date of creation: 04 Jun 2009
Date of revision:
Handle: RePEc:hhs:iuiwop:0798

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Keywords: Household Finance; Mental Accounting; Co-op; Capital Structure;

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References

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  1. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
  2. Campbell, John, 2006. "Household Finance," Scholarly Articles 3157877, Harvard University Department of Economics.
  3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September.
  4. James J Choi & David Laibson & Brigitte C Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Levine's Working Paper Archive 122247000000002014, David K. Levine.
  5. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
  6. Marianne Bertrand & Dean S. Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Working Papers 918, Economic Growth Center, Yale University.
  7. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, vol. 93(2), pages 175-179, May.
  8. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
  9. Amy Finkelstein, 2007. "E-ZTax: Tax Salience and Tax Rates," NBER Working Papers 12924, National Bureau of Economic Research, Inc.
  10. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
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  15. Bertrand, Marianne & Karlan, Dean & Mullainathan, Sendhil & Shafir, Eldar & Zinman, Jonathan, 2009. "What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment," Working Papers 58, Yale University, Department of Economics.
  16. Drazen Prelec & George Loewenstein, 1998. "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, INFORMS, vol. 17(1), pages 4-28.
  17. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
  18. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
  19. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Compartmentalized thinking in personal finances
    by Economic Logician in Economic Logic on 2011-05-16 14:29:00
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Cited by:
  1. Diego A. Salzman & Remco C.J. Zwinkels, 2013. "Behavioural Real Estate," Tinbergen Institute Discussion Papers 13-088/IV/DSF57, Tinbergen Institute.

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