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Misfortune and Mistake: The Financial Conditions and Decision-making Ability of High-cost Loan Borrowers


  • Leandro Carvalho
  • Arna Olafsson
  • Dan Silverman


This paper studies the relationship between adverse financial conditions (“misfortunes”), imperfect decision-making (“mistakes”), and the demand for high-cost credit. Imperfect choices are hard to identify; unobserved factors can justify many behaviors as optimal. We address this by linking administrative and experimental data. Bank records from Iceland detail the financial conditions associated with high-cost loan demand. The experiments manipulate constraints, while holding preferences and beliefs constant, to identify choice imperfections and measure decision-making ability. We then relate loan demand to decision-making ability and measures of constraints and preferences. High-cost borrowers are especially illiquid in the days leading up to getting a loan. They also have much lower decision-making ability: 28% of loan dollars are lent to the bottom 10% of the decision-making ability distribution, and 53% are lent to the bottom 20%. The relationship between decision-making ability and loan demand is not explained by demographic characteristics, granular information on financial conditions, or measures of preferences from the experiments, and is mirrored by the relationship between decision-making ability and an unambiguous “mistake,” the accrual of insufficient fund fees. Estimates from U.S. survey data are quantitatively similar. The results thus provide evidence that both misfortune and mistake are important for high-cost loan demand.

Suggested Citation

  • Leandro Carvalho & Arna Olafsson & Dan Silverman, 2019. "Misfortune and Mistake: The Financial Conditions and Decision-making Ability of High-cost Loan Borrowers," NBER Working Papers 26328, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26328
    Note: PE

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G2 - Financial Economics - - Financial Institutions and Services

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