Debt of high-income consumers may reflect leverage rather than poor cognitive reflection

Debt of high-income consumers may reflect leverage rather than poor cognitive reflection PurposeA recent population-wide study for Germany, where credit lines on current accounts are available to 80 percent of the population, finds that overdraft debt is more likely for people who give intuitive but incorrect answers on a cognitive reflection test. This suggests that those consumers in debt have poorer cognitive reflection and, thus, lack of self-control. The Germany study finds that “surprisingly, the level of income does not play a central role.” The purpose of this paper is to discriminate the consumers in terms of their income by considering two experiments.Design/methodology/approachIn the first (pilot) experiment, the authors do not discriminate consumers in terms of income and, as result, replicate the Germany study. In a follow-up experiment, which assembles a high-quality sample of high-income consumers, the authors find debt can no longer be explained by poor cognitive reflection.FindingsApparently, high-income consumers treat debt as mere leverage, as companies do.Originality/valueNot all consumer indebtedness can be caused by lack of self-control. High-income consumers are likely to contract debt as leverage. This resembles rational risk taking. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Behavioral Finance Emerald Publishing

Debt of high-income consumers may reflect leverage rather than poor cognitive reflection

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Publisher
Emerald Group Publishing Limited
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1940-5979
D.O.I.
10.1108/RBF-07-2016-0046
Publisher site
See Article on Publisher Site

Abstract

PurposeA recent population-wide study for Germany, where credit lines on current accounts are available to 80 percent of the population, finds that overdraft debt is more likely for people who give intuitive but incorrect answers on a cognitive reflection test. This suggests that those consumers in debt have poorer cognitive reflection and, thus, lack of self-control. The Germany study finds that “surprisingly, the level of income does not play a central role.” The purpose of this paper is to discriminate the consumers in terms of their income by considering two experiments.Design/methodology/approachIn the first (pilot) experiment, the authors do not discriminate consumers in terms of income and, as result, replicate the Germany study. In a follow-up experiment, which assembles a high-quality sample of high-income consumers, the authors find debt can no longer be explained by poor cognitive reflection.FindingsApparently, high-income consumers treat debt as mere leverage, as companies do.Originality/valueNot all consumer indebtedness can be caused by lack of self-control. High-income consumers are likely to contract debt as leverage. This resembles rational risk taking.

Journal

Review of Behavioral FinanceEmerald Publishing

Published: Mar 12, 2018

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