The Center for Research in Consumer Financial Decision Making (CFDM) is dedicated to producing world-leading research that not only advances our understanding of consumer financial behavior but also has a tangible impact on policy and public welfare. Our affiliated faculty members are at the forefront of their respective fields, consistently publishing groundbreaking studies in top-tier academic journals and presenting their findings at prestigious conferences around the globe.
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One of the key strengths of CFDM is our commitment to translating academic research into real-world impact. Our faculty members regularly engage with policymakers, consumer advocates, and industry leaders to share their findings and provide expert guidance on issues related to consumer financial well-being. Through these interactions, we ensure that our research not only contributes to the academic discourse but also drives positive change in the lives of consumers.
Research Topics
Below, you will find a comprehensive list of publications authored by CFDM's affiliated faculty. Each entry includes an abstract summarizing the key findings and implications of the study, demonstrating the depth and breadth of our research output. We invite you to explore these publications and discover how CFDM is pushing the boundaries of consumer financial decision-making research to create a more informed, empowered, and financially secure society.
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SAVING
Asaf Bernstein & Peter Koudijs (2024).听.听Quarterly Journal of Economics
In 2013, the Dutch government mandated that new conforming mortgages must fully amortize. Within a difference-in-difference design, we estimate that the marginal wealth accumulation from amortization is close to one, even five years later. Households purchasing after the reform primarily cut consumption and leisure over other savings, leading to a rise in wealth. This holds if we use life-events to instrument for the timing of home purchase. Estimates are similar for seemingly unconstrained households and movers suggesting a broad applicability of our results. Consistent with a simple model, we find lower estimates for households who appear less financially sophisticated or willing to adjust short-term consumption. Mortgage amortization schedules are among the largest savings plans in the world and our results highlight their critical importance for household wealth-building and macroprudential policies.
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Matz, S. C., Gladstone, J. J., & Farrokhnia, R. A. (2023).听.听American Psychologist.
Despite their best intentions, most people fail to save enough for the future. In this research, we demonstrate that people are more successful at saving when their savings goals are aligned with their Big Five personality traits. Study 1 uses a nationally representative sample of 2,447 U.K. citizens to test whether people whose self-declared savings goals more closely match their Big Five personality also report higher levels of savings. We apply specification curve analyses to minimize the risk of having arbitrary analytical decisions produce false-positive results. As our findings show, person-goal fit significantly predicted savings across all 48 specifications. Study 2 expands these findings by testing whether psychological fit can influence savings even if the saving goals are not formulated by the individuals themselves but instead suggested by a technology service designed to help them save. In a field experiment with 6,056 U.S.-based low-income users of a nonprofit Fintech app (with < $100 in current savings), we show that people who were encouraged to save $100 over the course of a month were more likely to achieve this target if they were encouraged to save toward personality-matched goals. Our research provides support for the theory of psychological fit, showing that an alignment between an individual鈥檚 Big Five personality traits and the personality appeal of a saving goal can help increase savings, even among those who struggle the most.
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Stephen Roll, Michal Grinstein-Weiss, Emily Gallagher听and Cynthia Cryder (2019) . *Conditional accept at Journal of Economic Behavior & Organization
This paper presents the results of an experiment testing the roles of a savings pre-commitment and different savings-focused choice architectures on the savings deposit decisions of 845,786 low- and moderate-income (LMI) tax filers. Results suggest that pre-committing to save at the start of the tax filing process can, among certain populations, dramatically increase savings rates. Among early tax filers, pre-commitment is associated with a 20.6 percentage point increase in savings deposits and a $418.86 increase in the amount deposited to savings. We observe more modest effects of pre-commitment on a general sample of tax filers. We also see strong evidence that choice architectures emphasizing savings strongly impact the deposit decisions of tax filers. The experiment also revealed cautionary evidence that the structure of pre-commitment can solidify decisions, making it then harder to later nudge those who opt-out of savings to change their minds. These findings may be broadly applicable to settings beyond the tax time moment 鈥� such as to applications that seek to encourage particular behaviors (like work or exercise) on the part of its participants.
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Emily Gallagher,听Jorge Sabat (2019) , SSRN, 23 (September), 1-47.
The rules of thumb offered by financial advisors regarding how much to hold in liquid reserves vary widely and usually imply far greater sums than low-income households save. This paper seeks empirically-grounded insights into the minimum liquidity buffer needed by the average low-income household. First, we document diminishing benefits to liquid savings in terms of the likelihood of experiencing financial hardship. Then, we formalize this relationship with a theory of poverty traps. Finally, to observed data, we fit a regression kink model with an unknown threshold (kink) point that must be estimated. Our key finding is that the threshold point is $2,467 with a 95% confidence interval of $1,814鈥�$3,011 (in 2019 dollars) or roughly 1 month of income for the average low-income household 鈥� which is far less than the savings amounts implied by common rules of thumb (typically 3鈥�6 months of income). Theoretical evidence suggests that financial advice based on an empirically-estimated threshold point is welfare enhancing for households with naive perceptions of their probability of experiencing financial problems.
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Yanwen Wang, Muxin Zhai, John Lynch (2018)听Generous to a Fault: The Effect of Employers Retirement Plan Contributions on Leakage from Cashing Out at Job Separation (working paper)
In the United States, "retirement plan leakage" occurs when employees withdraw money prior to retirement and pay a financial penalty for doing so. The vast majority of early leakage from retirement savings system occurs when employees leave a job. We analyze a large data set on employees鈥� 401(k) contributions and leakage decisions, and we investigate how retirement plan generosity affects the probability and amount of leakage at job termination. Our results suggest that employees respond strategically to employer-based de铿乶ed contribution plans. An overly generous plan may not unambiguously incentivize employee contributions to retirement savings. The likelihood of leakage at job separation increases with the proportion of employer鈥檚 contribution relative to the employee's contribution. We explain this phenomenon using mental accounting concepts. We suggest that the employer鈥檚 contribution is likely to be labeled as "free money" and thus subject to early withdrawal. Our counterfactual analysis of how employees respond to modi铿乧ations of current employer鈥檚 matching scheme supports the hypothesis.
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INVESTING
Dragana Cvijanovic and Christophe Spaenjers (2021).听. Management Science.
Previous research has shown that nonlocal household investors make suboptimal asset selection and market timing decisions. However, in real estate markets, heterogeneity in returns can exist even with identical ex ante investment (timing) choices, given that transaction prices are the outcome of a complex search-and-bargaining process. Analyzing notarial data for the Paris housing market, we find that 鈥渙ut-of-country鈥� buyers indeed buy at higher prices and resell at substantially lower prices than do local investors, ceteris paribus. Furthermore, our evidence suggests that this pattern is not due to higher search costs and information asymmetries but instead stems from wealth-related differences in bargaining intensity. Finally, we estimate the causal effect of out-of-country demand shocks on property prices in Paris to be positive but small.
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Reinholtz, Nicholas, Philip M. Fernbach, and Bart de Langhe (2021), ","听Management Science,听67(12), 7322-7343.
Diversification鈥攊nvesting in imperfectly correlated assets鈥攔educes volatility without sacrificing expected returns. Although the expected return of a diversified portfolio is the weighted average return of its constituent parts, the variance of the portfolio is less than the weighted average variance of its constituent parts. Our results suggest that very few people have correct statistical intuitions about the effects of diversification. The average person in our data sees no benefit of diversification in terms of reducing portfolio volatility. Many people, especially those low in financial literacy, believe diversification actually increases the volatility of a portfolio. These people seem to believe that the unpredictability of individual assets compounds when aggregated together. Additionally, most people believe diversification increases the expected return of a portfolio. Many of these people correctly link diversification with the concept of risk reduction but seem to understand risk reduction to mean greater returns on average. We show that these beliefs can lead people to construct investment portfolios that mismatch investors鈥� risk preferences. Furthermore, these beliefs may help explain why many investors are underdiversified.
Asaf Bernstein, Stephen Billings, Matt Gustafson, and Ryan Lewis (2022).听.听Journal of Financial Economics
Is climate change partisanship reflected in residential decisions? Comparing individual properties in the same zip code with similar elevation and proximity to the coast, houses exposed to sea level rise (SLR) are increasingly more likely to be owned by Republicans and less likely to be owned by Democrats. We find a partisan residency gap for even moderately SLR exposed properties of more than 5 percentage points, which has more than doubled over the past six years. Findings are unchanged controlling flexibly for other individual demographics and a variety of granular property characteristics, including the value of the home. Residential sorting manifests among owners regardless of occupancy, but not among renters, and is driven by long-run SLR exposure but not current flood risk. Anticipatory sorting on climate change suggests that households that are most likely to vote against climate friendly policies and least likely to adapt may ultimately bear the burden of climate change.
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Daniel J. Walters & Phillip M. Fernbach (2021). PNAS.
We document a memory-based mechanism associated with investor overconfidence. In Studies 1 and 2, investors were asked to recall their most important trades in the recent past and then reported investing confidence and trading frequency. After the study, they looked up and reported the actual returns of these trades. In both studies, investors were biased to recall returns as higher than achieved, and larger memory biases were associated with greater overconfidence and trading frequency. The design of Study 2 allowed us to separately investigate the effects of two types of memory biases: distortion and selective forgetting. Both types of bias were present and were independently associated with overconfidence and trading frequency. Study 3 was an incentive-compatible experiment in which overconfidence and trading frequency were reduced when participants looked up previous consequential trades compared to when they reported them from memory.
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听(Tony Cookson, Joey Engelberg and Will Mullins).听Review of Asset Pricing Studies. Vol 10, No 4 (December 2020), pp. 863-893
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Abstract. We use party-identifying language鈥攍ike 鈥渓iberal media鈥� and 鈥淢AGA鈥濃�攖o identify Republican users on the investor social platform StockTwits. Using a difference-in-difference design, we find that partisan Republicans remain relatively unfazed in their beliefs about equities during the COVID-19 pandemic, while other users become considerably more pessimistic. In cross-sectional tests, we find Republicans become relatively more optimistic about stocks that suffered the most during the COVID-19 crisis, but more pessimistic about Chinese stocks. Finally, stocks with the greatest partisan disagreement on StockTwits have significantly more trading in the broader market, explaining 28% of the increase in stock turnover during the pandemic.
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听(Tony Cookson and Marina Niessner). Journal of Finance. Vol 75, No 1 (February 2020), pp. 173-228.
Abstract. We study sources of investor disagreement using sentiment of investors from a social media investing platform, combined with information on the users' investment approaches (e.g., technical, fundamental). We examine how much of overall disagreement is driven by different information sets versus differential interpretation of information by studying disagreement within and across investment approaches. Overall disagreement is evenly split between both sources of disagreement, but within-group disagreement is more tightly related to trading volume than cross-group disagreement. Although both sources of disagreement are important, our findings suggest that information differences are more important for trading than differences across market approaches.
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Echo chambers听(Tony Cookson, Joey Engelberg and Will Mullins). Review of Financial Studies.听Vol听36, No听2听(February 2023), pp.听450-500.
Abstract. We find evidence of selective exposure to confirmatory information among 400,000 users on the investor social network StockTwits. Self-described bulls are 5 times more likely to follow a user with a bullish view of the same stock than self-described bears. Consequently, bulls see 62 more bullish messages and 24 fewer bearish messages than bears over the same 50-day period. These 鈥渆cho chambers鈥� exist even among professional investors and are strongest for investors who trade on their beliefs. Finally, beliefs formed in echo chambers are associated with lower ex-post returns, more siloing of information and more trading volume.
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Andrew Long, Phil Fernbach, Bart de Langhe (2018) . Journal of Marketing Research, 55(4), 474-488.
Consumers incorrectly rely on their sense of understanding of what a company does to evaluate investment risk. In three correlational studies, greater sense of understanding was associated with lower risk ratings (Study 1) and with prediction distributions for future stock performance with lower standard deviations and higher means (Studies 2 and 3). In all studies, sense of understanding was unassociated with objective risk measures. Risk perceptions increased when we degraded sense of understanding by presenting company information in an unstructured versus structured format (Study 4). Sense of understanding also influenced downstream investment decisions. In a portfolio construction task, both novices and seasoned investors allocated more money to hard-to-understand companies for a risk-tolerant client relative to a risk-averse one (Study 5). Study 3 ruled out an alternative explanation based on familiarity. The results may explain both the enduring popularity and common misinterpretation of the 鈥渋nvest in what you know鈥� philosophy.
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Asaf Bernstein, Matthew Gustavson, Ryan Lewis (2018) . Journal of Financial Economics,听Volume 134, Issue 2, November 2019, Pages 253-272.
Homes exposed to sea level rise (SLR) sell at a 7% discount relative to observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long horizon SLR costs, (1) we find no relation between SLR exposure and rental rates, (2) despite decreased remodeling among exposed homeowners, current SLR discounts are not caused by differential investment, (3) results hold controlling for flooded properties and views. Overall, we provide the first evidence on the price of SLR risk and its determinants. These findings contribute to the mixed literature on how investors price long-run risky cash flows and have implications for optimal climate change policy. ,
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Bhagwan Chowdhry, Shaun Davies, and Brian Waters (2018) The Review of Financial Studies, Volume 32, Issue 3, March 2019, Pages 864鈥�904,
We study joint financing between profit-motivated and socially motivated (impact) investors and derive conditions under which impact investments improve social outcomes. When project owners cannot commit to social objectives, impact investors hold financial claims to counterbalance owners鈥� tendencies to overemphasize profits. Impact investors鈥� ownership stakes are higher when the value of social output is higher, and pure nonprofit status may be optimal for the highest valued social projects. We provide guidance about the design of contingent social contracts, such as social impact bonds and social impact guarantees.
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Nick Reinholtz, Phil Fernbach, Bart de Langhe (2018)听听(Forthcoming at Management Science)
Diversification鈥攊nvesting in imperfectly correlated assets 鈥� reduces volatility without sacrificing expected returns. While the expected return of a diversified portfolio is the weighted average return of its constituent parts, the variance of the portfolio is less than the weighted average variance of its constituent parts. Our results suggest that very few people have correct statistical intuitions about the effects of diversification. Many people, especially those low in financial literacy, believe diversification actually increases the volatility of a portfolio. These people seem to believe that the unpredictability of individual assets compounds when aggregated听together. Additionally, most people believe diversification increases the expected return of a portfolio. Many of these people correctly link diversification with the concept of risk reduction, but seem to understand risk reduction to mean greater return. We show that these beliefs can lead people to construct investment portfolios that mismatch investors鈥� risk preferences. Further, these beliefs may help explain why many investors are underdiversified.
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Diego Garcia (2016) The Kinks of Financial Journalism. Working paper.
This paper studies the content of financial news as a function of past market returns. As a proxy for media content we use positive and negative word counts from general financial news columns from the Wall Street Journal and the New York Times. Our empirical analysis allows us to discriminate between theories that predict hyping good stock performance to those that emphasize negative news. The evidence is conclusive: negative market returns taint the ink of typewriters, while positive returns barely do. Given how pervasive our estimates are across multiple time periods, subject to different competitive pressures in the market for news, we conclude our results are driven by demand considerations. Financial Times.
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HOUSEHOLD DEBT
Marina Emiris, Francois Koulischer, and Christophe Spaenjers (2024).听. Working paper.
We model mortgage refinancing as a bargaining game involving the borrowing household,听the incumbent lender, and outside banks. In equilibrium, the borrower鈥檚 ability to refinance听depends on the incumbent bank鈥檚 cost (dis)advantage relative to locally present competing听banks and on the average creditworthiness of borrowers in the relevant market. It is also听driven by borrower impatience and switching costs. We find empirical support for the key听predictions of our model in an administrative data set covering the universe of mortgages in听Belgium.
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鈥�Blood Money: Selling Plasma to Avoid High-Interest Loans,鈥� Emily Gallagher and John Dooley.听The Review of Financial Studies,听Forthcoming in 2024.听
Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the U.S. blood plasma industry to shed light on the sellers of plasma. Sellers tend to be young and liquidity-constrained with low-incomes and limited access to traditional credit. Plasma centers absorb demand for non-traditional credit. After a plasma center opens nearby, demand for payday loans falls by over 13% among young borrowers. Meanwhile, foot traffic increases by over 4% at nearby stores, suggesting that constrained households use plasma markets to smooth consumption without appealing to high-cost debt.
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鈥�Let the Rich Be Flooded: The Distribution of Financial Aid and Distress after Hurricane Harvey,鈥� Emily Gallagher, Steve Billings & Lowell Ricketts;听Journal of Financial Economics听(2022), Volume 146, Issue 2, Pages 797-819.
Outside of flood hazard zones, households must decide whether to insure or rely on disaster assistance to manage flood risk. We use the quasi-random flooding generated by Hurricane Harvey, which hit Houston in August 2017, to understand the implications of flood losses for households with differing access to insurance and credit. Outside the floodplain, credit-constrained homeowners experience a 20% increase in bankruptcies and a 13% increase in the share of debt in severe delinquency in flooded blocks relative to non-flooded areas. Treatment effects are universally insignificant inside the floodplain, implying that flood insurance mitigates the financial impact of flooding across the credit distribution. Disaster assistance, on the other hand, does not appear to counteract the role of initial inequalities on post-disaster credit outcomes. We find SBA disaster loans and, more surprisingly, FEMA grants to both be regressive in allocation. Our results highlight that averages mask important heterogeneity after disasters, which challenges existing narratives of how effectively Federal disaster programs mitigate the financial burden of natural disasters.
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Asaf Bernstein & Daan Struyven (2022).听.听American Economic Journal: Economic Policy
This paper employs Dutch administrative population data to test the 鈥渉ousing lock hypothesis鈥�: the conjecture that homeowners with negative home equity, low levels of financial assets and restricted opportunities to borrow reduce their mobility. We exploit variation in home equity solely driven by the timing of home purchase within a municipality and the harshness of Dutch recourse laws, which allow us to isolate the housing lock channel. Instrumented negative home equity is associated with a 74-79% decline in mobility, and the effects are substantially larger for households with low financial asset holdings or moves over longer distances.
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鈥�,鈥� Emily Gallagher, Steve Billings & Lowell Ricketts.听The Review of Financial Studies, Volume 36, Issue 7, July 2023, Pages 2651鈥�2684.
How does household exposure to a natural disaster affect higher education investments? Using variation in flooding from Hurricane Harvey (2017), we find that college-aged adults from flooded blocks in Houston are 7% less likely than counterparts to have student loans after Harvey, with larger effects in areas with more potential first-generation students. We find a similar relative decline in enrollment at more exposed Texas universities and colleges and a shift toward majors with higher expected earnings. Our results highlight a decrease in the quantity but an increase in the intensity of investments in human capital after the storm.
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Tony Cookson, Erik Gilje and Rawley Heimer听(2020)听. (August 26, 2020)
How do persistent cash flow shocks affect debt repayment across the distribution of households? Using individual data on natural gas shale royalty payments matched with credit bureau data for 215,639 consumers, we estimate that individuals repay 33 cents of debt per dollar of windfall, and that initially-subprime individuals repay approximately 5 times more debt than initially-prime individuals do. This difference in debt repayment is driven by changes to revolving debt balances. Finally, we show that debt repayment precedes durable goods consumption, particularly for households who were initially financially constrained. These results shed new light on how deleveraging affects household consumption.
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Asaf Bernstein (2021).听听Journal of Finance
Using U.S. household-level data and plausibly exogenous variation in the location-timing of home purchases with a single lender, I find that negative home equity causes a 2% to 6% reduction in household labor supply. Supporting causality, households are observationally equivalent at origination and equally sensitive to local housing shocks that do not cause negative equity. Results also hold comparing purchases within the same year-metropolitan statistical area that differ by only a few months. Though multiple channels are likely at work, evidence of nonlinear effects is broadly consistent with costs associated with housing lock and financial distress.
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Stephen Billings, Emily A. Gallagher and Lowell Ricket (2019) Let the Rich Be Flooded: The Unequal Impact of Hurricane Harvey on Household Debt. Working paper (2019), *R&R at Journal of Financial Economics
Hurricane Harvey, which submerged 25鈥�30% of Houston in August 2017, is arguably the most generalizable major flooding event. Using a treatment intensity difference-in-difference design, we find substantial heterogeneity in household debt outcomes across flooded residents according to floodplain (flood insurance) status, credit history, income, and housing equity. We observe a small relative decline in Equifax Risk Scores (1鈥�4 points) among residents in the most flooded blocks 鈥� likely attributable to a temporary 4鈥�20% jump in the share of debt that is severely delinquent among younger and lower credit quality borrowers living outside of the floodplain. Our most surprising finding is a roughly $2,000 (or 9%) pay down in student debt in the most flooded, higher income areas outside of the floodplain. This effect is driven entirely by people with pre-existing student loans, lower housing equity, and higher credit scores. A plausible interpretation is that some flooded households are exploiting their greater access to more fungible government assistance to eliminate their higher-interest, non-dischargeable debt rather than to rebuild. We believe that this is the first paper to evaluate student debt outcomes as well as the role of differential access to various forms of assistance following a natural disaster.
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Asaf Bernstein (2018) . (December 5, 2019).
I find that negative home equity causes a 2%-6% reduction in household labor supply. I utilize U.S. household-level data and plausibly exogenous variation in the location-timing of home purchases with a single lender. Supporting causality, households are observationally equivalent at origination and equally sensitive to local housing shocks that don鈥檛 cause negative equity. Results also hold comparing purchases within the same year-MSA, that differ by only a few months. Though multiple channels are likely at work, evidence of non-linear effects is broadly consistent with costs associated with housing lock and financial distress.
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Asaf Bernstein, Daan Struyven (2017) (December 19, 2017).
This paper employs Dutch administrative population data to test the 鈥渉ousing lock hypothesis鈥�: the conjecture that homeowners with negative home equity, low levels of financial assets and restricted opportunities to borrow reduce their mobility. We exploit variation in home equity solely driven by the timing of home purchase within a municipality and the harshness of Dutch recourse laws, which allow us to isolate the housing lock channel. Instrumented negative home equity is associated with a 74-79% decline in mobility, and the effects are substantially larger for households with low financial asset holdings or moves over longer distances.
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Nelson Camanho, Daniel Fernandes (2016) . (September 19, 2018)
We find that home buyers are influenced by the comparison between the monthly rental payment and the monthly mortgage installment, for fixed rate mortgages. Consumers are more likely to buy real estate听when the monthly rental payment is higher than the monthly mortgage installment. Our experiments show that the mortgage illusion is not caused by a desire to pay less听per month for a mortgage, but by a desire to pay less each month for the rent than for the mortgage. Consumers use the monthly rental payment as a reference point to decide whether to buy a realty. Consumers with greater time discounting听are more likely to display the mortgage illusion. Financial literacy and numeracy do not help to overcome this bias.
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FINANCIAL PLANNING, BUDGETING AND COPING WITH CONSTRAINT
Pomerance, Justin and Nicholas Reinholtz (2024), ","听Psychology and Marketing,听41(5), 1100-1114.
Consumers often experience pain of payment, a tug of negative affect that holds back their spending. While the literature has long viewed pain of payment as self-regulatory in nature, it has left the dynamics of self-regulation that lead to the pain of paying largely unaddressed. In self-regulation, affect arises when people move away from a goal they hold. Thus, understanding the specific goals that people consider when making a payment can help us better predict when pain of payment will arise. We propose that people have a goal to maintain financial slack, and that violating this goal contributes to pain of payment. Thus, people experience more pain of payment when the goal to maintain financial slack is stronger or when it is particularly salient that a purchase entails losing financial slack. Critically, subjective changes in financial slack are not equivalent to objective changes in wealth, altering pain of payment for economically equivalent trades. This research contributes to the existing literature by identifying a novel antecedent to the pain of payment. It additionally expands our understanding of people's preferences between payment systems. Finally, it offers guidance to practitioners who wish to minimize pain of payment among their consumers.
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Christina Kan, Phil Fernbach, and John Lynch Jr. (2018) Personal Budgeting in the Short Run and the Long Run. Working Paper.
Personal budgeting is commonly recommended, and about half of Americans report doing it. Surprisingly, little causal evidence exists testing the efficacy of budgeting for attaining financial goals. We find that budgeting helps people attain their financial goals in the short run, but not in the long run. People who track their budgets are more likely to reduce their net spending after periods of overspending than those who do not track their budgets, consistent with popular press touting of benefits of budgeting. However, budget trackers are also more likely to overspend after periods of fiscal restraint than those who do not track their budgets. The net effect is that budget trackers are no more likely to attain their financial goals.
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FINANCIAL WELL BEING AND EFFECTS OF PUBLIC POLICY
The social signal听(Tony Cookson,听Runjing Lu, Marina Niessner and William Mullins). Journal of听Financial Economics. Accepted.听February 2024.
Abstract.听We examine social media attention and sentiment from three major platforms: Twitter, StockTwits, and Seeking Alpha. We find that, even after controlling for firm disclosures and news, attention is highly correlated across platforms, but sentiment is not: its first principal component explains little more variation than purely idiosyncratic sentiment. Using market events, we attribute differences across platforms to differences in users (e.g., professionals vs. novices) and differences in platform design (e.g., character limits in posts). We also find that sentiment and attention contain different return-relevant information. Sentiment predicts positive next-day returns, but attention predicts negative next-day returns. These results highlight the importance of distinguishing between social media sentiment and attention across different investor social media platforms. In the burgeoning social finance literature, nearly all papers examine single platforms; our paper cautions that attention-related results from these papers are more likely to generalize than results concerning sentiment.
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Money to burn: Crowdfunding disaster recovery听(Tony Cookson, Emily Gallagher and Phil Mulder). Working Paper.听.
Abstract.听Person-to-person charity has grown substantially in recent years, yet little is known about who benefits from it. This paper uses micro data on crowdfunding campaigns after a major wildfire to ask whether donors give according to the comparative need of beneficiaries. Linking to personal financial data and holding losses fixed, we find that beneficiaries with incomes above $150,000 receive 28% more support than beneficiaries with income below $75,000 and are more likely to have a campaign in the first place. We document that high-income beneficiaries possess several network advantages when soliciting crowdfunding. However, a networks mechanism does not fully explain why donors who give to multiple campaigns tend to give larger amounts to higher-income beneficiaries. These findings suggest that crowdfunded private charity may exacerbate income inequalities in the recovery process.
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Social media and finance (Tony Cookson, Will Mullins and Marina Niessner). SSRN.
In preparation for the Oxford Research Encyclopedia of Economics and Finance.
Abstract. Social media has become an integral part of the financial information environment, changing the way financial information is produced, consumed and distributed. This article surveys the financial social media literature, distinguishing between research using social media as a lens to shed light on more general financial behavior and research exploring the effects of social media on financial markets. We also review the social media data landscape.
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Netemeyer, Richard, Donald R. Lichtenstein, John G. Lynch, Jr., and David Dobolyi (2024) 鈥�EXPRESS: Financial Education Effects on Financial Behavior and Well-Being: The Mediating Roles of Improved Objective and Subjective Financial Knowledge and Parallels in Physical Health," Journal of Public Policy & Marketing, 0(ja).听听
Categories. Financial literacy, Financial Well Being
Abstract. How does financial education lead to improved financial behavior and higher financial well-being? An influential Consumer Financial Protection Bureau model introduced in 2015 proposes that the goal of financial education is to improve financial well-being and that financial education does so by increasing financial knowledge, which improves financial behavior, which improves financial well-being. In this study, the authors test links in the Consumer Financial Protection Bureau model, examining the differential roles of objective and subjective knowledge. They also test whether an analogous model might capture effects of physical health education on physical health knowledge, behavior, and well-being. They report a quasi-experiment comparing changes in financial and physical health knowledge, behavior, and well-being at two time points in a semester for students enrolled in a personal finance class, a personal health class, or neither. This study reports the first causal estimates of flow from financial education to financial knowledge to financial behaviors to a validated measure of subjective financial well-being. Financial education caused large changes in both objective and subjective knowledge. Yet only subjective knowledge mediated the large effects of financial education on changes in downstream behaviors. The authors find weaker but similar results for physical health. The findings suggest that financial education efforts should be refocused to foster subjective knowledge and improved behavior.
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Wang, Yanwen, Muxin Zhai, and John G. Lynch, Jr. (2023), 鈥�Cashing Out Retirement Savings at Job Separation,鈥� Marketing Science, 42 (4), 679-703.
Categories: Saving, Coping with Constraint,听 Financial Well Being and Effects of Public Policy
Abstract. The U.S. government imposes a 10% penalty to discourage preretirement leakage鈥攃ash withdrawal from 401(k) retirement savings before the age of 59.5 years. In our data set with 162,360 terminating employees covered by 28 retirement plans, 41.4% of employees leaked by cashing out 401(k) savings at job separation, most draining their entire accounts. We investigate the impact of employer matching contributions on leakage at job termination. The 鈥渃omposition鈥� of funds in one鈥檚 401(k) balance matters: leakage increases with employer contribution proportion. Micropatterns in our data align more with behavioral than with economic explanations of this effect. We estimate that a 50% increase in employer/employee match rate increases leakage probability by 6.3% at job termination. However, there could be a 35.3% reduction in leakage probability if employees ignore the perceived incentive generated by the account composition effect. Approximately 60% of accumulated assets from a 50% increase in match rate leak out of the system due to the account composition effect attributable to the percentage of assets contributed by the employer. Employers with more generous matches care about their employees鈥� well-being in retirement, but unintentionally nudge employees to cash out when they change jobs. We highlight proposals to help employers curb avoidable leakage.
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Lynch, John, Yanwen Wang, and Muxin Zhai (2023), 鈥�Too Many Employees Cash Out Their 401(k)s When Leaving a Job.鈥� Harvard Business Review, March 7 听
Categories: Saving, Coping with Constraint, Financial Well Being and Effects of Public Policy
Abstract:听 According to research of over 160,000 U.S. employees from 2014-2016, 41.4% cashed out at least part of their 401(k)s when leaving a job 鈥� and 85% of those drained their balance entirely. Why does this occur at this moment, despite evidence that it can damage your ability to retire and despite warnings from experts that it鈥檚 a bad idea? The answer is a combination of bureaucracy and psychology 鈥� how cashing out is explained to employees (or automatically occurs if balances are low), and how contributions (particularly if they come largely from the employer) are seen as a source of ready cash. This article explores these ideas further and offers suggestions for employers to nudge their departing employees toward maintaining their savings.
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Growing up without finance听(Tony Cookson, James R. Brown and Rawley Z. Heimer) Journal of Financial Economics. Vol 134, No 3 (December 2019), pp. 591-616.
Abstract.听Early life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have ten point lower credit scores and four percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.
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Personal wealth, self-employment, and business ownership听(Tony Cookson, Aymeric Bellon, Erik P. Gilje and Rawley Z. Heimer). Review of Financial Studies. Vol 34, No 8听(August 2021), pp. 3935-3975.听
Abstract.听We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur鈥檚 motivations.听
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Shale shocked: Cash windfalls and household debt repayment听(Tony Cookson, Erik P. Gilje and Rawley Z. Heimer). Journal of Financial Economics. Vol 146, No 3 (December 2022), pp. 905-931.
Abstract. Using individual credit bureau data matched with cash windfalls from fracking, we estimate that windfall recipients reduce debt-to-income by 2.4 percentage points relative to no-windfall controls. Debt repayment effects are 3 times stronger for subprime individuals than for prime individuals. Based on the timing of upfront versus continuing cash payments, debt repayment coincides with the timing of payments but not with news about future payments. These findings present a challenge for purely forward-looking models of debt. Indeed, when we incorporate a windfall shock into a forward-looking model, the model predicts an increase in debt that runs counter to our evidence of debt repayment.
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Joe J. Gladstone, Jon M. Jachimowicz, Adam Eric Greenberg & Adam D.Galinsky (2021).听.
Financial hardship is an established source of shame. This research explores whether shame is also a driver and exacerbator of financial hardship. Six experimental, archival, and correlational studies (N = 9,110)鈥攊ncluding data from customer bank account histories and several longitudinal surveys that allow for participant fixed effects and identical twin comparisons鈥攑rovide evidence for a vicious cycle between shame and financial hardship: Shame induces financial withdrawal, which increases the probability of counterproductive financial decisions that only deepen one鈥檚 financial hardship. Consistent with this model, shame was a stronger driver of financial hardship than the related emotion of guilt because shame increases withdrawal behaviors more than guilt. We also found that a theoretically motivated intervention鈥攁ffirming acts of kindness鈥攃an break this cycle by reducing the link between financial shame and financial disengagement. This research suggests that shame helps set a poverty trap by creating a self-reinforcing cycle of financial hardship.
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Kappes, Heather, Joe Gladstone & Hal Herschfield (2020). . Journal of Consumer Research.
Spending is influenced by many factors. One that has received little attention is the meaning that people give to the act of spending. Spending money might imply that someone is relatively wealthy鈥攕ince they have money to spend鈥攐r relatively poor鈥攕ince spending can deplete assets. We show that people differ in the extent to which they believe that spending implies wealth (SIW beliefs). We develop a scale to measure these beliefs and find that people who more strongly believe that SIW spend their own money relatively lavishly and are, on average, more financially vulnerable. We find correlational evidence for these relationships using objective financial-transaction data, including over 2 million transaction records from the bank accounts of over 2,000 users of a money management app, as well as self-reported financial well-being. We also find experimental evidence by manipulating SIW beliefs and observing causal effects on spending intentions. These results show how underlying beliefs about the link between spending and wealth play a role in consumption decisions, and point to beliefs about the meaning of spending as a fruitful direction for further research.
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Matz, Sandra & Joe Gladstone (2020). . Journal of Personality and Social Psychology.
Recent research suggests that agreeable individuals experience greater financial hardship than their less agreeable peers. We explore the psychological mechanisms underlying this relationship and provide evidence that it is driven by agreeable individuals considering money to be less important, but not (as previously suggested) by agreeable individuals pursuing more cooperative negotiating styles. Taking an interactionist perspective, we further hypothesize that placing little importance on money鈥攁 risk factor for money mismanagement鈥攊s more detrimental to the financial health of those agreeable individuals who lack the economic means to compensate for their predisposition. Supporting this proposition, we show that agreeableness is more strongly (and sometimes exclusively) related to financial hardship among low-income individuals. We present evidence from diverse data sources, including 2 online panels (n1 = 636, n2 = 3,155), a nationally representative survey (n3 = 4,170), objective bank account data (n4 = 549), a longitudinal cohort study (n5 = 2,429), and geographically aggregated insolvency and personality measures (n6 = 332,951, n7 = 2,468,897).
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Emily N Garbinsky, Joe J Gladstone, Hristina Nikolova, Jenny G Olson (2020). . Journal of Consumer Research.
Romantic relationships are built on trust, but partners are not always honest about their financial behavior鈥攖hey may hide spending, debt, and savings from one another. This article introduces the construct of financial infidelity, defined as 鈥渆ngaging in any financial behavior expected to be disapproved of by one鈥檚 romantic partner and intentionally failing to disclose this behavior to them.鈥� We develop and validate the Financial Infidelity Scale (FI-Scale) to measure individual variation in consumers' financial infidelity proneness. In 10 lab studies, one field study, and analyses of real bank account data collected in partnership with a couples鈥� money-management mobile application, we demonstrate that the FI-Scale has strong psychometric properties, is distinct from conceptually related scales, and predicts actual financial infidelity among married consumers. Importantly, the FI-Scale predicts a broad range of consumption-related behaviors (e.g., spending despite anticipated spousal disapproval, preferences for discreet payment methods and unmarked packaging, concealing bank account information). Our work is the first to introduce, define, and measure financial infidelity reliably and succinctly and examine its antecedents and consequences.
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Emily Garbinksy & Gladstone, Joe (2019). . Journal of Consumer Psychology.
When couples decide to share their lives, they must also decide how to pool their finances. In this article, we ask: Does the type of bank account from which one spends (joint vs. separate) affect the type of products one chooses to buy (utilitarian vs. hedonic)? Real-world evidence from analyzing bank transaction records (study 5), as well as data collected from experiments in the field (studies 1 and 2) and lab (studies 3 and 4), converge to support the hypothesis that couple members who spend from a joint bank account are more likely to choose utilitarian (vs. hedonic) products, than those who spend from a separate bank account. We find that these different spending patterns are driven by an increased need to justify spending to one's partner that is experienced when money is pooled together. If a hedonic product becomes easier to justify (study 4), the effect of account type on spending patterns disappears. These findings have important theoretical and practical implications for better understanding financial decision-making within romantic couples.
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James R. Brown, Tony Cookson, and Rawley Heimer (2019) . Journal of Financial Economics, Vol 134, No 3 (December 2019), pp. 591-616.
Early life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have ten point lower credit scores and four percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.
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Emily Gallagher, Radhakrishnan Gopalan, and Michal Grinstein-Weiss (2018) . Journal of Public Economics, Volume 172, April 2019, Pages 67-83.
We use administrative tax data and survey responses to quantify the effect of health insurance on rent and mortgage delinquency. We employ a regression discontinuity (RD) design, exploiting the income threshold for receiving Marketplace subsidies in states that did not expand Medicaid under the Affordable Care Act. Eligibility for subsidies is associated with a roughly 26 percent decline in the delinquency rate and reduced exposure to out-of-pocket medical expenditure risk. IV results indicate that this relationship is likely causal. We show that, under plausible assumptions, the social benefits implied by our RD estimates, in terms of fewer evictions and foreclosures, are substantial relative to the transfer value of the subsidies.
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Emily Gallagher, Radhakrishnan Gopalan, Michal Grinstein-Weiss, Jorge Sabat (2018) . Journal of Financial Economics, Volume 136, Issue 2, May 2020, Pages 523-546.
Using data on over 67,000 low-income tax filers, we estimate the effect of expanded Medicaid access on the propensity of households to save or repay debt from their tax refunds. We instrument for Medicaid access using variation in state eligibility rules. Medicaid eligibility has no effect on the savings behavior of the average low-income household. However, among those experiencing financial hardship, Medicaid eligibility increases refund savings rates by roughly 5 percentage points or $102. Effects are stronger in states with lower bankruptcy exemption limits and are consistent with a strategic default model, in which uninsured, financially constrained households use bankruptcy to manage health expenditure risk. While modest in absolute terms, our estimates are substantial relative to the effects of direct savings interventions on low-income populations. Our results imply that, as the social safety net expands, tax rebates may be less effective in stimulating consumption
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Richard Netemeyer, Dee Warmath, Daniel Fernandes, and John G. Lynch, Jr.听(2018) 听 Journal of Consumer Research, 5 (June), 68-89.
There has been little systematic examination of how perceived financial well-being may affect overall well-being. Using consumer financial narratives, several large-scale surveys, and two experiments, we conceptualize perceived financial well-being as two related but separate constructs: 1) stress related to the management of money today (current money management stress), and 2) a sense of security in one鈥檚 financial future (expected future financial security). We develop and validate measures of these constructs and then demonstrate their relationship to overall well-being, controlling for other life domains and objective measures of the financial domain. We find that perceived financial well-being is a key predictor of overall well-being and comparable in magnitude to the combined effect of other life domains (job satisfaction, physical health assessment, and relationship support satisfaction). Further, the relative importance of current money management stress to overall well-being varies by income groups and due to the differing antecedents of current money management stress and expected future financial security. We offer implications for financial well-being and education efforts.
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Emily Gallagher, Stephen Roll, Rourke O鈥橞rien, Michal Grinstein-Weiss (2018) . SSRN
We evaluate the effect of health insurance on negative earnings shocks using the administrative tax data and survey responses of 4,975 low-income households. We exploit exogenous variation in the cost of private insurance under the Affordable Care Act using a regression discontinuity (RD) design. Eligibility to purchase subsidized private insurance is associated with a 29 and 22 percent decline in the rates of unexpected job loss and income loss, respectively. Effects are concentrated among households with past health costs and exist only for 鈥渦nexpected鈥� forms of earnings variation, suggesting a health-productivity link. Rudimentary calculations based on our RD estimate imply a $256鈥�$476 per year welfare benefit of health insurance in terms of reduced exposure to job loss.
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Quentin Andr茅, Nick Reinholtz, John Lynch (2018)听Can Food Stamps Reduce Food Consumption? The Unintended Consequences of Restricted-Use Funds on Budgeting Decisions. Working paper.
We investigate the consequences of endowing consumers with resources that can only be spent on a limited range of products. Using a policy-relevant context, we show that consumers who receive a resource akin to food stamps spend less on food than consumers who receive an equivalent amount in money do.
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FINANCIAL LITERACY
Netemeyer, Richard,听Donald R. Lichtenstein,听John G. Lynch, &听David Dobolyi (2020),听What You Know and What You Think You Know About Money and听Health: Knowledge, Behaviors, and Well-Being (Working Paper).听
Physical and financial health are among the听most important domains affecting life satisfaction / subjective well-being (SWB).听Separate literatures on 鈥渇inancial literacy鈥� and 鈥渉ealth literacy鈥� examine听links of knowledge to听behavior in each domain. Each literature advocates听education aimed to improve well-being in that domain. Work in financial听literacy has focused on the role of objective knowledge. Work in health听literacy has focused on the role of听subjective knowledge and confidence in obtaining听and understanding health information. We offer the first examination of how objective听and subjective knowledge affects performing positive behaviors within domain听and spills over听to affect behavior in the other domain.听We present three cross-sectional surveys, including a two-wave听study assessing how knowledge about money and physical health prior to the听COVID pandemic relates to behaviors during the pandemic. Finally, we present a听quasi-experiment comparing changes in financial and physical health knowledge over听the course of a semester for students enrolled in a personal finance class, a听personal health class, or neither. We find consistent effects for听subjective听knowledge affecting positive behaviors and perceptions of future well-being听within and across domains. We also study how subjective knowledge 鈥渞ipples听through a system鈥� of potential mediators to affect SWB.听听
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Ward, Adrian, and John G. Lynch, Jr. (2018) Journal of Consumer Research. Summarized in , .
Many consumers suffer from low levels of financial literacy, and attempts to increase this dimension of consumer expertise via educational interventions are typically unsuccessful. We argue that many of these apparent deficits are caused by the distribution of responsibility for knowledge and decision-making between relationship partners. Early in relationships, responsibility for financial matters is often determined not by differences in financial expertise, but by differences in relative contributions to other domains (study 3). Although responsibility may be initially unrelated to ability, responsibility predicts learning of new financial information (study 4). Cross-sectional data from consumers in long-term relationships show that as relationships lengthen, high levels of financial responsibility are associated with increases in financial literacy, whereas low levels of financial responsibility are not (study 1). These diverging trajectories of expertise cannot be explained by role switching or changes in the sample over time (study 2). The resulting gap in financial literacy is linked to corresponding differences in both financial decision-making and financial information search (studies 5, 5a). Consumers develop expertise on a 鈥渘eed to know鈥� basis. Offloading responsibility to a relationship partner may eliminate this need in the present, while simultaneously creating barriers to developing expertise when needed in the future.
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