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

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.Behavioral economics, psychology, microfinance, marketing, field experiment, credit markets

Behaviorally Informed Regulation

Policy makers typically approach human behavior from the perspective of the rational agent model, which relics on normativc, a priori analyses. The model assumes people make insightful, well-planned, highly controlled, and calculated decisions guided by considerations of personal utility. This perspective is promoted in the social sciences and in professional schools and has come to dominate much of the formulation and conduct of policy. An alternative view, developed mostly through empirical behavioral research, and the one we will articulate here, provides a substantially difierent perspective on individual behavior and its policy and regulatory implications. According to the empirical perspective, behavior is the amalgam of perceptions, impulses, judgments, and decision processes that emerge from the impressive machinery that people carry behind the eyes and between the ears. Actual human behavior, it is argued, is often unforeseen and misunderstood by classical policy thinking. A more nuanced behavioral perspective, it is suggested, can yield deeper understanding and improved regulatory insight

Behaviorally Informed Financial Services Regulation

Financial services decisions can have enourmous consequences for household well-being. Households need a range of financial services - to conduct basic transactions, such as receiving their income, storing it, and paying bills; to save for emergency needs and long-term goals; to access credit; and to insure against life\u27s key risks. But the financial services system is exceedingly complicated and often not well-designed to optimize house-hold behavior. In response to the complexity of out financial system, there has been a long running debate about the appropriate role and form of regulation. Regulation is largely stuck in two competing models - disclosure, and usury or product restrictions. This paper explores a different approach, based on insights from behavioral economics on one hand, and an understanding of industrial organization on the other. At the core of the analysis is the interaction between individual psychology and market competition. This is in contrast to the classic model, which relies on the interaction between rational choice and market competition. The introduction of richer psychology complicates the impact of competition. It helps us understand that firms compete based on how individuals will respond to products in the marketplace, and competitive outcomes may not always and in all contexts closely align with improved decisional choice and increased consumer welfare. This paper adopts a behavioral economic framework that considers firm incentives to respond to regulation. Under this framework, outcomes are an equilibrium interaction between individuals with specific psychologies and firms that responds to those psychologies within specific market contexts. Regulation must then address failures in this equilibrium. The model suggests, for example, that in some contexts market participants seek to overcome common human failings (as for example, with under-saving) while in other contexts market participants seek to exploit those failings (as for example, with over-borrowing). Behaviorally informed regulation needs to take account of these different contexts. The paper discusses the specific application of these forces to the case of mortage, credit card, and banking markets. The purpose of this paper is not to champion politics, but to illustrate how a behaviorally informed regulatory analysis would lead to a deeper understanding of the costs and benefits of specific policies

An Opt-Out Home Mortgage System

The current housing and financial crisis has led to significant congressional and executive action to manage the crisis and stem the harms from it, but the fundamental problems that caused the crisis remain largely unaddressed. The central features of the industrial organization of the mortgage market with its misaligned incentives, and the core psychological and behavioral phenomena that drive household financial decisionmaking remain. While the causes of the mortgage meltdown are myriad and the solutions likely to be multifaceted, a central problem that led to the crisis was that brokers and lenders offered loans that looked much less expensive and much less risky than they really were—and borrowers took them. It is time for common-sense reform to the mortgage market. This paper develops a new framework for understanding the mortgage markets as the interaction between individuals with specific psychological biases and firms that respond to those psychologies within specific markets. We argue that regulation needs to take account of that interaction. Our new framework leads us to propose a sticky opt-out mortgage system, under which lenders would be required to offer borrowers loans with standard terms. Borrowers could opt out for other loans, but only after heightened disclosure requirements, and lenders would face increased exposure to liability or other sanctions

The Case for Behaviorally Informed Regulation

Policymakers approach human behavior largely through the perspective of the “rational agent” model, which relies on normative, a priori analyses of the making of rational decisions. This perspective is promoted in the social sciences and in professional schools, and has come to dominate much of the formulation and conduct of policy. An alternative view, developed mostly through empirical behavioral research, provides a substantially different perspective on individual behavior and its policy implications. Behavior, according to the empirical perspective, is the outcome of perceptions, impulses, and other processes that characterize the impressive machinery that we carry behind the eyes and between the ears. These proclivities, research has shown, intrude upon and shape behavior, often quite independently of deliberative intent, and in contrast with normative ideals that people endorse upon reflection. The results are systematic behaviors that are unforeseen and misunderstood by classical policy thinking. A more nuanced behavioral perspective, such research suggests, can yield deeper understanding and improved regulatory insight

The Case for Behaviorally Informed Regulation

Policymakers approach human behavior largely through the perspective of the “rational agent” model, which relies on normative, a priori analyses of the making of rational decisions. This perspective is promoted in the social sciences and in professional schools, and has come to dominate much of the formulation and conduct of policy. An alternative view, developed mostly through empirical behavioral research, provides a substantially different perspective on individual behavior and its policy implications. Behavior, according to the empirical perspective, is the outcome of perceptions, impulses, and other processes that characterize the impressive machinery that we carry behind the eyes and between the ears. These proclivities, research has shown, intrude upon and shape behavior, often quite independently of deliberative intent, and in contrast with normative ideals that people endorse upon reflection. The results are systematic behaviors that are unforeseen and misunderstood by classical policy thinking. A more nuanced behavioral perspective, such research suggests, can yield deeper understanding and improved regulatory insight

An Opt-Out Home Mortgage System

The current housing and financial crisis has led to significant congressional and executive action to manage the crisis and stem the harms from it, but the fundamental problems that caused the crisis remain largely unaddressed. The central features of the industrial organization of the mortgage market with its misaligned incentives, and the core psychological and behavioral phenomena that drive household financial decisionmaking remain. While the causes of the mortgage meltdown are myriad and the solutions likely to be multifaceted, a central problem that led to the crisis was that brokers and lenders offered loans that looked much less expensive and much less risky than they really were—and borrowers took them. It is time for common-sense reform to the mortgage market. This paper develops a new framework for understanding the mortgage markets as the interaction between individuals with specific psychological biases and firms that respond to those psychologies within specific markets. We argue that regulation needs to take account of that interaction. Our new framework leads us to propose a sticky opt-out mortgage system, under which lenders would be required to offer borrowers loans with standard terms. Borrowers could opt out for other loans, but only after heightened disclosure requirements, and lenders would face increased exposure to liability or other sanctions

Modulation of spin dynamics in a channel of a nonballistic spin field effect transistor

We have investigated the effect of gate control over the spin polarization drag in an Al0.3Ga0.7As/ GaAs/Al0.3Ga 0.7As heterostructure. The study is motivated by a recent proposal for a nonballistic spin field effect transistor that utilizes the interplay between the Rashba and the Dresselhaus spin-orbit interaction in the device channel. A model that utilizes real material parameters, in order to calculate spin dynamics as a function of the gate voltage, has been developed. From the obtained results, we define the efficiency of the spin-polarization modulation and spin-density modulation. The estimated modulation of the spin polarization at room temperature is of the order of 15-20%. The results show that the effect is not sufficient for device applications. However, it can be observed experimentally by spatially resolved optical pulse-probe techniques. © 2004 The American Physical Society

Anisotropic fragmentation in low-energy dissociative recombination

On a dense energy grid reaching up to 75 meV electron collision energy the fragmentation angle and the kinetic energy release of neutral dissociative recombination fragments have been studied in a twin merged beam experiment. The anisotropy described by Legendre polynomials and the extracted rotational state contributions were found to vary on a likewise narrow energy scale as the rotationally averaged rate coefficient. For the first time angular dependences higher than 2$^{nd}$ order could be deduced. Moreover, a slight anisotropy at zero collision energy was observed which is caused by the flattened velocity distribution of the electron beam.Comment: 8 pages, 4 figures; The Article will be published in the proceedings of DR 2007, a symposium on Dissociative Recombination held in Ameland, The Netherlands (18.-23. July 2008); Reference 19 has been published meanwhile in S. Novotny, PRL 100, 193201 (2008

When does an electron exit a tunneling barrier?

We probe the dynamics of tunnel ionization via high harmonic generation. We characterize the ionization dynamics in helium atoms, and apply our approach to resolve subtle differences in ionization from different orbitals of a CO 2 molecule