Working Paper: NBER ID: w24881
Authors: Theresa Kuchler; Michaela Pagel
Abstract: Using high-frequency transaction-level income, spending, balances, and credit limits data from an online financial service, we show that many consumers fail to stick to their self-set debt paydown plans and argue that this behavior is best explained by a model of present bias. Theoretically, we show that (i) a present-biased agent's sensitivity of consumption spending to paycheck receipt reflects his or her short-run impatience and that (ii) this sensitivity varies with available resources only for agents who are aware (sophisticated) rather than unaware (naive) of their future impatience. In turn, we classify users in our data accordingly. Consistent with present bias, we find that (i) sophisticated users' average paydown falls with higher measured impatience and that (ii) their planned paydown is more predictive of actual paydown than that of naives. We are the first to provide a theoretically-founded empirical methodology to measure sophistication and naivete from spending and income data and to validate this measure using our information on planned versus actual debt paydown. Moreover, our results highlight the importance of distinguishing between sophisticated and naive present-biased individuals in understanding their financial decision making.
Keywords: Present Bias; Credit Card Debt; Financial Decision Making
JEL Codes: D03; D14; G02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| present bias (D15) | debt repayment success (F34) |
| sophisticated users' impatience (D84) | debt repayment success (F34) |
| awareness of present bias (D91) | adherence to debt repayment plans (F34) |
| planned paydown amounts (G35) | actual paydown for sophisticated individuals (G51) |
| lack of awareness about future impatience (D84) | repeated delays in debt repayment (F34) |