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

Marianne Bertrand, Dean Karlan (), Sendhil Mullainathan (), Eldar Shafir and Jonathan Zinman ()
Additional contact information
Eldar Shafir: Princeton University

Working Papers from Economic Growth Center, Yale University

Abstract: 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.

Keywords: Behavioral economics; psychology; microfinance; marketing; field experiment; credit markets (search for similar items in EconPapers)
JEL-codes: D01 C93 D12 D21 D81 D91 M37 O12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-mkt
Date: 2005-07
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Related works:
Working Paper: What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment (2009) Downloads
Working Paper: What's psychology worth? A field experiment in the consumer credit market (2006) Downloads
Working Paper: What's Psychology Worth? A Field Experiment in the Consumer Credit Market (2005) Downloads
Working Paper: What's Psychology Worth? A Field Experiment in the Consumer Credit Market (2005) Downloads
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