The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

Tiziana Assenza, Alberto Cardaci and Domenico Delli Gatti
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Tiziana Assenza: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Alberto Cardaci: Goethe University Frankfurt = Goethe-Universität Frankfurt am Main

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Abstract: Existing evidence suggests that individuals often misperceive the value of their wealth. We examine the existence, direction, and magnitude of these misperceptions through a laboratory experiment. Our findings indicate that variations in the leverage ratio (the ratio of liabilities to assets) influence how individuals rank financial profiles, even when net wealth remains constant. Most subjects perceive a given net worth as greater than its true value, and this misperception becomes more pronounced in financial profiles with lower leverage ratios. We further explore how cognitive sophistication and behavioral/economic attitudes shape wealth misperception. Experimental evidence shows that misperception is associated with lower cognitive sophistication and inattentive thinking. Moreover, it correlates with greater impatience, lower debt aversion, and higher marginal propensities to consume following positive (transitory) income shocks.

Keywords: Perception; Metacognition; Market Psychology; Economic Psychology; Cognition; Behavioral Finance (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cbe, nep-eur, nep-exp and nep-neu
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Published in Journal of Economic Interaction and Coordination, inPress, ⟨10.1007/s11403-025-00453-3⟩

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Working Paper: The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05300791

DOI: 10.1007/s11403-025-00453-3

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