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The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

Tiziana Assenza, Alberto Cardaci and Domenico Delli Gatti

No 19-1055, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Existing evidence suggests that individuals frequently misperceive the value of their wealth. We test the existence, and estimate sign and magnitude, of an inaccurate perception of individual net worth. By conducting a laboratory experiment, we find that most subjects perceive a given net worth as greater than its true value and this misperception increases for lower values of the leverage ratio i.e., liabilities-assets ratio. We identify an explanation relating this misperception to low cognitive sophistication and inattentive thinking. Finally, such wealth misperception predicts greater impatience, lower debt aversion and greater marginal propensities to consume out of positive (transitory) income shocks.

Date: 2021-02
New Economics Papers: this item is included in nep-exp, nep-neu and nep-ore
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