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Mental Accounting in the Housing Market


Almenberg, Johan; Karapetyan, Artashes (2009). Mental Accounting in the Housing Market. Working paper series / Institute for Empirical Research in Economics No. 453, University of Zurich.

Abstract

We identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a suboptimal capital structure, but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.

Abstract

We identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a suboptimal capital structure, but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:November 2009
Deposited On:29 Nov 2011 20:09
Last Modified:12 Aug 2017 12:47
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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