Debt of high-income consumers may reflect leverage rather than poor cognitive reflection

Sergio Da Silva (Department of Economics, Federal University of Santa Catarina, Florianópolis, Brazil)
Newton Da Costa Jr (Federal University of Santa Catarina, Florianopolis, Brazil)
Raul Matsushita (University of Brasilia, Brasilia, Brazil)
Cristiana Vieira (Federal University of Santa Catarina, Florianopolis, Brazil)
Ana Correa (Federal University of Santa Catarina, Florianopolis, Brazil)
Dinorá De Faveri (Federal University of Santa Catarina, Florianopolis, Brazil)

Review of Behavioral Finance

ISSN: 1940-5979

Publication date: 12 March 2018

Abstract

Purpose

A recent population-wide study for Germany, where credit lines on current accounts are available to 80 percent of the population, finds that overdraft debt is more likely for people who give intuitive but incorrect answers on a cognitive reflection test. This suggests that those consumers in debt have poorer cognitive reflection and, thus, lack of self-control. The Germany study finds that “surprisingly, the level of income does not play a central role.” The purpose of this paper is to discriminate the consumers in terms of their income by considering two experiments.

Design/methodology/approach

In the first (pilot) experiment, the authors do not discriminate consumers in terms of income and, as result, replicate the Germany study. In a follow-up experiment, which assembles a high-quality sample of high-income consumers, the authors find debt can no longer be explained by poor cognitive reflection.

Findings

Apparently, high-income consumers treat debt as mere leverage, as companies do.

Originality/value

Not all consumer indebtedness can be caused by lack of self-control. High-income consumers are likely to contract debt as leverage. This resembles rational risk taking.

Keywords

Citation

Da Silva, S., Da Costa Jr, N., Matsushita, R., Vieira, C., Correa, A. and De Faveri, D. (2018), "Debt of high-income consumers may reflect leverage rather than poor cognitive reflection", Review of Behavioral Finance, Vol. 10 No. 1, pp. 42-52. https://doi.org/10.1108/RBF-07-2016-0046

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Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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