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Heuristics and Biases in Debt Managment


Managing a debt portfolio requires complex decision making and is particularly challenging in the current climate of economic instability. Faced with various debts and diverse interest rates, consumers must decide the amount to allocate and the order in which to settle their debts. Issues of debt management also impact financial institutions such as banks and credit companies who need to understand how their borrowers prioritize their payments to be able to estimate the probability that their loans will be paid back. This research program aims to identify heuristics and biases that affect consumers when managing their debts. We examine when debt behaviors are aligned with normative strategies and when they lead people to make predictable but irrational decisions. Using versions of interactive debt management games as well as other experimental methods the program is designed to achieve three main goals: (1) identify sources of suboptimal debt management (Studies 1-2) (2) expand our understanding of the processes underlying debt management decisions (Studies 3-4), and (3) explore techniques to direct consumers toward more optimal debt management strategies (Studies 5-6). Along with its theoretical contribution, the proposed research program has important practical implications. Understanding how people perceive and manage their debts will allow financial organizations to create tools and procedures to assist their clients in managing their loans, and improving the rationality of their debt repayments.

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8 hauniversita st
4610101 Herzliya

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Activity type
Higher or Secondary Education Establishments
Administrative Contact
Eric Zimmerman (Dr.)
EU contribution
No data