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- Title
Time Preferences and Mortgage Choice.
- Authors
ATLAS, STEPHEN A.; JOHNSON, ERIC J.; PAYNE, JOHN W.
- Abstract
Mortgage decisions have important consequences for consumers, lenders, and the state of the economy more generally. Mortgage decisions are also prototypical of consumer financial choices that involve a stream of expenditures and consumption occurring across time. The authors use heterogeneity in time preferences for both immediate (present bias) and long-term outcomes to explain a sequence of mortgage decisions, including mortgage choice and the decision to abandon a mortgage. The authors employ an analytic model and a survey of mortgaged households augmented by zip code–level house price and foreclosure data. The model suggests and data confirm that consumers with greater present bias and long-term discounting tend to choose mortgages that minimize up-front costs. However, greater present bias decreases homeowners’ willingness to abandon a mortgage, locking them into the contract. Long-term patience increases mortgage abandonment. This reversal across mortgage decisions is difficult for alternative accounts to explain. These results suggest that a two-parameter model of time preferences is helpful for understanding how homeowners make mortgage decisions.
- Subjects
UNITED States; MORTGAGES; TIME -- Psychological aspects; CONSUMER preferences; MORTGAGE loan default; ECONOMIC aspects of decision making; HOMEOWNERS; COGNITIVE bias; PSYCHOLOGY
- Publication
Journal of Marketing Research (JMR), 2017, Vol 54, Issue 3, p415
- ISSN
0022-2437
- Publication type
Article
- DOI
10.1509/jmr.14.0481