Bounded Rationality and Use of Alternative Financial Services

What is it about?

How individuals make choices in lending markets is a central point of this work. In particular, the paper emphasizes higher cost borrowing options (pay day loans are a good example). We explore dimensions of consumer financial knowledge, with an emphasis on what people know (objective knowledge) versus what they think they know (subjective knowledge). Findings indicate that overconfident (those that think they know more than they objectively do) consumers are more likely to use high cost borrowing options.

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Why is it important?

Consumer use of high cost borrowing options is a significant point of debate for many states in the United States. Our evidence suggests that some borrowers may be naively relying on these resources (likely to their detriment), and provides some insight into these "overconfident" borrowers.